Andres Manuel Lopez Obrador, winner of Mexico’s presidential election, waves during a rally at Zocalo square in Mexico City, Mexico. (Photographer: Cesar Rodriguez/Bloomberg)

Mexico's AMLO Scraps $13 Billion Airport Project; Peso Plunges

(Bloomberg) -- Incoming Mexican President Andres Manuel Lopez Obrador, the leftist who calmed investors with his initially market-friendly approach, ditched a $13 billion airport project backed by some of the nation’s wealthiest businessmen, sparking a rout in stocks, bonds and the currency.

Lopez Obrador scrapped the project after almost 70 percent of 1.07 million people who participated in a national referendum voted against the airport, among the nation’s biggest infrastructure projects. The peso tumbled past 20 to the dollar, erasing all gains since Lopez Obrador was elected on July 1. Analysts at BBVA said the decision could put pressure on the central bank to raise rates. JPMorgan Chase & Co. analysts cut their 2019 forecast for Mexican growth to 1.9 percent from 2.4 percent.

Mexico's AMLO Scraps $13 Billion Airport Project; Peso Plunges

"It could start a vicious cycle -- smashing any incipient investor confidence, sending the peso plummeting, inflation rising, Banxico forced to hike and slowing an already slow economy that needs foreign portfolio flows," said Kathryn Rooney Vera, the head of global research at Bulltick Capital Markets in Miami. "It hurts his honeymoon period and the benefit of the doubt with international investors."

Situated in the Mexico City suburb of Texcoco, northeast of the capital, the new airport was slated to replace the cramped and aging Benito Juarez International, Latin America’s busiest last year. The airport became a political lightning rod during this year’s presidential campaign as Lopez Obrador gave conflicting signals after vowing to cancel the project that’s more than a third of the way to completion.

Just last week, Lopez Obrador downplayed the potential impact of a cancellation, saying, there won’t be "macroeconomic imbalances, problems with the stock exchange, or devaluations." Today, even as financial assets tumbled, he said the decision won’t affect the interests of businesses and financiers, although he didn’t specify how. He said he doesn’t expect lawsuits.

While Lopez Obrador said funds are available to protect the investors who bought $6 billion of airport bonds, the bigger concern is the impact on investor confidence. Until now, the new leader had managed to soothe those who fretted that the populist would take steps such as the rollback of regulations that allowed more foreign access to the nation’s oil and gas industry.

"Our decision is to follow the referendum mandate," Lopez Obrador said at a news conference Monday in Mexico City. "The citizens’ decision is rational and democratic."

Now, the incoming administration will stand by its proposal to add two runways to a military base while upgrading the current airport and another in the city of Toluca, said Lopez Obrador, who doesn’t take office until Dec. 1.

The group in charge of the trust to build the airport said it will continue construction until it receives official notification to halt. "We will honor every commitment until Nov. 30, the last day of the current administration," Federico Patino, the group’s chief executive, said in a press conference Monday.

The peso fell 4.2 percent, cementing the worst decline since the election of Donald Trump spurred fears the U.S. president would live up to threats to tear up the North American Free Trade Agreement. Yields on the airport’s bonds maturing in 2047 rose 16 basis points to 6.98 percent. Airport operators also fell, led by a 6.8 percent tumble in Grupo Aeroportuario del Centro Norte. Grupo Aeromexico SAB slid more than 8 percent, the most since March 2017.

In the four-day nationwide “consultation” ending Sunday, almost 70 percent of the 1.07 million participants voted against the completion of one of the country’s biggest-ever infrastructure projects. Organized and funded by Lopez Obrador’s Morena party, the consultation tallied the results from polling stations in more than 500 towns. Plans for a door-to-door survey, to be carried out in the final days of the consultation, were ended before voting started.

Mexico's AMLO Scraps $13 Billion Airport Project; Peso Plunges

Campaigning as an anti-corruption reformer , Lopez Obrador said the project was rife with graft and a waste of taxpayer money. He said the alternative choice would save as much as 100 billion pesos ($5 billion). Yet the cost of canceling now could be as much as $10.5 billion, according to BBVA.

Scrapping the project could accelerate the payment of principal and interest in $6 billion of bonds that the group in charge of building it issued to finance the construction. The new president said he won’t ask airport bondholders for a haircut.

©2018 Bloomberg L.P.