When Mexico's incoming president Andrés Manuel López Obrador (a.k.a Amlo) clinched the presidency by a landslide election in July, the victory was met with cautious optimism. Few investors, or citizens for that matter, knew what to think about the former Mexico City head of government.
Some of his campaign promises seemed fantastical. For instance, he aims to balance the budget, while simultaneously increasing infrastructure spending, raising pensions and subsidising farmers. Oh yeah, and all without raising taxes.
Since Mr López Obrador does not take the political reins until December 1, it's hard to know how many of his promises will come true. But this weekend, things could get a bit clearer.
Through Sunday, Mexican citizens are voting on whether the construction of the new Mexico City airport should continue, or if the project, which is already a third of the way complete, should be scrapped in favour of an alternative option. Mr López Obrador called for this public consultation as part of his promise for “a government by the people and with the people.” The results, which will be announced on Sunday, are said to be binding.
The notion of bringing matters such as infrastructure and state spending to a direct vote is startling to some. But how Mr López Obrador proceeds when the result becomes known is the real test. His decision will shed light on what kind of leader he strives to be and the relationship he'd like to have with investors going forward.
First, some background on the airport.
The airport in Mexico's capital city has long been in need of a facelift. In the mid-2000s, the country built a second terminal, enabling the airport to handle 32m passengers, up from 24m, and 365,000 flights per year. In 2017, more than 44m people flowed through the airport and around 450,000 flights took on and off its tarmac, according to a report by IMCO, a Mexican think-tank.
To redress this capacity problem, Mexico's outgoing president Enrique Peña Nieto announced plans for a new international airport in 2014 that could handle roughly 70m passengers per year.
Should voters decide to bin the project and Mr López Obrador uphold the decision, which Citi's Ernesto Revilla concedes is not the most likely outcome, the economic costs would quickly mount. In fact, the chief executive of Grupo Aeroportuario de la Ciudad de México (GACM), which oversees the project, told Reuters that cancellation costs could breach $6bn once lawsuits, severance and other penalties are factored in.
With nearly 70 per cent of the $13bn airport budget already funded, a “no” vote would come at a very awkward time. Capital has flowed in from a number of sources. Private investors are involved, as is a state-owned development bank called Banobras as well as the government. Here's a chart by Citi's Revilla with the breakdown:
The remaining 30 per cent is said to come from passenger fees at the existing airport, among other sources.
For private investors, cancelling the airport at the behest of a public consultation sends quite a damaging signal. How can investors—domestic and foreign alike—have confidence that their capital will be safe going forward?
An even more unlikely outcome, but one that would help to shore up investor confidence, is if the people vote against the airport and Mr López Obrador proceeds anyway. That'll torpedo his political capital, but appease those with the financial kind. Whether such a decision is advisable before his term even starts is another question entirely.
Of course, the roughly 1m Mexicans expected to vote over the coming days could decide to go forward with the current plans. That'll avoid an altercation for now, but leave the door open for referendums later down the line.
Related Links:
Nafta la vista, baby — FT Alphaville
The Amlo-wdown — FT Alphaville
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