AMLO’s Seizure of Germán Larrea’s Rail Line Is Making Investors Vigilant of Mexico

Mexico’s president appears intent on forcing them to do business on his terms

AMLO has 15 months left to fulfill his promise to transform Mexico.
By Andrea Navarro
May 23, 2023 | 09:51 AM

Bloomberg — For global investors, predicting President Andres Manuel López Obrador’s moves has never been easy. And now as he enters the home stretch of his presidency, it might get even harder.

Last week, billionaire Germán Larrea woke up to find the government had seized a 120-kilometer stretch of a rail line he owns. The Navy took the section at 6 a.m. under a presidential decree citing “public use,” meaning that it serves a greater benefit for the government. On Monday, AMLO, as the president is known, denied that the government had expropriated Larrea’s rail; it had acted only to recover a concession, or the permit to manage the railroad.

The move shocked a business community that until now has been enjoying a surge in growth in foreign investment. One large business group said it could damage investor confidence in the country, while another said López Obrador’s recent actions have held up tens of billions of dollars of investments.

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López Obrador has 15 months left to fulfill his promise to transform Mexico. Over the past four years, he has created an environment where most business decisions must receive his seal of approval, while weakening regulators central to the perception of a stable and safe business environment. “It’s a step back to the Mexico of the 60s, the 70s, where companies had to sit down and negotiate directly with the president and no one knows what the rules are,” Guillermo García Sánchez, associate professor at Texas A&M University School of Law, told Bloomberg News.


The president’s decree came after a series of controversial moves that have begun making businesspeople skittish about the prospects of investing at this time in Mexico.

In March, López Obrador introduced a set of bill initiatives that, among other things, would extend the state’s reach into aviation and mining, two key infrastructure sectors. So far, congress has passed two of them.

A third one has had a much rockier time. Known as the “administrative megareform,” it would allow the government to terminate contracts with private investors if “public interest” calls for it. It would also cap the compensation companies can receive after a canceled contract. But the measure did not come up for debate. Congress will take it up again this fall.


While investment in Mexico has by no means ground to a halt, López Obrador’s insistence on increasing the state’s grip over business has executives at many medium-sized companies rethinking plans to open up shop or grow existing operations in Mexico, signaling a reluctance that, in the long term, could mean fewer dollars coming into the country.

Many of these companies don’t have the clout to make their case for appealing directly to López Obrador and get his blessing for a project. Even Elon Musk hopped on the phone with the president to discuss labor and fiscal details of a recently announced $5 billion Tesla, Inc. factory in Nuevo Leon before the deal went through.

Many companies, then, will keep their cash parked on the sidelines for now, José Medina Mora, president of business chamber Coparmex, told Bloomberg News. How much? Thirty-five billion dollars, Mora estimated, based on conversations with business groups from Canada, Germany, Spain, and the US.

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Companies “want clear rules that can apply to everyone, and they don’t want to negotiate individually, with their country’s ambassador present, to get authorization from the Mexican government for each one of their projects,” Medina Mora said.


A ‘new nationalization’ and investors’ fears

The experience of Iberdrola SA, a Spanish power company with business in Mexico, served as another reminder for investors that López Obrador is calling the shots. For years, the president had repeatedly used his morning press conference to lambast Iberdrola, regularly calling its executives corrupt thieves who had benefited from the privatization of Mexico’s electric industry.

Then on April 4, López Obrador announced that his government would buy 13 aging power plants from Iberdrola for $6 billion. He broke the news via a 13-minute video shot in an elegant room at the National Palace, seated at a large table.

To his right sat José Ignacio Sánchez Galán, chairman of Iberdola, who said he now understood the government’s energy policy, which led the company to seek “a solution that’s good for the Mexican people” and complied with the best interests of Iberdola’s shareholders. López Obrador framed the purchase agreement as a “new nationalization.”

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The next day, Iberdrola shares rose 2% as investors saw the deal as a good way to get cash for old plants that it could invest in renewables, according to analysts.

Garcia Sanchez said that Mexico won’t necessarily benefit from the agreement in the long run, because the plants are more than a decade old. “But AMLO was able to control the narrative and say he’s taking back control of infrastructure,” he said. And that, in turn, will “lead to the energy sovereignty he seeks.”

Investors that Bloomberg News spoke to discussing the business climate declined to go on the record for fear of alienating the López Obrador administration and future business prospects.

Worried investors, especially those in the energy sector, have called García Sanchez, asking for advice. Their “big question is whether it would be better to endure the state’s harassment hoping that in a year or so, there’ll be a change in circumstances after the presidential election,” he added.


The frontrunners in that election include three of López Obrador’s closest allies. Investors may well welcome a Marcelo Ebrard or Claudia Sheinbaum presidency, Garcia Sanchez said. “A change of actors always comes with the chance to renegotiate,” he said. “Investors believe they’ll be more pragmatic.”

A ‘sort of populist demagogue’

If López Obrador’s contracting reform passes this fall, investors will have few pathways to contest the early cancellation of a contract, Garcia Sanchez said. That, in turn, could invite under the table negotiations and corruption, he said.

Some investors who spoke to Bloomberg News said they hoped congress can water it down — they want to be able to bring their money into Mexico without looking over their shoulder. Others think the president will do whatever it takes to preserve the measures in their current form.


Marko Cortes, the head of the opposition party PAN, said his party will mount a legal challenge if it passes. López Obrador wants “to personally assume the control of the government’s budget and decide who gets contracts and permits and who gets them taken away,” he said in a video message.

Amid all this, Mexico’s economy has proven resilient. It grew 1.1% in the first quarter, surprising most economists. While the peso led major losses on Monday partly in response to the railroad incident, according to Bloomberg analysts, it recently reached its strongest levels since 2016. And the Tesla deal suggests that the age of nearshoring, a strategy in which companies move their operations closer to the US to shorten supply chains and cut transportation costs, has finally arrived.

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Mexico’s share of US imports has risen as companies produce more of their US-bound goods in the country, recent data show. The effect of nearshoring would likely be larger with more investor-friendly government policies, says Bloomberg Intelligence’s Felipe Hernandez. But that’s not in the cards, he said.


Gladys McCormick, an associate history professor at Syracuse University who specializes in Mexico-US relations, said López Obrador’s recent actions reflect the “sort of populist demagogue persona that he’s carved out for himself,” and that it’s all been part of a perfect recipe “for him to be go out there in public and remind people that he is, above all, for Mexico.”