Six years ago, Mexico became a focal point for international investment. Predictions lured foreign investors into Latin America's second largest economy with $1.26 trillion GDP, the 13 largest economy in the world.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 world's GDP.3
This positive forecast was accompanied by major structural reforms in Mexico's laws, headed by the past administration. The past 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 not 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:
- aircraft finance investment and aircraft manufacturing, and;
- the development of Latin America's most ambitious infrastructure project, the new Airport for Mexico City, which has now been cancelled by the new administration.
Impact on the cancellation of Mexico's largest infrastructure project: Mexico City's new airport
Upon the entry of the new federal administration on December 1st 2018, the panorama, that could not have been better, is now – to say the least – very different and challenging.
Since its political campaign the leftist and winning new federal administration announced a complete shift of paradigm from Mexico's past pro-foreign investment and infrastructure-developing based economic policy, replacing it with restrictive economic policies that debunk infrastructure projects and that challenged the two massive aviation-related investments beforementioned.
Now, what was once Latin America's most ambitious infrastructure project, the new Airport for Mexico City which represented an investment of over 7 billion USD, of which over 3 billion USD had already been assured and secured through underlying contracts with foreign investors is now cancelled.8 This massive project, which would provide 400 million jobs from stage one of construction until its full operation, and that 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 20219 is nothing but a long gone wish, scrapped nonchalantly by the new administration. Scrapped and replaced by a comical "alternative" whimsically designed by the President with no endorsement of IATA, MITRE, national air carriers and the true experts in airport construction, which have actually come out against it.
The effects of this neglectful cancellation could objectively cost the federal government more than 10 billion USD between the millions of dollars placed under the trust that initiated construction, the new bonds issued by the government to re-purchase investor's original funds of the cancelled project, the damages payable to contractors under the preexisting and valid agreements, plus the cost of building Santa Lucia's "alternative" and "cheaper" airport.10 One thing is certain, no official costs with a pragmatic and responsible study have been provided by the new federal government on either the costs of the cancellation, nor the new alternative airport of Santa Lucia.
With the announcement of the cancellation of Mexico's City New Airport, the Mexican peso lost more than 4% immediately.11 The country's benchmark S&P/BMV IPC stock index is on track for a 11.2% decline, its biggest drop since January 2009, during the global financial crisis, and credit rating agency Fitch downgraded Mexico's debt rating. As a result, The Economist newspaper readjusted its measure on the purchasing power parity (PPP) between currencies stating, that the peso has undervalued itself by 44.48% against the US dollar.
Impact on aircraft finance and aircraft manufacturer's foreign investment
Relating to Mexico's aviation finance practice, Mexican aviation had sustained for the past decade a positive growth rate with a 9.9% average increase in air traffic for the past two years.12 Scheduled deliveries were expected to double the number of commercial aircraft operating in Mexican skies from 300 to 600 over the next 18 years in the last study conducted previous to the change of government.13 This boosting market was a result of the demographic capacity and short term projections of the Mexican economy. However, in less than six months, whilst no official records are yet available, the volatility in the Mexican market, and speculation on the new paradigm of public and economic policy may affect orders in the future as they were originally forecasted.
Red flags are rising as the cancellation of Mexico's City new airport has obliged national carriers to rethink their growth strategy. In addition, Mexico's Central Bank has cut its GDP growth forecast for 2019 to 1.1% from 2.7%.14 Fitch Ratings has alerted of "persist[ing] trends in hampering growth" as a result of a reduction in government spending.15 Meanwhile, a positive note amongst all the speculation and negative economic forecast, is that Moody's maintains that Mexico will continue to support revenue generation with lower but solid traffic growth.16 Amongst these number what is evident is a deceleration of growth that will one way or another impact aviation finance and aircraft deliveries in Mexico. The calculated impact is yet to be seen.
Regarding, aircraft manufacturing and direct foreign investment, the most reputable aerospace manufacturing companies have either opened plant operations in Mexico or found significant supply bases, where investment has proved to be profitable. The Mexican market for aircraft and parts includes approximately 500 firms, affirming Mexico's growing progress and interest in the industry with foreign investment amounting to 3,183.7 million USD.17 Despite the smell of volatility in the atmosphere, no investors have expressed thoughts of leaving or reducing their investment in the country. However, one thing is for sure, unlike the last administration's government plan which contained a section on aerospace related investment projects, the new administration government plan contains no exact program or benefits, to be exact, it is not even mentioned.
2019 will be a year of challenges and above all speculation and volatility on Mexico's economic and political future. As nothing is yet certain, Mexico is aiming to prepare itself for the worst, with enduring resilience. Trusting the judiciary branch and the legal mechanisms enabled in the aforementioned reforms and assuring and protecting investments made, is the only way to reinforce Mexico's role in the aviation world.
- At the time of the reform, five financial institutions accounted for 73% of the total credits issued in Mexico.
- 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, http://reformas.gob.mx/wp-content/uploads/2014/06/Explicacion_ampliada_de_la_Reforma_Financiera.pdf .
- 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, http://reformas.gob.mx/wp-content/uploads/2014/06/Explicacion_ampliada_de_la_Reforma_Financiera.pdf).
- 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.
- Sierra, Carlos, 10 Billion Dollars, and counting, the cost of a stupid decision.Coelum, monthly publication. December 15, 2018.
- Official numbers provided by the Mexican General Directorate of Civil Aviation (Dirección General de Aeronáutica Civil).
- GLOBAL MARKET FORECAST 2016-2035, Projections for Latin America and the Caribbean, Airbus, publication date May 2016, http://www.team.aero/files/airbusforecast/Airbus-GMF-2016-2035-MappingDemand-full_book.pdf ].
- Negocios. ProMéxico Junio NAFTA at Twenty: Special Edition