Mexican President Andrés Manuel López Obrador (AMLO) lied about his commitment to preserve the energy-sector reform undertaken by the previous government, which for the first time in 70 years opened the door to private investment, and he has been dismembering it piece by piece.
His latest attack came on May 15 through a decree, which flagrantly breaches several laws, including the country’s constitution, that represents the virtual death knell for private investments in green-energy generation of more than US$30 billion, mostly from corporations based in the US, Canada and Europe.
As a perennial presidential candidate since 2005, AMLO frequently promised to stimulate green energy sources and criticized his predecessors for not doing enough in that respect. But when the energy reform was adopted in 2015, with the support of all political parties in Congress, he opposed it, claiming that it was an effort to “privatize” the money-losing, government-owned behemoths that monopolized all activities related to electricity and oil.
That was another lie, since the aim of the changes was to reorganize those industries in order to minimize their losses, by introducing competition and private investment in various phases of the production processes.
Various independent agencies were created to ensure transparency and efficiency of the reorganized sector, which won the universal applause of all the corporations and international watchdogs involved, gave confidence and certainty to investors, eliminated the possibility of corruption, and incentivized efficiency in all the stages of these industries.
AMLO’s moderate associates, such as businessman Alfonso Romo, whom I refer to as his “enablers,” since they toned down the jarring rhetoric of their leader, and made him electable by large numbers of skeptical centrist voters, promised that the reform would be respected, while recognizing its excellence.
But as soon as he was elected, AMLO started a U-turn, exposing that his moderate demeanor had been a fraud, and naming a triumvirate of radicals to lead the Ministry of Energy, the electrical monopoly CFE (Federal Electricity Commission), and the oil monopoly Pemex. Today, the radicals are victorious, and the “enablers” are either gone or muted, with their tails between their legs.
The onslaught against the energy reform gathered force recently when AMLO, traveling along the US-Mexico border, stopped at La Rumorosa, a patch of mountainous desert known for its perennial strong winds.
There, he taped a video making the accusation that “in one of the most beautiful sites in Mexico … the authorities allowed those ‘ventilators’ [meaning windmills] to produce wind power, spoiling the natural scenery and producing very little energy by private companies that demand subsidies. These were the dirty businesses of the ‘neoliberal’ period.”
His ecology secretary would later add “those blades rob the air from the indigenous people.” All lies!
I had the privilege of visiting the wind field alluded to by AMLO last year and was impressed by the quality and cleanliness of the operation of the IEnova plant, a Mexican consortium associated with US Sempra, that produces 155 megawatts that are exported to San Diego and provide energy to 65,000 homes in southern California.
There are no subsidies involved and it is a great business that generates taxes and hard currency for Mexico. I interviewed several of the owners of the land, peasants of a barren desert that cannot produce anything, the result of decades of demagogic land reform, who now instead of being forced to go to work in the US illegally enjoy the rents from leasing their land.
The illegal May 15 decree claimed that the pandemic crisis demanded “efficiency, quality, reliability, continuity and security of the national electric system,” which is Orwellian parlance of these demagogues, when clearly what they were doing was a power grab to restore the full monopoly of CFE over the whole spectrum of activities associated with the industry.
The real reason is that CFE is forced to buy all the fuel oil produced by Pemex, which lost its last remaining clients when the sea vessels that used it were forced to clean up their act and change to less polluting power sources. And Pemex produces lots of high-sulfur fuel oil because its refining are decrepit and inefficient, and without CFE it would have no client for it.
The consequences of this ill-conceived decree are multiple and very damaging:
- It opens the doors to harmful arbitration procedures in international tribunals that the Mexican government will surely lose, forcing the payment of billions of dollars in compensation. I have a friend, a recognized expert in the international arbitration arena and who is also very well acquainted with Mexico’s energy sector, who is already licking his chops at the amount of well-paid work that will come his way.
- The companies that will be suing will also stop paying their creditors that are, to a large extent, Mexico’s government-owned development banks, such as Nafinsa (Nacional Financiera) and Banobras, and global multilateral institutions that must be compensated by the government, such as the World Bank, the InterAmerican Development Bank and the North American Development Bank.
- The blow to the confidence of investors in Mexico, foreign and domestic, will be fatal, with the likelihood of the country losing its credit-rating status getting much closer, with the ensuing massive capital outflows. This, in turn, will put additional pressure on the foreign-exchange market that will lead to a steeper devaluation of the Mexican peso, beyond the more than 30% depreciation that has already occurred as the result of AMLO’s policies.
- The complete loss of investor confidence will also mean that the collapse of the economy, already dire due to the pandemic that led to the partial closure of the economy and the many ill-conceived measures previously taken by AMLO, will be deeper than the 12% collapse in this year’s gross domestic product that I expect, and will also be more prolonged. But we should not worry, AMLO has already dictated that we must “ditch measuring the GDP and gauge, instead, the happiness and spiritual well-being of the people.”
- A radicalized AMLO is already pondering the next moves in his incessant quest to demolish the economy of his country. His minions in Congress have announced plans to “nationalize” private retirement accounts, worth $215 billion, to finance his pet projects and giveaways to political clienteles. Another one proposed using the so-far-autonomous central bank’s international reserves, as well as the lines of credit with the International Monetary Fund and the US Federal Reserve for the same purpose.
- The chairman of his political party, morena (they insist acronyms for equality’s sake), proposed just last week that the statistical authority of the country, INEGI, start collecting information about the rich by visiting their homes to evaluate their wealth, in addition to accessing their tax returns and banking information.
The situation is looking bleaker by the day, and I am afraid that it will only get much worse.
Manuel Suárez-Mier is an economist and former central bank official, economic diplomat and professor at Georgetown and American universities. He now is a consultant residing in Washington, DC.