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Analysis

Legislative Stability Ensures Smooth Political Transition

Wed, 05/08/2019 - 13:45

The arrival of a new government offers the possibility to unlock regulatory issues that in many cases are dragged around by other government officers. It also opens up the door to changes in the country’s constitutional framework, which could generate instability and fear among investors. “It is hard to predict where the country is going, since the new government took office very recently,” says Eduardo Kleinberg, Managing Partner at Basham, Ringe y Correa. 
The Mexican economy has enjoyed stability in the past few years, which has helped maintain its attractiveness among investors. A wrong turn in terms of policymaking could send investors scrambling. Raymundo Enríquez, National Managing Partner of Baker McKenzie, says change is always inevitable but, on many occasions, it offers the possibility for growth. Mexico is no exception. “The fourth transformation announced by the new presidential administration implies a change in the way things are done and the way the government and private sector interact.” he says. More than a problem itself, Enríquez sees the current scenario as an opportunity for different players to participate as investors and for law firms established in Mexico to guide them through the complexities of the law. 
Reasserting trust in a convulsed environment is particularly important, especially after the cancellation of iconic projects such as NAIM. “I believe the airport consultation was not optimally conducted and generated a great deal of doubt. But in the end, Mexico is more than just one project and I think that the new government will comply with its obligations and will honor all the contracts that were awarded,” says Enríquez. Despite the uncertainty, the private sector must find a way to work alongside the new government, adds Raúl MartínezOstos, Chairman of the Board and Director General of Grupo Financiero Barclays México. “We have to understand that there is and there will be uncertainty, so we must find a way to work with it and clarify as much as possible.”
Juan López de Silanes, Managing Partner at Basham, Ringe y Correa, says that although the government might try to change the laws, undoing the legislative changes of the previous federal administration would not be as easy as many believe. “The federal administration must follow the rules under which previous contracts and tenders took place and, should the case arise, the government must comply with the penalties established in those contracts.” Even though NAIM’s cancellation generated fear among investors and credit rating agencies, many, including international financial markets, believe it will be business as usual. “So far, the markets have given López Obrador’s administration the benefit of the doubt, which helps when managing risk,” says Martínez-Ostos. “The government’s economic program, at least in its first year, is going in the right direction, which has had a calming effect. The landscape will gradually clear.”
 

INTERNAL FACTORS

The negotiation of USMCA pushed the country to move toward a new commercial paradigm with the US. “The paradigm shift, in which the US promotes protectionism and China promotes free trade, is an indication that Mexico must adjust its foreign policies,” says Hugo Cuesta, Managing Partner at Cuesta Campos y Asociados. “Mexico … will have to recognize other countries, including China, as potential partners and allies.”
Despite the uncertainty generated by international trade disputes, there are many internal elements in which the government could focus on to maintain the country’s competitiveness as an investment destination. An example would be improving the level of economic competition in the country. “For many years, monopolies negatively impacted Mexico’s competitiveness,” says Enríquez. “Competition is good for everyone since it lowers prices, generates employment and improves the population’s well-being.” Rafael Valdes, Partner at Valdes Abascal Abogados SC, says economic competition should not be neglected by the government. “Mexico’s economic growth and its exposure to the international market have bolstered the country’s competitiveness and productivity but this has also generated a more complex scenario for ensuring a fair and competitive environment for companies.” 
Despite the expectations generated by the arrival of a new government, Martínez-Ostos says the country needs to be patient. “People think that changing government administrations is a smooth process but it is not. There needs to be a diagnosis and there is a learning curve, not only for the government but also for us. The private and public sectors need to be in constant communication to understand how they can help each other and better coordinate policymaking.”