Mexican president-elect pulls plug on new airport, peso sinks

MEXICO CITY (Reuters) - Mexican President-elect Andres Manuel Lopez Obrador said on Monday his government would ditch a partially-built $13 billion new airport for Mexico City, sending Mexican financial markets into a nosedive.

A general view shows a part of the terminal area at the construction site of the new Mexico City International Airport in Texcoco on the outskirts of Mexico City, Mexico October 29, 2018. REUTERS/Henry Romero

Lopez Obrador said his administration, which takes office on Dec. 1, would heed the results of a referendum that called for abandoning the current project. Instead, a military air base north of the capital will be converted for commercial use to ease overcrowding at the current hub.

The move raised concerns that the leftist Lopez Obrador could shake up economic policy more than had been expected and put his government in confrontation with the country’s business elite, who he blasted during his election campaign but had sought to soothe following his landslide election.

Companies owned by the family of Mexican billionaire Carlos Slim, once the world’s richest man, were co-designing, co-financing, and co-building the project. Mexico’s pension funds had also put up money.

Mexico’s peso tumbled around 3.5 percent, blowing past the key 20 per dollar level after Lopez Obrador’s announcement.

The peso’s losses were the most of any major currency on Monday, and it was heading for its worst daily loss since the aftermath of the election of U.S. President Donald Trump in November 2016. The country’s benchmark stock index fell more than 4 percent to its lowest level since early 2016.

Markets had welcomed Lopez Obrador’s pledge to stick to orthodox fiscal policies after his election, but investors said the move to cancel the airport could mark a shift in sentiment toward the new government.

“The honeymoon could well be on the rocks before he even takes office,” said Andrew Stanners, an emerging markets fund manager at Aberdeen Standard Investments in London.

“The airport is the first question to the market about whether they have become a little too complacent about what a Lopez Obrador administration will really mean.”

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The public was asked over a four-day public consultation that ran from Thursday to Monday to weigh in on the fate of the new airport, and Lopez Obrador, who had called for the referendum and was against the new airport, pledged to respect the result.

Roughly a million people, or about 1 percent of Mexico’s electorate, participated.

“The decision is to obey the will of the people,” Lopez Obrador told reporters at a news conference.

He said it was a “rational” decision and that the government would save around 100 billion pesos ($5 billion). He also said it was “normal” for the peso to weaken.

“It’s normal. Once there is more information things will calm down. This isn’t significant ... there is nothing to fear,” said Lopez Obrador of the peso’s sharp decline.

The yield on Mexico’s benchmark 10-year peso bond bid 37 basis points higher to 8.74 percent, driving the price sharply lower, in its biggest one-day jump since Trump’s election raised worries he would rip up a free trade deal with Mexico.

“The market is adjusting to a new perceived reality of what the next six years under (Lopez Obrador) will be like,” said Aaron Gifford, an emerging markets bond analyst at T. Rowe Price in Baltimore.

Lopez Obrador said investors in the new airport project would be protected and that bonds issued to back its construction were guaranteed. Yields on bonds funding the new airport spiked higher.

Lopez Obrador argued during the election campaign that the new airport was tainted by corruption and would be expensive to maintain due to the geological complexity of the terrain. It has been under construction on the drained bed of Lake Texcoco east of Mexico City since 2015.

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The referendum was organized by Lopez Obrador’s National Regeneration Movement, without the national electoral authority INE. Opposition parties have said the consultation did not follow proper rules.

Several local media outlets reported cases of people who were able to vote more than once, and highlighted failures in software used to register voter identification cards, while opposition parties suggested the vote had been rigged.

Additional reporting by Michael O'Boyle and Miguel Angel Gutierrez; Editing by Tom Brown

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