No airport for Mexico. What about the peso?

29.10.2018 17:52|Marcin Lipka

"Mexico plans on stopping the construction of a gigantic airport, even though the cost of abandoning the investment is likely to exceed 10 billion USD. After this decision was made, the peso lost as much as 3%, but the economic problems of the Latin American country may be much more severe than just those relating to air transport," writes Marcin Lipka, Conotoxia Senior Analyst.

In the northeast of the Mexican capital, an airport with a target capacity of 120 million passengers per year has been in construction for the past three years. Although one-third of the 13 billion USD investment has already been completed, in a referendum held on 25-28 October, the Mexicans decided that they did not want to continue this construction.

Political struggles and billions of dollars down the drain

Where did the idea of holding a referendum on the airport during the already advanced construction process come from? There were major political changes in Mexico in July this year. Groups of populist left-wing rhetoric have seized power. One of the key elements of the presidential campaign and Congress was the issue of the airport.

Andres Manuel Lopez Obrador (AMLO), the President-elect, has repeatedly suggested that the airport investment carries the sign of corruption and has promised that if he comes into power, he will hold a referendum on the matter. Although the sworn in will not take place until December 1st, the vote (informal, party-funded) took place in late October, with as many as 70% of the 1 million citizens taking part in the referendum voting against the largest Mexican investment.

AMLO does not want to leave the capital, of which he was mayor in 2000-2005, with an inoperable airport. The alternative is to build a port in military areas, where the investment, according to the President's estimates, will cost 3.6 billion USD.

Still, this decision generates a whole series of other costs. Firstly, the current construction is already extremely advanced, which means that the money that has already been spent was lost. Secondly, a number of private institutions were involved in the work and hoped to benefit from the revenue generated by Mexico's new transport hub.

Question marks hanging over the mining industry

The fact that the gigantic infrastructure investment has been stopped means more than direct negative consequences for the companies building or financing the airport. Mexico is currently facing a very serious challenge to transform its mining industry.

The challenges of this process are perfectly described in the study of the International Energy Agency "Mexico Energy Outlook". Easily accessible oil fields are coming to an end, and investments from the bottom of the sea or shale require significant resources. According to estimates by the Financial Times, due to the liberalisation of access to the Mexican market in recent years, foreign companies have invested more than 35 billion USD in exploration projects.

According to the current authorities, they prefer to invest in state-owned companies and also want to suspend auctions for the exploitation of oil-bearing areas for two years, as mentioned by The Wall Street Journal at the end of August.

As a result, capital inflows to Mexico may be smaller than expected, especially as many foreign companies have recently nationalised their assets by the Venezuelan authorities. This is probably the main reason for the strong weakening of the Mexican peso against most currencies at the beginning of the week and not just the absurd events associated with the airport.

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