Previous Quarterly Editions
Expropriation Risk: 43 50 53 54 Political Violence Risk: 76 78 76 76 Terrorism Risk: 65 65 65 65 Exchange Transfer and Trade Sanction Risk: 55 57 58 56 Sovereign Default Risk: 47 40 52 54
TREND ► OUTLOOK ▲
President Andres Manuel Lopez Obrador, popularly known as AMLO, continues to use his large majorities in both houses of Congress to pursue an agenda that combines a strong belief in the public sector and a positive view of government spending with a wariness of fiscal deficits and a reluctance to increase taxes. One consequence has already been substantial budget cuts in some areas in order to fund other initiatives that AMLO has emphasised, such as the construction of a new oil refinery and greater spending on education. These reallocations were one of the reasons that his respected finance minister, Carlos Urzua, resigned in July, arguing that economic policy decisions lacked adequate justifications. His successor, Arturo Herrera, is also respected, but it is now widely accepted that economic policy is set by the president. As a result, it has followed an uneasy combination of orthodox and heterodox measures. The president has voiced support for free trade, with Mexico being the first country to approve the US Mexico Canada Agreement (USMCA) that is intended to replace NAFTA. However, AMLO has also rejected private investment for political reasons, such as when he ended work on a new airport for Mexico City. While setting ambitious goals for increased oil production and more capacity for domestic refining, he appears keen to dismantle his predecessor’s liberalisation of the energy sector that has been a key factor in attracting private capital. The latest business plan for Pemex, presented in July, insisted on ambitious production targets without clarifying where the necessary investment would come from. The result has been a fall in investor confidence and diminished economic growth. For the first time in decades, the Mexican economy has decoupled from the US, despite the fact that Mexico has now become the main trading partner of the United States as US-China trade slows. Although seasonally adjusted GDP growth for the first half of 2019 was only 0.3% year-on-year, AMLO remains confident that the final figure will reach 2%, and in late July the government announced a 25-billion-dollar stimulus plan intended to incentivise infrastructure investment and private consumption. However, his campaign promise that annual growth will average 4% over his six-year term looks increasingly difficult to achieve after the central bank drastically cut its growth forecast for 2019 from 0.8%-1.8% to 0.2%-0.7% at the end of August.
TREND ▲ OUTLOOK ▲
The extent to which AMLO is reversing aspects of the country’s energy policy is an increasing concern for investors, who have seen a freeze on new licences followed by regulators now challenging the terms of some existing contracts. Pemex continues to struggle with chronic inefficiency and crippling debt but is denied private investment even though the government cannot put the company back on its feet without endangering its own finances. The administration’s position is that the private sector is unreliable and prone to corruption, but many of the appointments already made to regulatory commissions have emphasised political loyalty over technical expertise. The government has fast-tracked through Congress new legislation to allow the swift expropriation, without compensation, of assets obtained through criminal activities. However, there are worries that expropriation may become a politicised threat, as the new law currently allows the seizing of assets before completion of the judicial process to determine that they were illegally obtained. After President Trump’s threat to impose tariffs on all Mexican imports in June, AMLO reversed his stance on permitting illegal migrants to cross through Mexico to enter the US and used the new National Guard to help enforce tighter controls. The quick move showed that AMLO, despite his rhetoric, is keen to prevent any further obstacles to bilateral trade.
Federal police officers took to the streets of the capital in July to protest government plans to integrate them into the newly created National Guard, which is intended to increase the military’s role in domestic security operations. The officers fear a loss of seniority and benefits, and object to being moved from a civilian to a military culture. Creation of the National Guard runs counter to AMLO’s initial promise to demilitarise the police, and it has become less popular since its use against undocumented migrants rather than drug cartels. The row threatens to undermine relations between government and law enforcement at a time when violent crime is reaching new levels.
TREND ► OUTLOOK ►
While Mexico has little experience of international terrorism, many drug cartels use terror tactics to intimidate local communities and businesses. They have also branched out into other criminal activities, which increasingly include the dangerous practice of stealing petrol directly from Pemex pipelines in order to resell it. A brief attempt by the government to reduce theft by moving petrol via road rather than pipelines caused severe shortages at the beginning of 2019. Since then, the government has chosen to avoid the risk of violent clashes between security forces and well-armed criminal groups and the problem remains.
TREND ▼ OUTLOOK ▼
In August, the central bank cut its benchmark interest rate by 25 basis points to 8%, citing the sluggish state of the Mexican economy, which is expected to grow by less than 0.7% this year. Its last cut was in 2014, when the rate was just 3%, but with the peso strengthening somewhat against the dollar the bank may feel able to make further rate cuts in an effort to shore up weak growth. The stronger peso will also discourage AMLO from any inclination to alter the free-floating exchange rate regime or reduce the central bank’s independence.
The financial state of Pemex continues to be a major threat to the government’s economic stability. Unable to issue international bonds, it is using bank loans to refinance an extraordinary level of debt that now exceeds 100 billion dollars. In June, Fitch Ratings downgraded that debt to junk status. A similar move by Moody’s or S&P could unleash a massive selling of Pemex bonds, as many investment funds are only permitted to hold debt of investment grade. If the AMLO administration needs to rescue Pemex, this would impose a severe strain on public finances and even endanger the rating of the bonds issued by the federal government.
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