On November 30, Mexican President Andrés Manuel López Obrador (AMLO) announced a US$11 billion investment program that includes 29 projects in infrastructure and energy.
This is the second of such government stimulus to boost the economy amid the COVID-19 pandemic. The first one came out in October, and Carlos Salazar, president of the Business Coordination Council, has said a third one is in the pipeline.
How do these public-private partnerships contribute to the Mexican economy?
So far, the Mexican government and the private sector have agreed to partner in 68 projects through concessions, permits, or joint ventures. Worth around $25 billion, these partnerships account for 2.3 percent of Mexico’s GDP, the highest infrastructure investment in recent times.
The involved private companies have committed to securing at least 50 percent of the funding for the projects, and the government has cut red tape so that investors can funnel those funds.
According to Salazar, both investment packages will create 400,000 jobs. If completed, the infrastructure and energy projects could bolster Mexico’s industrial activity and trade. Although the AMLO administration claims these projects will not increase the public debt, it remains to be seen how the government will raise the remaining funds.
Which are the investment program’s projects?
Most projects are in the energy, roads, and sanitation sectors. A major one heralded by the AMLO administration is the construction of a $2.2 billion liquified natural gas (LGN) plant in Mexico’s northwest by IEnova, the Mexican branch of the US firm Sempra Energy.
The program also includes eight roads to connect the new Felipe Ángeles International Airport (AIFA) and transportation facilities for industrial and trade sectors.
Mexico’s Electricity Federal Commission (CFE) has a stake in seven of the 29 projects.
Estimated Investment (US$)
|Road junction to AIFA’s main entrance
|Southern roads in the state of Mexico
|Costa Azul LNG plant
|T-MFC logistics hub
|Tecolutla Lerdo power stations
|Manufacturing plant for export
|Water supply and desalination plant in Los Cabos, state of Baja California Sur
|Water-management improvement in Los Cabos
|Internal combustion power plant in Baja California Sur
|Phase I of the internal combustion power plant Tuxpan
|Modernization of the Centinela-La Rumorosa highway
|Modernization of the San Miguel bridge and Los Mochis Topolobampo beltway
|Transisthmian gas pipeline
|Tultepec-Santiago Tolman highway
|Internal combustion power plant González Ortega
|Internal combustion power plant Mérida
|Internal combustion power plant San Luis Río Colorado
|Internal combustion power plant Valladolid
|La Gloria-Colombia highway
|Orizaba-Cd. Mendoza beltway
|La Piedad-La Barca highway
|Silao-San Miguel de Allende highway
|US border connection for the Samalayuca-San Jerónimo beltway
Source: Economía Hoy.
What has been the pandemic’s economic toll in Mexico?
The lockdowns have reduced Mexico’s GDP by 17 percent in the second quarter of 2020. In the third quarter, the GDP recovered 12.1 percent, but the year-on-year growth fell by 8.6 percent.
According to the Mexican Entrepreneurs Association, the pandemic has impacted eight out of 10 small and medium enterprises (SMEs). Around 100,000 SMEs have shut down, which means over 1 million jobs destroyed.
SMEs account for 95 percent of all Mexican companies, employ 78 percent of the workforce, and contribute 52 percent of GDP.
México Evalúa, a public policy watchdog, argues that rather than more helicopter money to citizens and businesses, SMEs need the government to dismantle regulatory hurdles holding back growth and competition. It also notes that state-run firms such as Pemex and CFE, which are heavily involved in the investment program, have chronically been in the red and cannot guarantee the projects will be delivered on time and on budget.
In addition, the Mexican central bank has forecasted the country will return to pre-pandemic productivity levels only in 2022. The United Nations Economic Commission for Latin America and the Caribbean expects poverty to increase by 7 percent in Mexico this year, highlighting that serious challenges lie ahead for the Mexican government in 2021. Managing several infrastructure projects across the country with different stakeholders will put a strain on officials at all levels.
Are there any risks that can compromise the projects?
- A lower tax collection in 2021 could lead the government to resort to public debt to finance these projects. If the government deficit widens as a result, Mexico could lose its investment grade and see its fundraising costs rise.
- In the same vein, a slower post-pandemic economic recovery could stall the investments as the private companies have less capital to invest. Furthermore, a sluggish economy cannot utilize the new infrastructure at its full potential.
- A slower recovery in the United States could also impact Mexico, its main trade partner, weakening the resilience of both the public and private sectors.
- According to Fitch Ratings, the main risks of these public-private partnerships lie at the state and local levels. Local officials should harmonize regulations with the federal government to increase confidence with investors.
- A mandatory requirement is to obtain the approval of local communities affected directly or indirectly by the projects. An opposition agitated by activists or politicians could halt development even at late stages.
- Mexican markets remain highly regulated. The gasoline and cargo transport markets, for instance, must deal with federal and local red tape that are not going away despite higher investments.
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