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2018: Mexico’s year of challenges on aviation related investme

Five years ago, Mexico became a geological focal point for international investment. Predictions lured foreign investors into Latin America's second largest economy with $1.26 trillion GDP into the 13 largest economy.1 This gigantic promise of opportunity came with Mexico's international economic platform of 33 reciprocal promotion and protection of investment agreements, 10 free trade agreements, 45 direct countries with tariff and trade benefits and participation in the world's most important and respected multilateral and regional economic and political organizations.2 This network has permitted Mexico to link its market directly to over a billion consumers worldwide, giving direct economic access to over 60 percent of the worlds GDP.3

This positive forecast was accompanied by major structural reforms in Mexico's laws, headed by the current, and now ending, Peña Nieto administration. The Federal government implemented the Financial Reform with four main elements that aimed to foster economic growth and provide legal certainty at all commercial levels:

1. Boost competition in the financial market;4

2. Promote access to "micro-credit";5

3. Foster access to credit through private financial institutions;6 and

4. Develop and strengthen a solid national financial system.

These main elements provided an economic focus for a legal reform that encompassed most of Mexico's commercial, securities, bankruptcy and creditor assurance laws and regulations. The authors of this substantive reform understood that creating a healthy, predictable and secure legal environment would reduce risk for investors and creditors, resulting in more foreign investment in the country. The reform encompassed 34 different laws intended to improve the ability and speed with which banks can foreclose against debtors. These amended laws and provisions include: i) The Law for the Protection and Defense of Users to Financial Services (Ley de Protección y Defensa al Usuario de Servicios Financieros); ii) The Law of Credit Institutions (Ley de Instituciones de Crédito); and iii) The General Law on Securities and Credit Operations (Ley de General de Títulos y Operaciones de Crédito). In the latter, some of the pivotal changes that the reform incorporates include enhanced procedures to enable expedited execution of secured credits, as well as shorter statutory periods under judicial proceedings, and, finally, granting public instruments, such as those executed before a notary public, that include an acknowledgement of debt to be directly enforceable before a court in summary proceedings.

These changes made substantial progress within the existing legal system through the implementation of mechanisms that increase legal certainty in favor of the rights of creditors, thereby reducing risk and creating a more reliable legal environment. These changes, and despite the lack of properly ratifying the Cape Town Convention,7 nevertheless brought with them a cascade of foreign investment in many areas of the economy, amongst many, particular to this article:

i) aircraft finance investment and aircraft manufacturing, and;

ii) the development of Latin America's most ambitious infrastructure project, the new Airport for Mexico City.

The panorama could not have been better, but five years after, 2018 has proven to be a challenging year for Mexico. Mexico has had to cope with the internal and international political paradigm shifts, rethink its economic policy, strengthen its monetary policy deeply affected in the past year, stabilize, and determine its economic and commercial ties, and prove itself as the consolidated democratic state it claims to be by electing a new president in July 2018. Mexico has no room for error. As 2018 develops Mexico has two main challenges to affront if it was to remain a competitive market for foreign investment and safeguard the massive aviation-related projects. These are: i) come to terms with the renegotiation of the North Atlantic Free Trade Agreement (NAFTA), and ii) glide through the volatility and assumptions derived from an electoral campaign were the left-party candidate with restrictive economic policies is on the lead. These two challenges directly impact the two massive aviation-related investments beforementioned.

Relating two Mexico's aviation finance practice, Mexican aviation continues to flourish: Mexico experienced a 9.9% increase in air traffic in 2017,8 and scheduled deliveries are expected to double the number of commercial aircraft operating in Mexican skies from 300 to 600 over the next 18 years.9 This boosting market is a result of the demographic capacity and needs of the Mexican economy, but the volatility in the Mexican market on elections, and speculations may affect orders in the future. This is yet to be known, but flags are rising.

Relating to the manufacturer industry of aircraft in Mexico, the renegotiation of NAFTA raises major flags. Particularly as, NAFTA was the initial catalyst for the aerospace industry's growth in Mexico. The trade barriers that NAFTA destroyed allowed Mexico to welcome the aerospace sector with open arms and become the location of choice for those who are seeking a low-cost manufacturing footprint in North America, with high skilled labor, NAFTA trade benefits and a preferential location. The substantially reduced labor costs with NAFTA provided Mexico an even more viable option than China. As an active member of NAFTA and the second largest U.S. trading partner, Mexico becomes an important supplier and a key manufacturing center of this industry. Mexico's geographic proximity, large manufacturing capacity, competitive production costs, highly trained labor force, and absence of trade barriers are all key elements that make it the ideal location for NAFTA, and other related investment.

The aerospace companies of NAFTA partners have either opened plant operations in Mexico or found a significant supply bases, where investment has proved to be profitable. The best opportunity for investment in Mexico is as a supplier for aircraft parts. The Mexican market for aircraft and parts include approximately 500 firms, affirming Mexico's growing progress and interest in the industry with foreign investment amounting to 3,183.7 million USD.10 As Washington and Mexico discuss strong differences and the ever-growing lack of negotiating policy, Mexico must prepare to safeguard its regulatory reform on investment protection through different commercial partners.

Finally, regarding the development of Latin America's most ambitious infrastructure project, the new Airport for Mexico City, represents an investment of over 7 billion USD, of which over 3 billion have already been assured and secured through underlying contracts with foreign investors.11 This massive project, is expected to provide over 400 million jobs from stage one of construction to its full operation and derives from the necessity of an over-saturated airport, that can no longer withhold the ever growing and expected demand of over 113 million passengers by 2021.12 Despite this massive economic project, one of the proposals of one of the Mexican candidates to the Presidency is to cancel its construction. Should this occur, it would produce contractual liability to the Mexican government beyond imaginable costs.

2018 has been a year of challenges and above all speculation and volatility on Mexico's economic and political future, resultant from Mexico's presidential election and the everchanging economic and political relationships with the United States. As nothing is yet certain, Mexico is aiming to prepare itself for the worst, with endured resilience. Trusting the legal mechanisms enabled in the financial reform and assuring and protecting investments made, is the only way to reassure Mexico's role in the aviation world.

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  4. At the time of the reform, five financial institutions accounted for 73% of the total credits issued in Mexico.
  5. At the time of the reform, small businesses, which account for 74% of employees in Mexico, had little or no access to credit. See Official newsletter published by the Presidential Office of the United Mexican States as follows: Presidencia de la República, Mexico, Gobierno de la República. "Reforma Financiera," Presidencia de la República, 2014, .
  6. At the time of the reform, private financing and credit accounted for 28% of Mexican GDP, compared to an average of 47% in Latin America and an average of 157.3% of credit and private financing with respect to the average GDP of OECD countries. See Official newsletter published by the Presidential Office of the United Mexican States (Presidencia de la República, Mexico, Gobierno de la República. "Reforma Financiera," Presidencia de la República, 2014,
  7. The 'Cape Town Convention', or, more concisely, 'CTC') is an international treaty that produces economic benefits to both creditors and debtors by reducing the risk of loss in aircraft financing and leasing transactions by setting specific remedies related to the repossession of aircraft and engines, permitting a creditor to promptly repossess its asset.
  8. Official numbers provided by the Mexican General Directorate of Civil Aviation (Dirección General de Aeronáutica Civil).
  9. GLOBAL MARKET FORECAST 2016-2035, Projections for Latin America and the Caribbean, Airbus, publication date May 2016, ].
  10. Negocios. ProMéxico Junio NAFTA at Twenty: Special Edition.