Index trend
Previous Quarterly Editions
Expropriation Risk: 60 60 60 60 ►Political Violence Risk:57 57 57 57 ►Terrorism Risk:65 63 63 63 ►Exchange Transfer and Trade Sanction Risk: 54 54 54 54 ►Sovereign Default Risk:55 55 55 55 ►
Overall Risk Temperature: 59 (Significant) TREND ►
Special topic: Relationship with the 'global rules-based order'
President Andres Manuel Lopez Obrador (widely known as AMLO) challenged the rules-based order on many fronts. He appeared at times to believe he had gained a political and moral authority that put him above international (and even domestic) laws. He repeatedly asserted that the ideal of justice was above any legal stipulation.
Concerning international rules, he placed the sovereignty of Mexico above any international laws or treaties. He treated sovereignty as an elastic concept that, like justice, he felt free to interpret arguing that he represented the Mexican people. He harshly rejected any criticism of his administration from other governments, international organizations or media.
Domestically, AMLO at times showed an authoritarian bent, supporting undemocratic regimes, notably the governments of Venezuela, Cuba and Nicaragua. His offer of political asylum to a former Ecuadorian vice president accused of several crimes caused great tension between both countries and the breaking of diplomatic relations in April. He also displayed ambiguous positions on the Russian invasion of Ukraine; however, he gave a low priority to the international scene, rarely traveling outside Mexico and only to countries in the Western Hemisphere, never going to Europe or Asia.
The president played to a home audience with assertions that he was against neoliberalism. In an economic sense, that meant enthusiasm for state participation in certain areas, notably energy, communications, mining and agriculture, and protectionist ideas based on the notion of “to produce what we consume.” Such beliefs, while often detrimental to foreign investors, rarely translated into action against international organizations or treaties. Specific policies, notably in the energy and agricultural sectors, caused clashes with the U.S. and Canadian governments, which alleged violations of the trilateral trade agreement, the USMCA, but without causing any escalation beyond the stage of consultations.
The president tried, unsuccessfully, to remodel the Supreme Court and the National Electoral Institute radically, but he lacked the two-thirds majority to change the constitution. With his chosen successor, Claudia Sheinbaum, having won with a landslide 32 point margin of victory over the second place candidate, the new government may have more leeway (as of this writing, the legislative results have not been announced).
That said, while Mexico under AMLO has not been enthusiastic about an international rules-based order, the country seems unlikely to join the ranks of those countries in active opposition. AMLO has been isolationist in the strictest sense, with the president only reacting when feeling attacked. His successor may choose to maintain that trajectory.
TREND ►
Until the 1st of October transition to Mexico's first female president, AMLO remains in charge. The risk of expropriation is significant in the specific instances AMLO considers it important for the government to intervene, even if it violates international treaties, domestic legislation or contracts agreed upon by previous administrations. That has been most notable in the energy sector, where AMLO has aimed to exert greater state control, citing national sovereignty as the justification. Both foreign and domestic investors should expect government interference in other sectors, as the administration has become more radical with time. The usual tactics involve enacting legislation, threatening with expropriation or directly taking over companies through force and expecting those affected to negotiate from a weakened position. The president has demonstrated willingness to bear the consequences, including any financial penalties and reputational costs. As mentioned, AMLO considers that sovereignty issues (as he defines them) take precedence over legal stipulations and even international treaties.
The president has practically destroyed any incentive to invest in electricity generation due to his attacks on private companies. For example, he pushed Spain’s Iberdrola to sell several plants to the government. He has also canceled concessions to exploit lithium, withdrawn the permission to build a brewery (already well advanced in its construction), occupied by force a segment of a private railway (forcing the owner to cede the concession in exchange for other interests) and threatened a private company to sell a quarry and a port in the Yucatan Peninsula or be expropriated, among various actions that have affected private interests.
Arguably, a major failure of AMLO’s administration has been violence: His policy of “hugs, not bullets” in reality represents a government shortcoming in the fight against criminal groups, particularly drug cartels. Such groups practically control territorial enclaves where violence has exploded uncontrollably. They also greatly influence some municipal and state governments. The president himself has shown public sympathy toward the Sinaloa Cartel and its former leader, who is currently imprisoned in the U.S.
Activities by criminal organizations are causing significant tensions with the U.S. Some U.S. Republican legislators are openly calling for U.S. military action against cartels in Mexican territory, particularly aiming to halt the illegal trade of opioid fentanyl coming from Mexico. The U.S. presidential campaign will probably heighten those tensions, fanned by other hot topics, such as illegal migration.
Drug cartels and other criminal groups routinely use terrorist tactics to intimidate local communities, businesses, and municipal and state governments. They have also branched out into other criminal activities. They sell “security” to businesses (protection rackets), which has become a widespread problem even for small and midsize firms.
AMLO prefers a strong and nominally stable U.S. dollar-peso parity, but he has not attempted to alter the exchange rate policy (which the finance ministry can modify) or curtail the independence of the Bank of Mexico (Banxico).
However, AMLO has shown a cavalier attitude when designating members of the Banxico Governing Council, privileging loyalty above expertise. Nonetheless, the central bank has maintained a strict monetary stance to arrest inflation. Its benchmark rate was lowered in March for the first time in three years by 25 basis points to 11.0%. Thus, the real interest rate remains relatively high and greatly explains a robust currency, combined with an increasing inflow of remittances from the U.S. (which may include money laundering from drug cartels). The exchange rate has even traded below 17 pesos per dollar since mid-2023, a level unseen since the end of 2015.
AMLO’s sovereignty stances have also added to trade tensions. The government’s discriminatory policies against electricity companies and a ban on imports of genetically modified corn for human consumption may eventually trigger sanctions against Mexico from the U.S. and Canada.
The substantial jump in the fiscal deficit in 2024 should also increase public debt significantly. Although the debt trajectory cannot be categorized as explosive, budget pressures may spook the capital markets, already wary of the enormous debt owed by state-owned Pemex. The company needs significant financial injections to avoid a default on its $110 billion obligations (it is the most indebted oil company in the world). Pemex’s bonds have had a junk credit rating since 2020.
AMLO’s nationalistic obsession with oil may thus entail problems during his last months in office. The skyrocketing cost of the Dos Bocas refinery is expected to reach at least $25 billion (the original estimate was $8 billion). A combination of severe financial problems at Pemex and the major fiscal expansion may push credit rating agencies to downgrade the federal government’s debt during 2024.
