Markets weigh political options in Brazil, highlight shifts in Mexican infrastructure

Markets weigh political options in Brazil, highlight shifts in Mexican infrastructure

Corporate & Sovereign Strategy Economy & Policy Project & Infrastructure Finance Electricity Politics Brazil Canada Mexico United States

Transitioning, financing and executive leadership were the main themes of Mayer Brown’s infrastructure financing in Brazil and Mexico panel the law firm held this week. Partners Luis Adams, also former attorney general for Brazil, Ariel Ramos and Eduardo Lima spoke of the challenges and the uncertainty for the economies and financial markets of both nations.

Brazil’s upcoming general election will pin two different ideologies, seeking to make Brazil a stronger and more attractive option for international investors, Adams and Lima said.

“If you look at the [top] candidate’s positions, you’ll see two very different positions,” Adams said. “You have a strong leading position with [Jair] Bolsonaro, who is in favor of full privatization of Brazil’s companies. He is, in a way, a very pro private market establishment. Then you have Fernando Haddad, who defends the contrary, which is not the privatization, but wants more regulation and better regulation for the development of the economy.

“But, both of them, despite being very strong in the political debate in the left and in the right, they are all trying to move to the center, in general. And that is because they are trying to gain support from people who are not expressive in the extremes. The people who vote pro-investment and pro-growth. They are trying to focus on their perspective and on an environment for investment.”

According to Lima, both candidates understand the need of the next Brazilian presidency to continue the growth of the capital markets, especially when it comes to infrastructure.

“The question that remains is how to create the market conditions to attract the capital markets,” Lima said.

National development bank BNDES left a gap in the marketplace after it changed the interest rate to the TJLP and this transferred into the way deals were financed in the country. Whether Brazil's financiers are willing to fill the void remains a work in progress, Lima added.

“Although we have large local institutional investors in Brazil and we have a large debt capital markets in Brazil, it is not very clear that they are willing to fill the gap left in the market. There are some communications in some of the projects.

“It is clear that Brazil needs to create more stable regulations, improve contract arrangements, make instruments to mitigate current risks and work with tax incentives to bring in other sources of financing for the Brazilian market.”

Mexico's changing political dynamic

In Mexico, Ramos pointed to the historical nature of the election outcome, where for the first time, the same party controls congress and the presidency as well as some regional territories.

The challenge now remains in visualizing the feasibility of the proposals president-elect Andrés Manuel López Obrador and his transition team have suggested will be a priority in the short term.

“Basically, the two most important events for Mexico, specifically were on one hand, the presidential election and the other the outcome of the negotiation and renegotiation of NAFTA or whatever name they end up calling it nowadays,” he said. “[The winning party] has an enormous amount of power and that also means that most companies are going to have to wait to see what is the agenda they are going to have.

“There have been a number of unofficial announcements with respect to what they intend to do. They are ideological, and there are different ideologies involved here, so we are going to have to wait for a little bit. Also, we are going to have to see to what extent reality prevails in terms of the situation of the government, and of the country as a whole.

For Ramos, the upcoming administration’s effort to promote infrastructure development through a number of proposals, including the Santa Lucia airport and the Mayan train, are likely to face technical hurdles that make them non-viable.

And AMLO’s push to involve PEMEX into farmouts and offshore exploration, and his push to transfer development and generation projects to the nation's utility CFE, will be met with budgetary constraints that require congress and the new administration to rethink their campaign stands.

AMLO will take office on December 1.

“We assume that one of the first things that [government] is going to amend with respect to the hydrocarbon laws is going to be the regime applicable for PEMEX with respect to farmouts in order for PEMEX to have more latitude and more flexibility to select their own partners.

“With respect to the power sector, it’s a similar story. They just mentioned that an old politician is going to be the head of CFE. They said they were also going to review the PPAs with the private sector. Same thing with PEMEX, they want to transfer the development of all the generation capacity through CFE instead of the private sector. But it’s the same thing; the financials of CFE don’t give them too much latitude for that.”

Ramos said regardless of the constraints and viability of the upcoming administration’s proposals, the successful negotiations of the trade agreements with Canada and the US, and the market’s decision to pursue low-risk financing during the negotiation period have, at the very least, greatly reduced the expected volatility.


Photo: Brazilian presidential candidate Jair Bolsonaro. Provided by FAMÍLIA BOLSONARO/ Flickr