AMLO's Fragile Ties to Business Are Tested by Pipeline Contracts

(Bloomberg) -- A dispute over seven gas pipeline contracts is the most recent test of Mexican President Andres Manuel Lopez Obrador’s relationship with the country’s business community.

Earlier this week, Mexico’s Federal Electricity Commission, or CFE, filed six preliminary arbitration claims in London and one in Paris targeting natural gas pipelines being built by Carlos Slim’s Grupo Carso SAB, Infraestructura Energetica Nova SAB, TC Energy Corp, among others. The government says it doesn’t agree with some of the contracts’ clauses and is seeking fair treatment, while companies have said they’re willing to negotiate.

The conflict is threatening to strain an already fragile relationship, and it’s all happening at a bad time for the Mexican economy, which recently shrank more than analysts estimated. Lopez Obrador’s austerity program has slashed public spending, making private investment even more important if the economy is to grow at the president’s 4% target. Mexico may grow as little as 0.8% this year, according to central bank estimates.

“It’s a bad sign for foreign investment,” Armando Ortega, head of the Canadian Chamber of Commerce in Mexico, said in an interview. “It’s a bad precedent for the country’s brand. For years, Mexico has made an effort to present itself as a trustworthy partner and a safe investment. This will inevitably create enormous doubts.”

The head of the CFE, Manuel Bartlett, disagrees with the notion that the move will hurt investor confidence. “In fact, the rule of law gives us the right to renegotiate the contracts,” he said in a press conference Tuesday. “We have to look after our legitimate interests.”

Rising Tension

Carlos Salazar and Antonio del Valle, heads of two prominent business chambers, have stepped in to represent the private sector at a negotiation table with the government in hopes of brokering a deal before the matter plays out in international arbitration.

“There’s a lot of tension,” Salazar said Wednesday morning in an interview with Noticieros Televisa. “We’re going to see what’s the best way to reach an understanding before we head to the very last option, arbitration.”

The U.S. Chamber of Commerce said it was concerned by the decision to seek arbitration. “There are few factors more critical to investment and economic growth than the legal certainty and predictability fostered by the respect for the rule of law,” it said in a statement Monday. Canada’s ambassador in Mexico, Pierre Alarie, said his government has raised concerns at the highest levels of the Mexican administration.

CFE’s request for arbitration is credit negative for Ienova and TC Energy “because it undermines market and investor confidence,” Moody’s Investor Service said in a note June 27. It’s also credit negative for CFE, as it “disincentivizes future partnerships with the private sector to develop infrastructure.” Last week, Ienova shares fell as much as 8% in its biggest intraday drop since November.

To contact the reporter on this story: Andrea Navarro in Mexico City at anavarro30@bloomberg.net

To contact the editors responsible for this story: Walter Brandimarte at wbrandimarte@bloomberg.net;Juan Pablo Spinetto at jspinetto@bloomberg.net

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