Balancing energy transition and economic priorities: a challenge for Mexico’s incoming president

In 2024, there are at least six countries holding general or presidential elections, with the potential to cause sea changes in economic policies, which in turn may result in changes to attitudes from external investment parties. In other areas, the political wind continues to blow the same direction, but expectation in the markets can create uncertainty as the position of the new leader and how their party will respond may affect the economy in forthcoming years.

In Mexico, for example, the country has recently been stunned by the landslide victory of Claudia Scheinbaum, protegee of outgoing president, Andrés Manuel López Obrador, or AMLO as he is widely known. Scheinbaum is understood to be likely to continue AMLO’s left-wing agenda, with perhaps some evolution in respect of her approach to renewable energy and a more international outlook.

When she takes up her position as president on 1st October shortly before the US elections, many are now wondering how her manifesto pledges will come to fruition, what impact they may have on the economy and how the outcome of the subsequent election could impact the relationship between the two countries.

In recent years, Mexico has benefitted from US ‘nearshoring’, offering improved capabilities in professional services and supply chain thanks to Mexican engineering and energy production exchange – Mexico currently imports 40% of its gas from Texas. Depending on the outcome of the US election, this may in itself transform once again, if changes in attitude towards exports and international relations change.

At present Mexico’s biggest individual economic concern is state oil and gas giant, Pemex, and it’s growing debt which is the equivalent to approximately 6% of GDP. Although the country is stably rated at BBB- the increasing government debt is fast approaching nearly 50%.

The current administration has continued to invest heavily in propping up the company, but at what cost to the country overall? Whilst some say the company has suffered from too many years of neglect, its woes are no doubt contributory to the increase in country deficit.

With a PhD in energy engineering which focused on Mexican energy and as an author of numerous articles and books on the subject, Scheinbaum should be well positioned to take a measured approach towards the matter of fixing the current problems with energy. The question of Pemex itself is so universally acknowledged that it was included in the manifesto pledges of both parties. Scheinbaum’s position is to focus on the refinancing of Pemex maturities to reduce the debt and modernise production infrastructure to increase productivity and reduce reliance on imports. Without setting dates for Net Zero – or indeed acknowledging the need for it as a target at all - she has pledged to decarbonise as quickly as possible.

Existing oil and gas generation capacity in the country has stagnated within in the last three years, whilst demand has grown at a rate of approximately 3% annually. with a system currently unable to meet demand. This is particularly a problem with natural gas, currently 60% of Mexico’s power generation capacity, which cannot be delivered across the country, particularly in economically poor areas due to lack of infrastructure.

For energy production to flourish in the country, the grid will need to be upgraded to develop transfer throughout the country, and to incorporate wind and solar at the times that they are available. This infrastructure growth activity, if it can be realised, will provide opportunities for the insurance market, from both energy and political risk perspectives as investors potentially seek cover on development projects in Mexico or loans to Mexican borrowers.

So how is the new government expected to influence existing insureds with energy interests locally? Sheinbaum has raised the concept of energy transition in a way that her predecessor did not, planning to increase renewable energy generation and transition whilst retaining current supply to Mexican citizens. Whilst energy transition may be popular with the people, Scheinbaum has also pledged to support and strengthen Pemex and national electricity provider, CFE. Finding funds to complete both plans and maintaining foreign investment support for the heavily indebted oil giant could present a challenging balancing act.

Whilst rating agencies currently still expect the Mexican economy to continue to be stable, growth has slowed from 3.2% in 2023 to 2.4% in 2024 and is forecast to slow further to 2.0% in 2025. If the economy were to shrink too much and the money to keep Pemex afloat runs out, will the government still be in a position to bail out a company which is paying more to service its debt annually than it earns in a year?

In the Political Risk market, insurers will be watching progress of the economy, in particular the ability of the state oil and energy companies to service their debts, significant shares of which are insured in the market, and of Mexico to lighten the load of this weighty economic millstone.