Election of Andres Manuel Lopez Obrador Represents a Major Risk to Mexican Business Status Quo.

The election of a self-declared leftist in Mexico represents a potential seismic shift in the Mexican economy. For decades, the Mexican business climate operated under rather simple set of oligarchical fiefdoms. A handful of wealthy families paid, through various means, economic rents to necessary government departments, individuals and agencies in order to maintain monopoly or oligopoly status in key domestic industries. This system provided abnormally high levels of profit at the business level within the domestic economy.

In the new government, all bets on “business as usual” are off. The statement from Lopez Obrador: “contracts obtained under energy reforms passed under President Enrique Pena Nieto will be scrutinized for any corruption or illegality, but otherwise contracts will be honored. “There will be no confiscation or expropriation of assets. … Eradicating corruption will be the principal mission,” should be read carefully before concluding that all will be well at the business level in Mexico.

Mexican law is inconsistent with US laws in many respects. The country operates on a variant of French/Russian Napoleanic code. Such statutes presume that an individual or business is guilty, when charged with an infraction, rather than assume innocence. The presumption of guilt is not the American version of “guilt beyond a reasonable doubt”; being just a little guilty, even by accident or oversight, is still guilt in the eyes of the Mexican judiciary. As a result, Mexican businesses were seldom willing to engage the government in a court when charges were discussed; the preferred manner of dealing with issues was to iron out irregularities quietly, privately and with bags of cash.

Since entire government departments within Mexico, as well as business, are complicit, officials have taken great pains, in the past, to cover up the clubby system of endemic corruption. All that it will take is a few whistleblowers to out all of the dirty laundry. Some whistleblowers might be motivated by genuine altruism; others might be motivated by immunity, some might even find that a whistleblower payment system, similar to that of the United States; will be sufficiently enticing as to open up floodgates.

Should Lopez Obrador decide to evaluate every major and minor business contract entered into with the prior governments of Mexico, for the past 30 years to explore potential corruption and illegality, taking into account the legal framework in Mexico and then positing that even minor infractions can be used as leverage against large Mexican businesses, it seems clear that any/all Mexican businesses are at a clear legal risk. Monopolies might be broken, oligopolies might find that their concessions have reduced lifespans or less profitable terms and punitive fines might abound.

It may be that Lopez Obrador sincerely wishes to eradicate Mexican crime and make the country safer for residents of the increasingly violent nation. However, whether it be property crime, physical crime or commercial crime, crime is crime. At this time, Lopez Obrador has not made any distinctions between physical harm to Mexican people. a crime of omission, or a crime committed to obtain a favorable long-term business concession/contract, all might be treated with equal harshness under the incoming government. There is no way to tell what the economic outcome of a leftist crusader will have on the Mexican economy in the short or long term. Rhetoric from Lopez Obrador, over more than a decade, certainly indicates his clear resolve to level the playing field for the ordinary Mexican citizen.

Obrador will have a great battle on his hands against the bureaucratic mandarins within Mexico that benefit from status quo. When faced with such odds, the intial position of leftists is to typically play hardball and then settle for less radical changes. Hardball headlines and pronouncements against entrenched Mexican business interest will be received poorly at the multinational level and should frighten the average Mexican equity investor. Large businesses and wealthy families in Mexico, shielded by decades of complicit partnerships with the PRI and with officials of the outgoing Mexican government are right to be worried. Nothing worries investors and businesses more than a left-leaning populist with an axe to grind and that also occupies the moral high ground, all the while looking down at a pit of corruption. A righteous leftist hammer can hit very hard. These are uncharted waters.


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