Mexico’s incoming government names ally from left to central bank

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Reuters / Frank Jack Daniel / November 26

 

MEXICO CITY (Reuters) – Mexico’s incoming finance minister on Monday nominated left-leaning economist Gerardo Esquivel as central bank deputy governor, the second appointment to the board by the new government following an independent named in September.

In a 2016 newspaper opinion piece, Harvard-educated Esquivel raised the question of whether the autonomous Banco de Mexico should adopt a dual-mandate to promote growth as well as low inflation, and argued for more diverse views on the board.

Esquivel was a spokesman on economic matters for the campaign of President-elect Andres Manuel Lopez Obrador. He is married to Lopez Obrador’s choice for economy minister, Graciela Marquez, and was previously due to serve as a deputy finance minister in the cabinet.

Lopez Obrador, who secured a landslide election victory in July, takes office on Saturday.

In his profile on Twitter, Esquivel says “his heart beats to the left.” In 2015 he co-authored an Oxfam study titled “Extreme Inequality in Mexico” that explored the rapidly increasing wealth of Mexico’s small group of billionaires.

He did not immediately respond to an interview request for this story.

In a December 2016 column in Mexican daily El Universal, Esquivel strongly defended the bank’s independence, but suggested a debate about whether to change its objective.

“Maybe what we should start to ask ourselves is whether it is time to move to a dual objective (growth and inflation) in the central bank, instead of a single objective (inflation), in the same way as happens in other countries, like the United States,” he wrote.

He also cited an article in which he said economist Jonathan Heath argued for “a plurality of visions and perspectives about the economy” on the central bank’s five-strong board.

Incoming finance minister Carlos Urzua nominated Heath to the board in September, to replace a departing deputy governor. Esquivel is replacing another deputy, who is standing down on health grounds.

Incoming finance minister Carlos Urzua told Reuters earlier this year that the central bank should preserve its single objective.

Heath is an outspoken and well-known private economist who was previously chief economist for HSBC bank in Mexico. He told Reuters in September he had a “balanced” view on monetary policy. He has been critical of the outgoing government as well as some of Lopez Obrador’s policies.

Both nominations must be approved by the Senate, which is controlled by Lopez Obrador’s MORENA party and its allies.

Urzua announced the appointment in a news conference aimed at calming investors, after Mexico’s S&P/BVM IPC stock index .MXXcrashed to its lowest in more than four years on Monday and the peso weakened.

Urzua later told Reuters he would name Victoria Rodriguez Ceja, another close ally who previously worked with him in Mexico City’s local government, to replace Esquivel.

The losses to the index and the peso MXN=, which slipped to its weakest against the dollar in more than five months on Monday, come after Lopez Obrador announced he would stop the construction of a $13 billion airport and after a series of bills from his party aimed at regulating business more closely.

 

Reuters / Frank Jack Daniel / November 26

 

As new Mexican president takes office, experts foresee rocky road in relations with U.S.

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Houston Chronicle / Olivia P. Tallet / November 15

Two men with outsized personalities, both intent on bringing dramatic change to their societies. Two countries, side by side, with a long history of friendly trade and sometimes hostile diplomacy.

As leftist president Andres Manuel Lopez Obrador takes the mantle of the Mexican presidency Dec. 1, political experts, former diplomats and business leaders are bracing for a potential collision with self-styled nationalist President Donald Trump.

The anticipated confrontation between Trump and Lopez Obrador — commonly called by his initials, AMLO — could affect Texas more than any other state given the billions of dollars in Lone Star products that are sold south of the border.

The possible flash points include a changing energy policy, trade protections, increased heroin and methamphetamine trafficking and an abrupt reversal of the Mexican government’s costly campaign to confront the powerful drug cartels. But perhaps the biggest is the bitterness engendered by Trump’s harsh immigration policies and his plan to erect an impenetrable wall along 1,200 miles of U.S.-Mexico border.

“There is a rocky road ahead for the relationship between the U.S. and Mexico and the two presidents,” said Duncan Wood, the director of the Wilson Center’s Mexico Institute, during in a recent visit to Houston.

Lopez Obrador is a skilled politician who was mayor of Mexico City from 2000 to 2005 and national party leader, running twice for the presidency prior to winning. He and Trump are forceful, charismatic leaders with a populist, anti-establishment bent to their politics and are adept at inflaming the passions of their base supporters. And perhaps more to the point when it comes to a personality contest, “Neither of them likes to be contradicted,” said Wood.

Indeed, Trump had reportedly referred to the Mexican president-elect as “Juan Trump,” a recognition of the similarities between him and the populist Mexican politician, according to a story in Americas Quarterly.

Both leaders have taken unexpected steps to demonstrate their resolve. Lopez Obrador has put Mexico’s $218 million presidential jet up for sale, while Trump earlier renegotiated the price tag of two Air Force One replacements and claimed savings of $1.4 billion.

But Lopez Obrador has distanced himself from any semblance to Trump, who, in his opinion, “fuels racism … as a political strategy” and a leader who has done Mexico much damage, according to an interview with the Spanish language TV network Univision.

Vice President Mike Pence will lead the U.S. delegation to Mexico to attend Lopez Obrador’s inauguration.

New course for Mexico?

Observers say the Mexican leader has already given some key indications of the course he will steer.

Lopez Obrador’s plan to cancel the construction of the Mexico City airport, a $13.3 billion project with a third of the work already completed, sent shock waves through the investment and business sectors. With U.S. foreign direct investments in Mexico of $110 billion last year, concerns rose about Mexico as a reliable business partner.

“We are already getting a sense of what an AMLO presidency might look like, since the administration has named many of the key policy personnel and moved forward on some campaign promises, such as its consultation for whether or not to keep building the new Mexico City airport,” said Antonio “Tony” Garza, the former U.S. ambassador to Mexico.

Lopez Obrador was able to easily wrest power from outgoing President Enrique Peña Nieto, whose Institutional Revolutionary Party (PRI) had supported global open markets and free trade. But Peña Nieto’s presidency was also hamstrung by unchecked corruption and what was perceived by the Mexican populace as a submissive stance when Trump met with the president and insisted that Mexico would pay for the border wall.

“Trump’s nationalism looks outward; it manifests in attacks on international institutions and the leaders and people from other countries,” said Tony Payan, the director of the Baker Institute’s Mexico Center.

Lopez Obrador’s nationalism looks inward to restoring Mexico’s working class with subsidized policies, “seeking to restore the state as a central economic agent, and his criticism of globalization and the (North American) free trade agreement has to do with his belief that previous administrations implemented a neoliberal economic model that punished the poor,” Payan said.

Key energy policy changes

The stakes are high for the future of the U.S. economic relationship with Mexico, its third-largest trading partner with combined trade of $616 billion.

Mexico was the second largest export market for U.S. products in 2017, while becoming the largest provider of fruits and vegetables and other agricultural products, according to the Office of the United States Trade Representative. Cross-border trade between Texas and Mexico was $187 billion.

Wood agreed that Lopez Obrador’s appointees so far signal a cabinet that is committed to unraveling the energy reforms signed into law in August 2014 by the previous administration, with AMLO already announcing a plan to suspend auctions for oil production contracts in the Gulf of Mexico. “I am particularly worried about the energy sector and what happens next with it,” Wood said.

So far, 110 oil and gas contracts representing about $200 billion in foreign investment have been granted under Mexico’s reform of its energy sector and the national PEMEX oil monopoly, with U.S. companies winning the second highest number of contracts after private Mexican firms.

The energy reforms were considered to be particularly beneficial to Houston’s economy, given its leadership in offshore oil exploration and production technologies.

At a minimum, the airport pullout signaled that Lopez Obrador plans to deliver on campaign promises.

In a recent speech, he pledged to “rescue the oil and gas industry,” from a decline in production that he blamed to the historic opening of PEMEX to foreign investment. When enacted, Lopez Obrador accused the current president of being a “traitor to the country” for handing over “the country’s natural resources to foreigners.”

“The likelihood of the next (Mexican) administration impacting how business is done in the energy sector is high,” said Garza, who’s now counsel to the law firm of White & Case in Mexico City. “The question is how disruptive will it be and if returns will be seen as justifying the additional risk.”

“So far AMLO’s party has proposed legislation aimed at the new regulatory framework,” said Garza, adding that the president elect has been “all over the board on issues having to do with gas and power, and essentially come out against fracking, all of which, if he’s serious about, have the potential to impact Texas.”

Gov. Greg Abbott, through a press aide, said he welcomes working with Mexico’s new administration to build on economic and cultural bonds.

“Governor Abbott believes that a strong relationship with Mexico, our largest trade partner, is essential to Texas’ economic success,” said Ciara Matthews, deputy communications director. “Through cooperation on infrastructure, energy, trade, and security, Texas and Mexico will continue to strengthen our long-standing relationship and bring even greater prosperity to both sides of the border.”

Differences over immigration

Differences with Mexico regarding Trump’s immigration policies, analysts said, could be another contentious topic.

As caravans of migrants departed Central America to seek asylum at the U.S. border in the weeks before midterm elections, Trump moved quickly to politicize the “caravan” by branding it an “invasion” and claiming that Middle Eastern terrorists and gang members were among their ranks.

Trump ordered the U.S. military to the border, and meanwhile threatened to withhold foreign aid to Mexico and the Central American countries whose citizens are fleeing economic hardship and violence.

Mexico choose not to halt the migrants by force, but instead offered visas and asylum to the Central Americans in an effort to induce many to abandon the long trek to the north. Trump has declared the migrant caravans a national security threat, and ordered border agents not to accept asylum seekers who enter the U.S. away from legal ports of entry.

Lopez Obrador has repeatedly criticized Trump’s “xenophobic” and disrespectful depiction of migrants and insisted they should receive humanitarian treatment.

During his presidential campaign, Lopez Obrador introduced a petition before the Inter American Commission on Human Rights condemning Trump for allegedly persecuting immigrants and implementing hate speeches and policies, such as the border wall, in violation of human rights, as he and a lawyer explained the action.

War on drugs in flux

Earlier this month, Lopez Obrador said his administration will de-emphasize the fight against drug cartels, focusing instead on roots of crime, according to a Bloomberg report.

Main points of the strategy include creating a national guard and stressing regional coordination of security efforts, eradicating corruption, rethinking the prohibition of some drugs and creating job opportunities, Lopez Obrador and cabinet members have said.

 

Houston Chronicle / Olivia P. Tallet / November 15

 

Will Mexico’s New President Have An Economic Impact on RGV?

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KVEO / Joanna Guzman / 12 November

 

MCALLEN, Texas – Mexico’s president-elect, Andres Manuel Lopez Obrador, plans on canceling the construction of a $13 billion airport project in Mexico City. Officials say this will have an economic impact for both the United States and Mexico.

Duncan Wood, Director for Wilson Center-Mexico Institute says, “We’re seeing that the United States has invested very heavily in Mexico over the past 20 years, since the signing of NAFTA. Mexico is investing increasingly north of the border as well. we see integrated production chains that have been created where by factories in the United States depend upon the input counterparts in Mexico and vice-versa.”

With more than 1.5 million Americans living in Mexico, Woods says the U.S. and Mexico share over $2 million in goods traded every hour. Adding the Rio Grande Valley is a part of the Untied States that depends heavily on the trade between the two countries.

Wood says, “In a place like McAllen which is depending so heavily upon Mexican’s coming north to do their shopping, issues like the border, how easily you can get across the border. Issues like public security in northern Mexico, Mexican’s are more willingly to take the journey from let’s say Monterrey into McAllen to do their shopping. Those are issues which really matter and will have a very important economic impact on these communities.”

One-third of the new international airport in Mexico City is already finished. It is estimated the cost to cancel the project is nearly $5 billion. Lopez Obrador says the country has money set aside for. Meanwhile, Woods says the focus right now is on what the future holds.

“We’re trying to work out exactly what the prospects are for the economy, for security; public security in particular, for migration, and of course the energy sector which matters so much down here in McAllen.” says Wood.

Lopez Obrador says the airport project is corrupt and will end ties between economic and political power. Lopez Obrador will take office on December 1.

 

KVEO / Joanna Guzman / 12 November

 

Relief On Horizon for Mexico Natural Gas Market, Despite Short-Term Challenges

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Natural Gas Intelligence / Andrew Baker / November 12

Mexico’s natural gas market faces multiple short-term challenges, the most urgent of which is a lack of supply to power generators, petrochemical plants, and industrial consumers in the southern and southeastern part of the country, as the state-owned oil and gas producer struggles to increase output.

Amid declining gas output by national oil company Petróleos Mexicanos (Pemex) and delays to critical midstream infrastructure that would bring abundant and inexpensive gas from Texas, consumers in southern Mexico now face the prospect of switching to more expensive fuel oil, diesel and liquid petroleum gas (LPG) in order to continue operating over the coming months.

A lack of Pemex supply and scarce available cross-border pipeline capacity for private sector gas shippers, as well as a dearth of storage capacity, are compounded by the fact that a new government will take over on Dec. 1.

However, relief appears to be on the horizon. The 2.6 Bcf/d Sur de Texas-Tuxpan marine pipeline is expected to enter operation next month or in January, with the Cempoala compressor station reversal project slated to finish in April. Both projects should provide relief to consumers in the south, the energy ministry’s general director of natural gas and petrochemicals, David Rosales, told NGI’s Mexico Gas Price Index.

While details of a planned tender to construct 45 Bcf of underground storage capacity still need to be ironed out, Rosales said the hope is for the new administration to give an order to proceed with the tender by early next year.

“I think it’s very clear for them that this is a [project] that will not cost the state, and will be paid for by the users of the gas system themselves,” Rosales said.

The incoming administration has generated unease among investors with its proposed oil policies, such as a pledge to halt crude exports and to divert Pemex investments from exploration and production to new refineries, but Rosales said a dramatic shift in course on natural gas policy is less likely. An efficiently run gas segment translates directly to cheaper electricity prices for end-users, he noted.

Recent days have also seen progress on other cross-border pipeline projects that should help meet rising demand from the power sector.

San Antonio, TX-based Mirage Energy Corp. last week said it has a memorandum of understanding (MOU) for reserved capacity on its proposed Texas-to-Mexico gas pipeline with commodities trader TrailStone NA Asset Holdings LLC.

The nonbinding MOU would allow TrailStone to purchase 150,000 MMBtu/d (146 MMcf/d) of reserved capacity for 10 years at a fixed tariff from the Banquete/Agua Dulce area in South Texas to Compressor Station 19 and Los Ramones interconnection points on the national pipeline network Sistrangas,” Mirage said. TrailStone is a partner and commercial operator in the recently commissioned Banquete header near Corpus Christi, TX.

The 42-inch diameter, bi-directional pipeline system under development would include nearly 140 miles of pipeline in Texas and about 103 miles of pipeline in Mexico. In addition to the four sections of pipelines in the two countries, Mirage said another interconnect in Falfurrias, TX, also in far South Texas, to Transcontinental Gas Pipe Line (Transco) is being considered, as is a 14-mile pipeline in Mexico known as the Storage Line that would connect the Progreso, TX, on the border to the Brasil storage field in Tamaulipas, Mexico.

Mirage expects to begin final development work on the project in December, “with a view toward receiving required United States and Mexico permits and authorizations in 3Q2019. The company has completed the necessary engineering and design of the pipeline. The alignment for the pipeline has also been substantially completed and Mirage is in the process of securing right-of-way agreements.”

Valley Crossing To Supply CFE Import Capacity

The Mirage news follows the startup of Enbridge Inc.’s Valley Crossing gas pipeline, which spans 168 miles in Texas from the Agua Dulce hub near Corpus to the Gulf of Mexico east of Brownsville.

Valley Crossing’s primary customer is Mexican state power utility Comisión Federal de Electricidad (CFE), which is undertaking a massive shift to combined-cycle gas turbines (CCGT) from fuel oil and diesel-fired power generation capacity. Mexico’s installed CCGT capacity stood at 28,084 MW at the end of 2017, a figure that is expected to double by 2032, according to the Energy Ministry’s 2018-2032 power sector development program.

“Valley Crossing is expected to account for about half of the CFE’s total import capacity,” Enbridge said last week. Transport capacity is “half the average daily production output of the entire Eagle Ford Shale basin — in fact, it’s more than 10% of the average daily production for the entire state of Texas.”

The pipeline is designed to “support Mexico’s growing electricity generation needs, as power companies like the CFE choose natural gas,” which is a “cleaner” burning fuel and more economical than imported liquefied natural gas, the Calgary-based operator said.

“Supply in Mexico continues to decline, but at the same time their demand continues to grow,” said Enbridge Executive Vice-President Bill Yardley. “And the U.S. has some of the most economical, plentiful and reliable natural gas supplies in the world.”

Valley Crossing connects to the Sur de Texas-Tuxpan pipeline, a joint venture of Sempra Energy unit Infraestructura Energética Nova and TransCanada Corp.

Fitch Bullish On Mexico Power Sector

A FitchRatings unit said last week it holds a positive outlook for Mexico’s gas-dependent electric power sector over the next 10 years, despite uncertainty over the energy and infrastructure policies of incoming President Andrés Manuel López Obrador, who is commonly known by his initials AMLO.

“We expect the Mexican power sector to register strong growth and offer investors significant opportunities over the coming decade, thanks to rising energy demand, a supportive market structure and favorable policies,” Fitch analysts said. “Our positive view for the market is premised on the expectation that AMLO will adopt a pragmatic approach and will not reverse reforms of the power sector that contribute to attracting investment in the market.”

Fitch analysts said they expect “Mexico’s total installed capacity — net of project retirements — to increase by almost 30% between 2018 and 2027, driven primarily by the development of wind, solar and thermal power projects. Moreover, we expect Mexico’s power consumption to increase by an annual average of 2.4% over the same period.”

Although wind and solar capacity is expected to increase the most on a proportional basis to current levels, conventional thermal power is seen accounting for about two-thirds of the country’s total capacity through 2026, Fitch said, citing projections from Mexican energy ministry Sener and the U.S. Energy Information Administration.

Despite the overall optimistic outlook, analysts cautioned that, “AMLO’s unorthodox approach toward decision making for the infrastructure sector could weaken private companies’ interest in investing in the market.” Fitch cited investor unease over López Obrador’s recent decision to cancel a $13 billion airport for which construction was more than 30% complete via a referendum in which only about 1.1 million of Mexico’s 129.2 million people voted.

Other risks to the power sector include López Obrador’s ability, because of the comfortable majorities held by his coalition in both of the national legislative chambers, to reverse the 2013-14 energy reform of predecessor Enrique Peña Nieto.

“AMLO has long opposed the liberalization of the Mexican energy sector, although his criticisms have mostly focused on the oil and gas industry rather than the electricity industry. A risk of changes to the power sector’s regulatory framework, however, must be taken into account.”

Fitch also cited the risk of an economic slowdown in Mexico, but noted that this risk is mitigated by the tentative agreement reached Oct. 1 by Mexico, Canada and the United States on the U.S. Mexico Canada Agreement, an updated version of the North American Free Trade Agreement. The agreement has yet to be completed.

 

Natural Gas Intelligence / Andrew Baker / November 12