Mexico’s New Leader Faces Challenges Including Heavily Indebted State Oil Company

On 1 October, following the transfer of presidential authority to Claudia Sheinbaum, Mexico’s departing president, Andrés Manuel López Obrador, raised her arm in a shared display of triumph. López Obrador, a highly popular yet contentious personality in Mexico, passed on more than merely the presidential sash to his political successor. She takes over a country and an economic system that demonstrates strong performance in certain sectors while confronting considerable difficulties in others. From the viewpoint of her incoming administration, a positive development is Mexico’s enhanced trade standing with its northern neighbor, having overtaken China as the United States’ primary trading partner. Mexico has gained from “nearshoring,” which involves the movement of American and Asian companies from China to northern Mexico to circumvent punitive US duties on Chinese goods. Former Mexican trade negotiator Juan Carlos Baker Pineda stated prior to the election, “Mexico has always been attractive to capital flows because of our geographical position, our free trade agreements with North America, our work force.” He added, “But over the past few years, it increasingly seems that if you [a foreign firm] want to do business with the US you need some kind of footing in Mexico.” Mr. Baker Pineda considers the prospects favorable, highlighting Amazon’s recent declaration of a $5bn (£3.8bn) investment in Mexico spanning the next 15 years, along with a further $1bn investment from German automotive manufacturer Volkswagen. He additionally mentions encouraging initiatives from South African, Japanese, and Chinese companies. Detractors are not as persuaded that the transfer of manufacturing operations from Asia to northern Mexico genuinely benefits the Mexican economy, as opposed to merely strengthening the participating businesses. Mr. Baker Pineda asserts that the crucial factor is establishing the appropriate “corporate and government decisions in this country to sustain this trend in the long-term.” Regarding the immediate economic challenges confronting President Sheinbaum, the most urgent is the state-owned energy company Pemex, which carries approximately $100bn in debt, positioning it as the globe’s most indebted oil enterprise. Fernanda Ballesteros, the Mexico country manager for the Natural Resource Governance Institute, states, “The debt is a problem not just for Pemex but for Mexico.” Over recent years, the López Obrador government decreased the tax burden on Pemex, reducing it from 60% to 30%. Concurrently, the departing administration provided Pemex with several financial infusions, which López Obrador expressed a desire to see persist. Nevertheless, a consistent drop in Pemex’s output in recent times has exacerbated the financial complexities of the state-owned energy behemoth, which, based on government figures, employs approximately 1.3 million individuals. Ms. Ballesteros remarks, “President López Obrador’s policies and priorities were to double down on fossil fuels and give unconditional support to Pemex.” She contends that the company is currently ill-prepared for the essential shift towards more environmentally friendly and effective energy sources in the decades ahead. She further notes, “Over the past six years, 90% of Pemex’s infrastructure investments have gone towards a new refinery in Dos Bocas in Tabasco state, and the acquisition of a refinery in Deer Park in Texas.” The government asserts it is progressing towards its objective of complete fuel self-sufficiency by the first quarter of 2025. Yet, Pemex’s persistent financial troubles restrict the Sheinbaum administration’s ability to manage the immense debt. Eugenio Fernández Vázquez, an environmental expert, describes Pemex as a “big challenge” for Sheinbaum. He clarifies, “Not just in dealing with the oil industry, which is huge in terms of Mexico’s GDP, but also in taking Pemex’s massive debt burden off the public’s shoulders.” He further states that Sheinbaum is tasked with achieving a delicate equilibrium: encouraging Pemex to increase sales of its products, “which are obviously fossil fuels and oil-based,” concurrently with fulfilling Mexico’s climate change obligations and tackling pressing urban problems such as air pollution. This situation must be particularly vexing for a president lauded as Mexico’s most environmentally aware leader—Sheinbaum was an accomplished environmental engineer prior to her political career. This is especially true while simultaneously allocating billions in public funds to support a major greenhouse gas emitter. Shifting to Mexico’s intricate relationship with its northern neighbor, President Sheinbaum will encounter two distinct potential counterparts in Washington: either Kamala Harris, who would be the first female president of the US, or a second term under Donald Trump. Regardless of the November election outcome, several complex cross-border matters require attention, including trade, undocumented immigration, the illicit flow of firearms into Mexico, or fentanyl into the US. Additionally, the United States-Mexico-Canada Agreement (USMCA) free trade pact is scheduled for renegotiation in 2026, allowing for potential modifications ranging from minor adjustments to substantial revisions. The USMCA was implemented in 2020, succeeding the former North American Free Trade Agreement among the three nations. Sheinbaum must also monitor the peso. The currency experienced a sharp decline against the dollar in the period following her election win in June. This depreciation was primarily a reaction to the outgoing president’s choice to proceed with a comprehensive overhaul of the nation’s judicial framework, which stipulates that all 7,000 judges and magistrates in Mexico will be selected through popular ballot. Sheinbaum also endorses this proposal. Washington’s objection to this initiative, openly voiced by US Ambassador to Mexico Ken Salazar, indicated that it might complicate, or even imperil, aspects of the USMCA renegotiation. The relationship between Ambassador Salazar and the incoming administration is already perceptibly cooler. Beyond diplomatic disagreements, aligning the new constitutional provisions with the free trade agreement’s legal stipulations might turn out to be considerably more intricate than initially foreseen. Nevertheless, these mark the initial days of President Sheinbaum’s tenure. Inheriting her predecessor’s legacy, she benefits from an almost unparalleled degree of backing, with the governing party holding an unchallengeable stance nationwide. Her primary campaign pledge—to broaden López Obrador’s social initiatives encompassing pensions, family allowances, and student scholarships, and to construct what she terms the “second floor” of his political agenda—garnered her the support of millions of Mexican citizens. She can additionally rely on a supportive congress and, subsequent to the reform, potentially command the judiciary as well. Assuming office with such substantial authority is an advantage that both her proponents and detractors anticipate she will utilize to effectively tackle some of Mexico’s principal economic impediments.