Mexico, Latin America’s second-largest economy, remains a big draw for infrastructure investors despite lower-than-expected macroeconomic growth and big cuts to public spending, writes Tiziana Barghini.
When Mexico’s president Enrique Peña Nieto steps down in two years, he is likely to leave behind a legacy very different from what his electorate had hoped for.
Economic growth has been disappointing, infrastructure spending has been lower than promised, and corruption remains a big concern.
Despite this, Latin America’s second-largest economy is still considered to be a sweet honeypot by infrastructure investors, who say that Mexico has an attractive pipeline of opportunities especially now that fresh budget cuts are reducing federal funds available for roads, airports, hospitals and energy projects.
Reduced federal funds increases demand for the private sector to step in and finance new infrastructure, and deals in energy and transport have topped the most-recent list of financial closings. Cuts to the national budget won’t have a major impact on the overall volume of investment, specialists say.
Meanwhile, international players have said that they will be kept busy for many months to come.
This is in view of expected privatizations, deals in the secondary market, fresh projects such as pipelines and power auctions, and the various phases of Mexico City’s new airport.
But there is also a sense that Mexico, which is the world’s 15th-largest economy in nominal terms, has missed opportunities to upgrade its creaking infrastructure and fulfil the potential predicted by some economists.
Reforms approved at the start of the Peña Nieto presidency in 2012 and 2013, such as the opening of the energy industry to private players, were intended to unshackle much of Mexico’s economy that had long been entangled in red tape and parastatal largesse.
Most of reforms did not immediately yield positive results: a big drop in oil prices thwarted a plan to inject private money in the country’s huge oil industry.
Other reforms such as the new PPP law implemented in 2015 or the new Fibras (finance vehicles popular in real estate that were extended to infrastructure and energy) were slow to bear fruit.
A four-year infrastructure plan known as PNI (from its acronym in Spanish) was meant to implement projects for MXN 7.75trn (USD 416bn) by 2018 to upgrade the country’s creaking infrastructure. But it is lagging far behind targets, with just 30% of the projects built in the first two years of the four-year program, and there is little hope that all of its projects will be built on time.
The country’s economy is also a concern.
Mexico’s third quarter GDP surprised with a 1% quarter on quarter upside, setting the strongest rate since 2014, but economists said that strong growth is unlikely to be sustained and remain sluggish by the standards set by many developing economies over the past decade.
“It’s fair to say that Mexico has weathered the collapse of global commodity prices better than most in Latin America, but its star has faded – and it doesn’t look likely to return in the next couple of years”. Capital Economics’ emerging markets economist Neil Shearing said in a recent note.
Fiscal policy, which tightened last year, is expected to become even more restrictive for the next budget cycle. The draft 2017 budget law foresees a spending cut of 1.2% of GDP. Around 40% of these cuts will be to state-owned oil company Pemex’s budget.
The axe is also expected to swing on funds aimed at the Communication and Transport Secretariat (SCT), which administers spending on Mexico’s roads, railways, ports and airports will be slashed 26% from 2016.
According to think-tank Mexico Evalúa, the level of public spending on infrastructure for 2016 will be around MXN 65bn, plus another MXN 9bn from PPPs, well below the aggregate MXN 91bn spent in 2012.
Early promises by the Peña Nieto administration to channel more resources to the country’s infrastructure were not met, not even including the funds coming from PPPs.
Yet the abundant opportunities to invest in new projects in Mexico is likely to mean that a government funding gap is likely to be filled by the private sector, particularly in energy industries, which have witnessed brisk activity in recent months.
According to InfraDeals data, the last ten financial closings in Mexico, reached between May and October 2016, totaled nearly USD 7bn, nearly equally split between transportation (USD 3.66bn) and power and renewables (USD 3.25bn).
Major investors expect that increasing amounts of private capital will flow into Mexico, and Australian infrastructure investor Macquarie points to structural trends that augur well for investments.
“Demographics and fundamentals of the Mexican economy are such that we see significant infrastructure gaps that will provide opportunities in the short, medium and long-term to deploy large amounts of capital,” said Ernesto González, Mexico’s Infrastructure head for Macquarie Infrastructure and Real Asset (MIRA) and CEO of Macquarie Mexico Infrastructure Fund (MMIF).
“We see a lot of demand on both the private and the public side,” González said, adding that the ups and downs of the country’s economic outlook do not really affect the needs for better infrastructure and a long-term demand for investment.
“Public spending, even before these budget cuts, was low for infrastructure. The more active industries such as natural gas pipelines, power and also Pemex were already complemented with private investments,” said Alejandro Olivo, associate Managing Director at Moody’s in Mexico City.
Blockbuster projects such as Mexico City’s huge, symbolic new airport, which is scheduled to start operations in 2020, will ensure healthy order books for some construction companies and service providers.
Conceived as a public work, the new airport in the federal capital will require an investment of USD 13.3bn, and is now expected to be funded with at least 40% via private debt with a total of USD 6bn bonds to be placed in international markets.
The megaproject will be backed by securitized proceeds from passengers’ charges levied by the city’s current main airport. The initial USD 2bn bond was successfully placed in September amid speculation that the government could increase the private debt component, while smaller airports will likely offer a new area of business linked to possible privatizations.
Developers are getting ready to bid for the project of the new terminal, a USD 3.5bn work, amid reports that Spanish FCC and Acciona are expected to bid jointly with three other Mexican firms. The futuristic airport building was designed by British architect Norman Foster and Fernando Romero, son-in-law of tycoon Carlos Slim who just completed purchase of Spain’s FCC.
Transport is just one of the areas being targeted by Ainda, a Mexican company that will soon launch a placement of up to MXN 6bn in structured equity certificates (Certificados de Capital de Desarrollo). In January, it forged a joint venture with Goldman Sachs to invest in Mexican infrastructure, and Energy.
Ainda’s CEO Manuel Rodríguez is another who maintains that big cuts in government spending will mean, conversely, that there are more opportunities in infrastructure investment, not fewer.
Airports is one such area. In September, local media reported that state-owned airport operator Aeropuertos y Servicios Auxiliares (ASA) is evaluating how many of its 22 airports should be put up for sale.
The three main private airport operators in the country (Grupo Aeroportuario del Pacífico (GAP), Grupo Aeroportuario del Sureste (ASUR) and Grupo Aeroportuario del Centro Norte (OMA)) will be excluded from bidding, but new buyers would bring additional proceeds.
Fund investors also expect lots more opportunities in roads.
“We still have a significant portion of toll roads which are public, such as Mexico City to Querétaro (Federal Highway 57) or Mexico City to Cuernavaca (Federal Highway 95 or Autopista del Sol),” Ainda’s Rodríguez pointed out.
A glance at the 2017 budget suggests that opportunities in the near future will be limited mostly to roads and hospitals even if more projects such as water infrastructure projects are on the cards.
The budget draft foresees seven new procurement projects at a total estimated cost of MXN 11.87bn (USD 625m), with four highways and two hospitals.
Meanwhile, investors have also had to consider the impact of volatile financial markets in Mexico this year, which have been particularly sensitive to the US election campaign.
The peso and Mexican financial markets weakened considerably during the summer, when Hilary Clinton’s lead in the polls had narrowed and the possibility rose that Donald Trump would win the White House.
The maverick Republican nominee has undertaken to implement a range of policies that could be economically disastrous for Mexico.
Trump proposes a scrapping of the North American Free Trade Agreement (NAFTA), forced deportations of illegal immigrants and the construction of a “border wall” between the two countries that would severely limit trade between the two economies.
“The US election caused some pause with investors, but these pauses were exaggerated and we have now seen two recent transactions showing a good level of confidence”, said MIRA’s González.
Markets recovered once Clinton opened up large gaps in the polls, and investors have cited increasing confidence as one of the reasons behind the recent purchase by IFM Global Infrastructure Fund of a MNX 8.64bn stake in the Mexican Unit of Spanish Construction firm OHL, for example.
But in the final few days of October the peso had fallen again in response to news that an investigation was being reopened into Clinton’s use of a private email servers while she was Secretary of State.
Amid great uncertainty with a week to go before the US elections, Mexican markets seemed less reassured that the demagogic Republican candidate will be soundly beaten on 8 November.