In The Club, Not Out Of The Woods.

In just six short weeks President Pena Nieto will hand over the reins of power to wily outsider Andres Manuel Lopez Obrador. As we inch closer to the AMLO era, whispers about the President elect’s intentions appear to be growing louder. Get the latest right here.

 

Higher Aspirations?

Last February, Mexico officially became a Member Country of the International Energy Agency, the first from Latin America. Comprised of 30 Member Countries and seven Association Countries, the IEA now represents more than 70 percent of global energy consumption—up from less than 40 percent in 2015.

The move was a big step for Mexico, and one that took a significant commitment to achieve. Having initially expressed interest in joining the agency in November 2015, Mexico met its membership requirements in record time. The Mexican Senate ratified the IEP Agreement just one month later, paving the way for the deposit of the accession instrument through which membership would take effect.

Membership in the IEA is a big deal for Mexico, but should the country be reaching even higher? At least one prominent voice is pushing Mexico to join OPEC. In addition to giving Mexico a voice in the discussion on volumes and pricing, OPEC membership carries the added benefit of the prominence of associating with Saudi Arabia, Iran, Iraq, and Kuwait.

While Mexico is currently participating as a non-partner in OPEC’s supply restraint agreement, the country’s crude output has been in decline for years. It may not be in Mexico’s best interest to even consider OPEC given AMLO’s clear intention to increase production.

In related news, former Pemex board member Fluvio Ruiz has been keeping busy on the lecture circuit, outlining his plan to “make Pemex great again” at forums in Mexico and abroad. The incoming administration has not yet defined Ruiz’s role, but according to him, “I will be something in Pemex.”

 

Open Markets. Closed Meetings.

At a recent closed-door meeting with energy company executives, AMLO reiterated his promise to honor the more than 100 contracts that have already been awarded to private investors in Mexico. Echoing previous statements, AMLO called for a thorough review of all contracts to ensure transparency, and added that companies will be required to share the results of all drilling activity (reserves reporting for the present, production as it comes online). Executives in attendance also noted that the president-elect criticized the 2013 constitutional reform for failing to stop the country’s extended output slide.

That may not be the case for much longer, however. Nieto administration officials estimate that the oil and gas blocks awarded in bidding rounds over the past three years will yield some $160 billion in new investment. Even still, AMLO’s single-minded focus on output will likely result in greater pressure on some companies.

Indeed, AMLO has made clear his desire for companies to prove themselves by quickly pumping oil from recent finds. At the same time, he has given no indication of offering up new fields to reverse dwindling output. Sounds to me like a leader looking to lever the mirage of future business opportunities to compel private investors to get going now.

 

Banking on Mexico

With the United States-Mexico-Canada Agreement all but signed, President Trump and the US Treasury have announced a plan to expand the emergency swap line between Mexico and the United States. First introduced in 1941, the program was designed to stabilize currency exchange rates and allows Mexico to borrow dollars for pesos during times of rate volatility. Under the new plan, the line will triple to $9 billion but economists don’t expect Mexico to tap into the available funds given the country’s current rainy-day funds on hand, as well as the $88 billion Mexico enjoys in available credit from the IMF.

History buffs may remember; during the 1994-95 Mexican financial crisis, also known as the “Tequila Crisis,” the US lent Mexico approximately $20 billion dollars. Given the current uncertainty of the Mexican economy, the new trade agreement, the severe financial duress surrounding Pemex, an Fx rate that has seen some swings, and an incoming President with very broad ambitions, it’s probably not a bad idea to have a contingency plan in the financial toolbox.

The arrangement acts as a signal to the market that the US views Mexico as a significant trade partner, and is willing to step up to provide financial support in an effort to maintain stability between the neighboring nations.

Inspired to jump into the Mexican market? Click here to contact our international markets team.

Best,

Chad Smith
Senior Vice President of Terminal Services