Date first published: 05/05/2022
Key sectors: all; electricity; mining; oil and gas
Key risks: regulatory changes; contract frustration; nationalisation
On 17 April President Andres Manuel Lopez Obrador’s (AMLO) flagship and controversial plan to reform the electricity market failed to reach the two-thirds majority needed in the lower house of Congress to become law. The reform included constitutional amendments strengthening the state’s role vis-á-vis the private sector, a move which will remain amongst AMLO’s priorities. Denouncing those who voted against the reform as treasonous, AMLO submitted changes to the 1992 Mining Law immediately after the defeat. The lower house approved these changes on 18 April with the required simple majority – for which the ruling party does not need opposition support – and by the Senate on 19 April. The changes set the stage for the nationalisation of lithium resources – designated as a strategic asset – by prohibiting private participation in the lithium market.
Why it matters
There are at least two immediate takeaways from these recent legislative developments. First, a certain degree of reassurance that a major overhaul of the energy sector is unlikely during AMLO’s term, which ends in December 2024. This might ease concerns of potential violations – and therefore lengthy litigation processes – of the United States–Mexico–Canada Agreement trade deal. The second takeaway is that these concerns – and those related to the populist drive to foster resource nationalism – will be eased but not eradicated, mostly because AMLO will continue to prioritise the state over the private sector.
Efforts to hamper the participation of private players in the energy sector will continue and likely extend to other sectors – as seen by the changes submitted and approved regarding the regulation of the lithium market which will be overseen by a federal authority. Moreover, similar moves towards other mineral resources cannot be ruled out.
Even though re-election is not currently allowed, AMLO’s reform drive has a potential to live on to the next administration. Although Mexico does not currently have commercial lithium production, it is believed to have around the world’s ninth-largest stock of the commodity. While the lithium-related legislative changes currently have mostly a political impact – compensating for the loss of the constitutional reform – the mid to long term implications related to trade and the overall sector’s development and regulations are on track to be massive.
AMLO has pushed to strengthen the role of the state in the energy sector since taking office in December 2018. Speculation over the likely roll back of the 2013 energy reform – which opened up the sector to private players – was evident early in his electoral campaign. The build up to the vote on the proposed reform including the constitutional amendment was significant, particularly since 7 April when the Supreme Court upheld the reform of the Electricity Industry Law (EIL) approved in March 2021 after falling short of the qualified majority needed to overturn the changes. The government portrayed this as a victory ahead of the 17 April vote, which ended up proving that the reform drive will continue to face legislative and legal hurdles.
Tensions between AMLO’s administration and the private sector and foreign investors will persist. Regulatory uncertainty – even if constitutional reform appears to be off the table for the remainder of AMLO’s term – will continue to dent the country’s overall business environment.