What Mexico's Tough Week Tells Investors

With a high-profile jailbreak and a 'failed' oil auction, it was certainly a tough few days for Mexico. Many feel these two events highlight the country's main failings so LatAm INVESTOR investigates what it all means for investors...

Thought you had a bad week last week? Spare a thought for Mexican president Enrique Peña Nieto. His week began with the humiliating jailbreak of ‘El Chapo’, Mexico’s most notorious drug lord. Then on Wednesday his much-trumpeted energy reform debuted with an underwhelming oil auction that failed to achieve the expected number or value of bids.

Peña Nieto was already suffering from poor approval ratings. And these two latest episodes have given more ammunition to his critics. But it’s not just him that suffers. Both these events made international headlines, which means that Mexico’s image also had a terrible week.

A lot of analysts, and normal Mexicans, felt that the week summed up the country’s major problems. Namely the state’s inability to stop organised crime, and the failure of the reforms to boost the economy.

Fighting crime

It's no secret that Mexico is suffering from a brutal drug war.

The Mexican state is struggling to improve the security situation.

The violence is between rival cartels battling for control of the lucrative routes to take drugs made in South America to the massive market of North America. And as I said three years ago, any long-term solution to that will require new policies in the US.

Most Mexicans aren’t directly impacted by the drug war, as the violence takes place in certain, strategic towns, mostly to the north of the country. Yet the presence of these powerful drug smuggling organisations has a pernicious wider effect of corruption and impunity. These gangs use a mixture of intimidation and bribes to get their way. And this erodes the power of the state.

And that’s why El Chapo’s (shorty) escape is has upset so many. Mexico’s most well-known drug lord, whose billion-dollar fortune earned him a place in the Forbe’s Rich List, he had already escaped from prison back in 2007. When he was caught again, last year, it was heralded as a sign that the Mexican state was able to deliver justice to even the most important crime bosses. So the fact that he was brazenly able to escape from Mexico’s most secure prison, undermines that narrative.

And while the escape was sophisticated – it used a 1.5km tunnel with lights, ventilation and a railroad motorbike – it’s clear that it also involved plenty of old-fashioned corruption. This prompts the question – if corruption can free Mexico’s most wanted prisoner, is any institution there clean?

'Failed' Auction

Actually there are clean institutions in Mexico. And that’s why, unlike most analysts, I was encouraged by the recent ‘failed auction’. Because, regardless of the amount of bids or amounts spent, it was a completely transparent process. As Gustavo Mohar, from Mexico-focused risk consultancy Atalaya, points out, the Mexican government bodies in charge of implementing the reform have acted with “a combination of Germanic efficiency and Scandinavian transparency”.

“All the meetings between firms and the National Commission for Hydrocarbons (the sector’s regulator) were videotaped and their minutes published online. The meetings could not take place unless two commissioners were present at any given time.

“The auction itself was almost pious in its emphasis of transparency. Not only was the entire process broadcast live (an almost five-hour long marathon), but even the desks on which the envelopes containing the bids were placed were made out of perfectly see-through glass.”

LatAm INVESTOR wrote a detailed report on Mexico's energy reform back in 2014. The business leaders we interviewed were excited about the opportunities but your ‘everyday Mexican’ was far more cautious. The common line of thought was, ‘this is just another way for the corrupt elite to get more money from the country’. But this reform has proved them wrong. It failed because the governments had very high expectations and requirements for fields that obviously weren’t that valued by the private sector. But the most important thing is that the process was clean and transparent.

This round was won by a consortium of British, American and Mexican firms, including FTSE250-listed Premier Oil. They were the only winners, snapping up 2 of the 14 shallow water bocks on offer.

With the next rounds of the auction, we will see the government tweak the requirements to attract more interest. We’ll also see more attractive oil plays being put up for action. And as Mexico’s hundred-billion barrel oil sale goes on, we will find more ways to invest it.