Mexico’s government has seized railway assets, nationalized the lithium industry, and taken private land. But with a presidential election looming, investors are not too phased. The country is just too well located for a nearshoring boom to look for other hubs.

No expropriations, no confiscations, no nationalizations. That was a campaign promise that Andrés Manuel López Obrador made in 2018 before becoming the president of Mexico.

Some five years later he changed his mind.

AMLO, as the president is known, has a little more than a year left in his six-year term to fulfill another of his vows, which is to transform Mexico with new infrastructure. A flagship project is to connect the Gulf of Mexico to the Pacific Ocean across the Isthmus of Tehuantepec, the narrowest strip of land between those two bodies of water. The goal is to make an overland international trade corridor, replete with 300 km of rail lines, road improvements, and major airports and ports, that can compete with the Panama Canal.

But with the clock ticking, AMLO is in a hurry to complete this multi-billion dollar infrastructure investment, even if that means breaking his campaign promise.

In June, his administration seized 120 km of rail lines from Ferrosur. The lines, which stretch across the state of Veracruz, will be used for the Isthmus of Tehuantepec railroad. Ferrosur is operated by Grupo México, a major conglomerate run by Mexican billionaire Germán Larrea, who has long been at odds with AMLO.

This was the latest push to expropriate or nationalize assets, companies and industries, a government strategy that has made some investors think twice about investing in Mexico.

The expropriation of private land in the state of México to build commuter train stations for a suburban train to connect with the New International Airport Felipe Ángeles has affected factories. The nationalization of the lithium industry has raised concerns that the silvery white metal may not be developed to meet global demand for its use in electric car batteries, a burgeoning industry. Mexico has the 10th-largest lithium reserves in the world, according to data from the US International Trade Administration.

Armando Ortega, head of the mining task force of the Canadian Chamber of Commerce in Mexico, warns that the state may struggle to run a lithium mining company, citing its loss-making efforts to mine copper in the 1970s.

He adds that the Ferrosur rail line seizure is not helping to encourage investment. “It is clearly a direct expropriation even though the government has called it a temporary occupation,” Ortega says, adding that this is affecting Mexico’s reputation as “a reliable partner.”

Perhaps because of this, AMLO subsequently agreed to add eight years to a Grupo México railway concession to compensate for the track takeover.

Ferrosur is not AMLO’s only brush with private investors. In 2018, a project to build the so-called New International Airport of Mexico City was canceled after construction had begun. Two years later, US-based beer, spirits and wine maker Constellation Brands was forced to cancel the construction of a $1.4 billion brewery in the border city of Mexicali, Baja California when construction was 70% complete after local residents voted against it in a public referendum.

Juan Gonzalo, country manager in Mexico of the International Finance Corporation (IFC), the private sector arm of the World Bank Group, says that despite these knocks to private investment, it continues to pour into the country.

We believe that in the medium and long term, the river will return to its course.

Juan Gonzalo, IFC

“We believe that in the medium and long term, the river will return to its course,” he says. “In any other country, such a decision [to seize rail lines] could definitively stop investment, but I believe that Mexico has so many benefits that investment continues to arrive.”

The Big Shift

The nationalization push comes at a time when Mexico has become a magnet for the relocation of operations from Asia to supply rising US demand for products made closer to home.

Gonzalo says automotive and energy investors, for example, are looking to the long-term growth potential in Mexico, led by a nearshoring boom.

Rodolfo Hernández, executive director of international business in Mexico for the Spanish bank Santander, says Mexico is the “main bet” in Latin America for nearshoring investment, including by Asian companies seeking to supply the United States.

“It’s too attractive to have a country that shares such a large border with the United States to look for a hub elsewhere,” Hernández says.

Indeed, nearshoring is expected to lead a 14% increase in Mexico’s total foreign direct investment to $40 billion this year from $35.2 billion in 2022, according to an estimate by HSBC México.

Photo: Rodolfo Hernández

Long-Term Bet

Gerardo Colosio, a partner and chief operating officer of the local investment fund Mexico Infrastructure Partners, says he is not worried about the Ferrosur track seizure because AMLO’s term will end in 2024, given that presidents are limited to a single six-year term in Mexico.

The Isthmus of Tehuantepec Interoceanic Corridor “was a promise” that failed to progress as had been planned, meaning that the seizure was not “a systematic issue against all concessions” in Mexico, Colosio says.

Manuel Camacho, a managing director at Goldman Sachs in Mexico, is advising clients to look beyond the rail line seizure and a recent government deal to buy 13 power plants for $6 billion from the Spanish company Iberdrola.

“Noise and uncertainty are never good for investment,” he says. “But it is important to try to see through the noise.”

It is important to try to see through the noise.

Manuel Camacho, Goldman Sachs

On Guard

Even so, the growth potential combined with the uncertainty over state intervention have made it harder to plan investment and financing in Mexico.

Mexico Infrastructure Partners will hold off on selling bonds for now to finance its investment plans, Colosio says. Instead, it will raise capital from investment funds and commercial banks.

Fibra Prologis, the Mexican division of US real estate investment trust Prologis, plans to use the cash on hand it raised in recent equity offering, which means it doesn’t have to issue bonds or take out new loans for the time being to finance its nearshoring projects, says Jorge Girault, senior vice president of finance at the local REIT.

Fibra Prologis, which raised $400 million in the Mexican equity market in May, has around $500 million in cash to invest in nearshoring opportunities, Girault says.

The REIT’s fundraising plans depend less on the short-term vicissitudes in Mexico and more on when economic conditions improve locally and internationally, according to Girault.

“We already have a flight plan,” he says.

The firm will decide whether to raise fresh capital “according to opportunities and market conditions both in Mexico and the US,” he says, adding that this “in terms of new debt will depend on where interest rates are, the type of debt and if we need to raise more money.” LF