Landmark Mexico Oil Reform Is Set to Stay: AMLO's Chief of Staff

(Bloomberg) -- Rest assured, President-elect Andres Manuel Lopez Obrador won’t use his congressional muscle to overhaul Mexico’s landmark oil reform that allowed foreign companies back into the industry, the head of his transition team said.

Lopez Obrador, known as AMLO, will review private oil contracts for graft, but if something untoward is found there will be talks with the companies before any change is made, said Alfonso Romo, who will become the next president’s chief of staff.

"I don’t see changes," to the oil reform of 2013, Romo said in an interview in his Mexico City office. "If anything happens, it would be done without hurting private investment."

Just four months ago, AMLO told a rally during the election campaign that he would never allow Mexican crude to return to the hands of foreigners. More recently he said he may seek to reform the oil industry in the second half of his administration. Neither of those options appear to be on the table now, says Romo, and that will come as a relief to investors.

The oil reform approved by current President Enrique Pena Nieto has attracted pledges for billions of dollars in investment from oil giants including Exxon Mobil and Chevron Corp., as the government looks to halt more than a decade of declining output.

"Mexico has a necessity for lots of money for offshore drilling,” Romo said. If oil output returns and drives growth "no one will fight success."

Landslide Victory

Lopez Obrador won the July 1 election by a landslide and projections show his coalition will have an absolute majority in both houses of congress, though not the two-thirds required to change constitutional reforms such as the oil bill. However, members of other left-leaning parties could join forces to help him reach that constitutional majority. But rather than scaring away investors as some analysts feared, the man who once sought to undo the oil reform has sought to calm markets.

"What do we want to do? We want to take advantage of all of the enthusiasm we’ve generated to fix everything we can," Romo said. "What don’t we want? To create uncertainty. Zero. I’m terrified of that."

The peso has soared as a result and is headed for its biggest weekly gain since Feb. 2016.

Among the policies that AMLO will back is banking deregulation to promote lending to small and mid-sized companies, as well as more flexible investment schemes for the nation’s pension funds, known as Afores, so that workers can increase their savings, Romo said.

Lopez Obrador is also seeking a conciliatory, not a confrontational, solution to an impasse with Pena Nieto’s administration over a $13 billion airport project that he’s criticized as too costly, Romo said. AMLO’s team is still deciding what it will do, and doesn’t want to spend money on the project, but one solution may be to maintain some ownership and sell the rest off to the private sector, he said.

"If this goes forward it will be through the private sector," Romo said. "It could be like oil contracts where we take 40 percent of the business without having to invest anything."

Public Revolt

Lopez Obrador rode to victory on a public revolt against rampant crime, corruption and poverty and handed a crushing defeat to the business-friendly parties that have run the country for decades. He takes office in December and has promised to end corruption and government privilege, while boosting social welfare programs for the young and elderly.

Romo, who owns brokerage firm Vector and several other ventures, has been AMLO’s liaison to the business community, and his plans for bank deregulation and more flexible pension funds fall squarely along business-friendly lines.

His goal, Romo says, is to help Mexico boost its meager long-term growth rate of about 2.5 percent through deregulation and investor confidence, among other tools. He said his team will seek to facilitate financial inclusion for small businesses, partially through development banks.

As for changes to the pension system, in one month his team should have a concrete plan to create more flexible investment rules so that Afores can loosen their portfolio concentration in government bonds.

"Without being irresponsible, we have to give the Afores a margin to have adequate yields in order to face the problems we have" with savings deficits in Mexico’s pension system, Romo said.

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