HIGHLIGHTS:

  • Mexico recently voted for a new president, Andrés Manuel López Obrador, in the biggest – and likely the most important – election in the country's history, electing the first left-wing candidate in Mexico.
  • While it is still too early to offer conclusive descriptions on the objectives of López Obrador's administration, this Holland & Knight alert provides an outlook of the new president's prospective policy decisions in key sectors that could impact doing business in Mexico.

Mexico had the biggest election of its history in terms of numbers and importance on July 1, 2018. With a participation rate of 62 percent of eligible citizens, 55 million people chose a president, eight governors, the mayors of Mexico City, the full Senate and House of Representatives, and other candidates to fill 3,200 positions at all levels of government.

Deriving from the preliminary numbers published by the National Electoral Institute (INE), Andrés Manuel López Obrador, the leftist candidate, won with more than 53 percent of the total votes, followed by Ricardo Anaya with 22 percent, and José Antonio Meade, from the ruling party, with 16 percent.

Business associations and political personalities have backed the election results, proposing collaboration with López Obrador. Likewise, the current administration of President Enrique Peña Nieto has offered a smooth transition and open dialogue for a quick start of the new administration on Dec. 1, 2018.

The good news is that the stock market and the exchange rate have not shown drastic changes in respect to the election day results.

While it is still too early to determine the specific objectives of López Obrador's administration, Holland & Knight's Mexico City attorneys have outlined some of his most relevant declarations on prospective policy decisions in key sectors that could impact doing business in Mexico:

  • the administration will allow for free enterprise; freedoms of association and speech, and will respect Constitutional rights
  • taxes will not be increased
  • Banxico (Mexico's Central Bank) will remain autonomous
  • government will maintain financial and tax discipline
  • all obligations with domestic and foreign companies and banks will be honored
  • energy contracts will be reviewed to prevent acts of corruption or illegality; if anomalies are found, which may affect the national interest, the government will take action to Congress as well as to national and international courts. There will be no confiscations or expropriations of assets.
  • there will be no significant increases on gasoline prices (No-Gasolinazos)
  • public investment will be increased to promote productive activities and employment
  • a friendly and cooperative relationship for development will be sought with the United States
  • the national market strengthened through domestic production of local consumption products (substitution of importations)

During the coming weeks, Holland & Knight's Mexico City attorneys will continue to follow the specifics plans and programs of the new administration. In addition, we will continue to follow and update our clients on various aspects of how investors and companies can adapt to the new business environment.

Contacts:

  • Anti-Corruption and FCPA: Jaime Rodriguez
  • Banking and Finance: Alejandro Landa Thierry, Guillermo Uribe
  • Dispute Resolution (Litigation and Arbitration): Salvador Fonseca, Carlos Vejar
  • Capital Markets: Guillermo Uribe, Alejandro Landa Thierry
  • Energy: José Antonio Prado, Carlos Ochoa
  • Labor and Employment: Leslie Palma
  • Hospitality and Real Estate: Luis Moreno
  • Telecommunications and Media: Octavio Lecona
  • Trade and Foreign Investment: Carlos Vejar, Luis Rubio Barnetche

Outlook For Key Sectors

Anti-corruption and FCPA

López Obrador's main proposal during the campaign was to eradicate corruption. Therefore, it is expected that the new administration will reinforce the current anti-corruption system. Companies should be prepared by having compliance programs in place, and by training personnel to prevent putting the company in jeopardy for committing a corrupt action. López Obrador's plan is based on strengthening mechanisms for public biddings, to avoid unjustified increase on prices; allow private entities and individuals to file charges for corrupt actions, even when they are not directly or indirectly affected; creating an anti-corruption program for the tax and financial industries; and eradicate conflicts of interest from governmental employees.

In line with the anti-corruption policy, López Obrador is also proposing to amend the administrative, commercial and civil laws to allow for greater accountability in the use of public funds by private contractors and to avoid permitting the secrecy rules for banks or other private entities to stand in the way of transparency. His plans in this regard include allowing the lifting/piercing of the corporate veil when there is fraud or an illicit use of public funds.

Bankind and Finance

In this sector, it is not anticipated that reforms on the proved financing and collateral structures will happen in the near future or that restrictions on cross-border financing will be implemented.

On the regulatory framework, a change in the banking regulation was one of López Obrador's proposals in order to lighten the regulatory burden to smaller banking institutions. Financial technology (FinTech) is envisioned to increment the percentage of population that have access to the banking system.

In the project finance arena, the implementation of a public and private fund for unsolicited infrastructure projects is expected in order to promote the development of local infrastructure.

Finally, in the public financing sector, it is yet to be seen whether the highly regulated finance activity of local governments is lightened in order to promote economic growth or yet continue to be centralized as in the current administration.

Capital Markets

Even though there is no particular reference in the political agenda, the need of project and corporate finance will be decisive for the capital markets activity. Since the new economic plan intends to strengthen savings and investment, Mexico will continue to have an active market on capital-raising transactions for all types of infrastructure in the country. Also, having diversification needs, Mexico will follow an upward trend in products whose purpose is to improve the degree of investment diversification of pension funds in foreign markets.

If a more active role of Mexican public utility and oil and gas companies is envisioned, local and international capital markets will play an important role in the new administration.

Dispute Resolution (Litigation and Arbitration)

Regarding the topic of justice and dispute resolution, López Obrador and his party, Movimiento Regeneración Nacional (Morena), have three main proposals in their legislative agenda:

  • to create a Constitutional Tribunal that would take over from the nation's Supreme Court of Justice the adjudication of disputes concerning the constitutionality of laws and acts of government
  • to change the method for the appointment of justices to the Supreme Court through more democratic procedures and allow the participation of universities in the process for the nomination of the candidates
  • to eliminate the Council of the Federal Judiciary (Consejo de la Judicatura Federal), which is currently the administrative body of the Federal Judiciary, and to entrust these activities to an additional chamber of the Supreme Court with the aim of reducing administrative costs and to promote the independence of the judiciary from the other powers of the state

There is a great deal of uncertainty as to the specifics on how the new administration will carry out these proposals. The costs of adjustment and the risks of increasing the already existing severe backlog of judicial procedures, and uncertainties regarding the quality of the justice that will be provided by the reconfiguration of the Mexican courts, reinforce the convenience for companies doing business in Mexico to review their existing contractual relations and consider resorting to commercial arbitration as an alternative to national courts. Since 1993, Mexico has adopted the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Commercial Arbitration. In addition, Mexico is a party to both the New York and the Panama Conventions on International Commercial Arbitration, and over the years the Mexican court system has strengthened the commercial arbitration practice in Mexico.

Finally, companies are reminded that if under a proper risk analysis they conclude that their investments may be at risk under possible adverse changes in government decisions, it might be a good time to revisit their current investment protections. Companies also should look at the possibility of restructuring their investments before potential disputes arise (after which such restructuring could become illegal under international law) and to make sure that they are protected under any of the Bilateral Investment Treaties or Free Trade Agreement with an investment protection chapter.

Energy

Upon his election, López Obrador offered comments on the celebration of contracts relating to the energy sector between the Mexican state and individuals. Among the key points:

  • All energy contracts concluded with individuals within the sector will be revised in order to elude or identify acts of corruption as well as detect anomalies that affect the national interest.
  • Although the process in which the said revisions are carried out due to the current legal framework has not been formally expressed, it is expected that they will be handled at the federal executive level (Secretary of Energy and Secretary of the Public Function) and by the Congress of Union (Federal Congress) via a Special Legislative Commission that could be created for these purposes.
  • Likewise, López Obrador has expressly stated that in case of finding anomalies or acts of corruption in the conclusion of such contracts will be addressed to the Congress of Union, national and international courts, although always clarifying will be acting by the legal route, with no expropriations.
  • The next president has stated in various speeches his intention to strengthen the national energy companies (Pemex and CFE) in order for Mexico to become self-sufficient in its production of petroleum, as well as in the generation of electricity.
  • Risks seem to have increased substantially, since the next president will have a large majority in the Federal Congress, which will allow him to modify and even repeal any law that would serve as an obstacle to redesigning the new legal environment of the Mexican energy sector.
  • The recent statements of the next president decelerates and discourages the next oil and gas auctions, saying that even the addition of several specialists in the sector is already "a greater crossroad" for the country. This must be resolved in the forthcoming months, even before López Obrador formally assumes the presidency on Dec. 1, 2018.
  • A large and intense wave of lobbying and reactions to the country's energy future is expected in the upcoming months, because in order to carry out this type of investment, long-term certainty is required.

Hospitality and Real Estate

Acknowledging that hospitality is one of Mexico's most important foreign revenue sources to the country, Lopez Obrador has repeatedly stated his support to domestic and foreign investment in this sector. International and domestic market participants should take advantage of this opportunity and set their footprint from the outset of the new administration in the promotion and development of at least six new regional touristic destinations in the country. These new touristic hubs are planned to be developed as prime destinations for the international and domestic traveler, and will be supported through development bank's construction financing and other governmental means. Promotion of existing destinations will be also made through governmental expansion and/or upgrading of touristic infrastructure, which includes the development of new medical clusters along the border with the U.S.

Commercial activity in the real estate industry will also be bolstered by the new administration, in particular with regard to the automotive and aerospace sector. Thus, domestic and international funds, developers and operators should keep a close watch on the new administration's support of this sector. The new administration has promised the creation of new infrastructure that will help their expansion plans in the country.

Labor and Employment

With the outcome of the elections, companies doing business in Mexico are expected to have expanded opportunities for growth as a result of the economic plan proposed by López Obrador, which is based on increased economic competition and access to credit, as well as the encouragement of microcredit development for small and medium-sized companies. This would allow companies to prosper and become sources of employment, increase the country's minimum wage to create competition and greater productivity, and plan strategically that the Ministry of Economy will assume a busier role in the promotion of investment and generation of employment. The expected adjustments in minimum wages will present an opportunity to resume and successfully conclude the North American Free Trade Agreement (NAFTA) negotiations. Internally in Mexico, companies should seize the opportunity to create compensation plans for key executives and develop plans that include competitiveness among employees. Holland & Knight has the experience and knowledge to advise new investment employers, as well as collaborate in the development of plans that increase the productivity of already established macro companies.

Telecommunications and Media

The new administration will be tasked with further promoting the development of this sector, which requires, among other issues, reformulating the criteria to determine the amount of compensation payable due to the extension of spectrum licenses. Additionally, the current satellite policy should be reviewed and changed to establish a level playing field for all satellite operators, both for those occupying Mexican orbital positions and for those transmitting from foreign positions. The incumbent administration has continued imposing Mexican satellite operators with burdens that are disproportionate to those imposed on foreign satellite operators servicing the Mexican market. This policy has had the undesired effect of deflecting much needed investment in this sector to other countries that serve the Mexican market and do not impose such burdens. Other matters to be addressed by López Obrador's administration include developing and implementing efficient policies and programs to ensure universal broadband coverage, bringing telecommunication services to unserved or underserved urban and rural communities, as well as improving the current framework to enable telecommunication operators to use federal and state government buildings throughout the country to deploy telecommunications and broadcasting infrastructure.

Trade and Foreign Investment

In his first speech after the official preliminary results of the election were announced, López Obrador touched upon two specific issues that could have an impact on foreign investment in the energy sector and international trade:

With regard to the energy sector, López Obrador assured that there will be no expropriations or confiscation of property, which is a positive message placing Mexico in distance of possible investment disputes against such actions. But what is still uncertain is the specific objectives that the new administration will seek with regard to the existing contracts in the energy sector.

The language used in López Obrador speech includes the following: "Energy sector contracts signed with individuals will be reviewed to prevent acts of corruption or illegality. If we find anomalies that affect the national interest, we will recourse to the Congress, to national and international courts; that is to say, we will always conduct ourselves legally. We will not act arbitrarily nor will there will be confiscation or expropriation of property."

Recognizing recourse to national and international jurisdictions to address the results of their findings is in itself positive, particularly if corruption or illegality issues were indeed found. It is worth reminding that Investor-State cases (and international private commercial arbitrators) in a still limited number of cases, have already addressed claims where corruption was present, in some instances denying access to those mechanisms, but definitely imposing difficulties to private actors to raise claims against government actions derived from investments or contracts where findings of corruption are determined.

Unfortunately, the language is still not clear on exactly what would be sought from Congress' intervention to address "anomalies that affect the national interest." Congress' intervention would only be justified if an amendment to existing legislations is necessary. "Anomalies affecting the national interest" is an extremely ambiguous concept, which read in isolation from the concepts of corruption and illegality could mean many things, such as increasing government share or participation in the contracts, increase national content requirements, among others. Although direct expropriation may not be sought under the new administration, it should be careful not to adopt measures that could be considered tantamount to expropriation, which may give rise to millionaire claims under Mexico's existing Investor-State Arbitration Agreements.

López Obrador's statement also made a couple of interesting points that could have an impact on Mexico's trade relations with the U.S. and the rest of the world. A relationship of friendship and cooperation for development will be sought with the U.S. government, (underlining rights and protection for Mexican immigrants in the U.S.), while reducing current spending and increasing public investment to boost productive activities and create jobs will be made with the objective of "strengthening the domestic market, to produce in the country what we consume."

The key concepts of these statements are "cooperation for development" and "produce in the country what we consume," concepts which may be difficult to reconcile. How could Mexico obtain further cooperation for development and at the same time restricting, substitute or impose conditions to replace imports from those countries where cooperation will be sought, as stated in the second concept (produce what we consume)?

This later objective seems to match similar objectives of the existing U.S. trade agenda, as it would imply some sort of restriction or substitution of imported goods through local production, an idea that recalls Mexico's policies before NAFTA and that would definitely be a game changer for Mexico in its current NAFTA renegotiation process.

Mexico's current policy in the trade negotiations is based on full free trade arguments against protectionism and defending the benefits derived from "comparative advantage." These policies will have to be changed to pursue a similar approach as that taken by the U.S., which in practical terms could entail a serious opportunity to close the existing gap in negotiating positions and reach a new NAFTA deal promptly, one in which does not include the existing full free trade standard.