President-elect Andres Manuel Lopez Obrador's decision to cancel the construction of the $13-billion New International Mexico City Airport (NAICM) sets a concerning precedent for energy investments in the country, multiples sources told S&P Global Platts Monday.
After a weekend referendum, Lopez Obrador canceled the project during a webcast event on Monday. The option to cancel the project won in the referendum with 70% of the vote.
"This decision will be taken with the absolute respect to the rule of law without affecting the interest of companies and investors," Lopez Obrador said. The consultation was an exemplary exercise of democracy, he added.
The NAICM cancellation shows Lopez Obrador's willingness to sidestep institutions and his disdain for the rule of law, Francisco Monaldi, a Latin American energy policy fellow at Rice University's Baker Institute for Public Policy, told Platts on Monday.
"I do think that it sets a bad precedent in general for investors, but particularly for energy investors, given that the animosity against NAICM is matched by Lopez Obrador's disdain for the energy reform ... But the market reaction might remind him to look at the peso and not the polls," Monaldi said. The peso fell about 3.6% against the dollar following the NAICM announcement.
Completing the construction of the airport was a contentious issue during the campaign. The president-elect opposed NAICM, saying it was a waste of money. He said he preferred maintaining the existing Mexico City airport and reconfiguring the nearby Santa Lucia military airport. To date, NAICM is 30% completed, local media has reported.
The president-elect has been a long-time opponent of the privatization of Mexico's energy sector. After the 2013 historic energy reform was approved, the country's Supreme Court blocked Lopez Obrador's plan to hold a binding referendum to cancel the reform, citing that it was unconstitutional to hold referendums that would affect Mexico's federal budget.
Lopez Obrador said he is going to change the constitution to make this type of referendum legal. If Mexicans had voted on the energy reform, the country would have avoided the energy crisis of rising gasoline prices and decreasing oil output, he said.
A SKEWED CONSULTATION
The referendum process lacked impartiality, transparency, credibility, and minimum guarantees of fairness, Juan Pablo Castanon, the director of Mexico's business coordinating council (CCE), the country's largest business group, said Monday in a webcast event.
"This greatly damages the reputation of Mexico... The referendum went against the existing legal framework and institutions," Castanon said.
Energy companies shouldn't be worried about the cancellation of their contracts, said an advisor close to Lopez Obrador's transition team, who asked not to be identified due to the delicate political situation surrounding the NAICM cancellation.
"They are separate issues. The referendum on the cancellation of the airport was announced long ago. I wouldn't mix the issues," the advisor said.
This is an "extremely" negative signal to international investors, Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars, told Platts on Monday.
"Investors are going to think if Lopez Obrador is willing to cancel a mega project worth $13 billion, what isn't he willing to cancel?" Wood said.
Wood expects that major international companies already operating in Mexico will advance their existing projects. Although this will make future investments in the country's energy sector more difficult, he said.
EXISTING CONTRACTS
However, Wood said he isn't afraid about the cancellation of existing contracts, adding it is important to distinguish between projects Lopez Obrador said he would cancel and those he said he would honor.
"He was consistent through the campaign that he was going to cancel the new international airport but respect energy contracts," Wood said. "He has been clear in recent weeks saying he will consider future upstream auction rounds if the existing contracts bear fruit," he added.
However, for Monaldi, the cancellation of the NAICM clouds the future of the energy reform.
"Even though I still expect the...administration to be generally pragmatic, not because they want to, but because they have to, the mismanagement of the airport issue heightens the risks of badly managed 'review' of the reform," he added.
Mexico's Association of Upstream Hydrocarbon Producers, or AMEXHI, declined to comment on how the cancellation of NAICM will affect the operation of upstream companies in Mexico.
