Constant Changes in the Energy Market

One of the major concerns of any investor is the lack of certainty on their investment. If the probability of change is high, then the return needed by investors will also spike. But what happens when there’s a mix? That’s one of the main issues posed by investors in regard to Mexico.

For more than 20 years, our country has demonstrated macroeconomic stability where some of our peers in the emerging market have defaulted not once but twice. Investors have not only seen these defaults, but also expropriations, lack of autonomy of the Central Bank and weakness of their autonomous institutions, as well as inexperienced finance ministers. This built momentum in Mexico with investors that continued throughout most of 2019. That was not the case by 2020, resulting in a mixed reaction by investors, some of whom paused their investments while others continued pouring money into Mexico.

In the first six months of 2019, there where no major changes to the government’s investment policy. But some investors were surprised by the first attempt of the federal administration to change the rules related to the CELs (Certificado de Energía Limpia – Clean Energy Certificate) in October 2019. From there, everything went spiring downward. Later, in 2020, we had the April and May policies that again changed the rules of the market, all of which were contested in courts. The result was that both policies were canceled.

2021 was not going to be different and the year started with more changes. This was not met with surprise by investors because as changes continue to occur, the uncertainty has become certainty. In other words, investors now are certain that changes in market rules will continue to occur not only in the power industry but for business in general. This raises a question for most investors: whether or not to continue investing in Mexico. Investment is still available through government-issued bonds and foreign reserves are at an all-time high, Mexico is still a powerhouse in manufacturing and although the country’s GDP has decelerated, there are some states within the country that are recovering jobs and growth, mostly driven by the USMCA and Trump’s policy on China, although this is not the case for the country as a whole.

After COVID-19, most countries have needed to rethink the way they do public policy and have changed it to promote business or provide aid to the economy. This was not the case in Mexico. Not only was Mexico ranked the second-lowest in Latin America regarding government aid as a percentage of GDP but we started the year with – again– another change in the power market, the result of a preferential bill sent by the president to Congress where we have seen little resistance because the president’s political party and his allies have a majority. Some resistance is expected in the Senate but the bill will eventually pass, and the path to follow by investors will be the same as in 2020: resorting to legal measures and international arbitrage. In doing so, investment will continue to be placed on hold or pulled out.

For more than 20 years, investors knew what to expect from Mexico. After 2018, the only certainty is uncertainty and the most likely outcome will be that risk will be met by higher yields, which the country hasn’t offered since 1995.