Morgan Stanley sees little chance Mexico will nationalize railroads

A photograph of a train locomotive passing by some trees.

The possibility that the Mexican government would seek to nationalize the freight railroads seems unlikely, but it can’t be ruled out, according to a research update from investment firm Morgan Stanley.

The update, released Sunday, summarized two recent reports, one from the local newspaper El Universal saying that Mexican President Andrés Manuel López Obrador was considering nationalizing the railroads, and another from the same source  later in the day disputing that report.

The reasons Mexico would nationalize the railroads are a perceived “abandonment of a meaningful percentage of stretches by rail concessions due to lack of profitability, and an allegation that a number of concessions are being operated by private concessionaires in a way that would not entirely fulfill contractual and social commitments,” the Morgan Stanley note said.

But the president has also denied that his administration is considering nationalizing the railroads, according to Morgan Stanley’s summary of the two reports.

The likelihood that Mexico would significantly change the rail regulatory model is a “low risk,”  considering that the Mexico Federal Competition Commission found “nothing material” in its preliminary findings on insufficient rail competition on certain routes, Morgan Stanley said.

But one can’t fully dismiss the issue either because someone came up with the idea that facilitated the El Universal report.

“… If it proves the case that the rail companies have in fact abandoned rail stretches in violation of their concession terms and the government were to seek redress, this could imply

some kind of liability” for Grupo Mexico Transportes (BMV: GMXT) and Kansas City Southern (NYSE: KSU), Morgan Stanley said. Kansas City Southern operates a line in Mexico, while GMXT operates Ferromex, Ferrosur, TexasPacifico and Florida East Coast Railway.

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