Previous Quarterly Editions
Expropriation Risk: 62 59 60 60 ►Political Violence Risk:60 57 57 57 ►Terrorism Risk:65 65 65 65 ►Exchange Transfer and Trade Sanction Risk: 45 45 45 54 ▲Sovereign Default Risk:47 47 55 55 ►
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Protest intensity in 2022 and Q1 2023* 2022 Q1 2023Cost of living : High LowAll protest: High Very High
Cost-of-living protest risk in 2023*Wage protest: LowFood/fuel policy protests: Medium
*Note: Protest intensity is calculated based on ACLED. Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of calculations, see the introductory essay.
Inflation increased prominently in Mexico, as in many other countries, from mid-2021. However, inflation did not go up as markedly as it could have done, due to the decision of President Andrés Manuel López Obrador (AMLO) to subsidise gasoline, to keep its price practically constant in real terms, that is, allowing only a smooth rise in nominal terms.
The decision was taken mainly on political grounds. For the early 2000s, as Mexico City Governor and in the three presidential campaigns that he fought,
finally winning in 2018, AMLO fiercely attacked any increase in the gasoline price. He pledged to lower pump prices if elected. While he broke that promise, he has kept prices roughly stable after inflation.
The subsidy was substantial during 2022, reaching MXN397.3 billion, according to the Ministry of Finance and Public Credit (SHCP), equivalent to 2.2% of GDP. The SHCP argued it received about MXN300 billion from additional oil-related revenues from the higher oil price, greatly financing the subsidy. However, the gap is still significant, and the government would have used the oil windfall on items such as public health or infrastructure. However, the subsidy managed its purpose of avoiding political costs. Moreover, the SHCP estimated
inflation could have even reached 14% without the subsidy, which instead peaked at 8.7% in August 2022.
Food prices, on the other hand, were not subsidised nor controlled. A package was agreed with private businesses, aiming to stabilise prices of basic foodstuffs. However, the package was voluntary. AMLO has greatly increased the universal pension
received by all adults of at least 65 years of age, from MXN1,350 per month in 2021 to MXN1,925 the following year, and MXN2,406 during 2023.
These actions explain why inflation has not sparked any public protests, even as the government has maintained a tight fiscal policy, a constant feature since AMLO took office in December 2018. Even during the COVID-19 pandemic, the
fiscal deficit was not allowed to increase significantly, as the president – peculiarly for a left-wing politician – is a fiscal conservative who dislikes the accumulation of public debt. The government’s unpopularity rather derives from the lack of economic growth and public insecurity.
The risk of expropriation is mostly concentrated in the energy sector, where AMLO wishes to exert greater state control, arguing it is a matter of national sovereignty. Years of tension between the government and Spanish energy giant Iberdrola were resolved in early April when the government announced it would be acquiring from it 13 power plants for USD6 billion. AMLO termed the deal a “new nationalisation”.
Foreign investors can, however, expect government meddling in other sectors. AMLO initially stated publicly in February 2023 that he would not authorise a new Tesla gigafactory in the northern state of Nuevo León, arguing insufficient water supplies (the motive he presented to cancel a half-built beef factory in another northern state in 2020). After some negotiations with Elon Musk, the head of Tesla, AMLO approved the project.
The president has shown repeatedly – since announcing, before he took office, cancelling the massive new airport for Mexico City, on which construction had already started – he is willing to confront private investors and literally pay for the consequences, including any financial penalties and other costs. AMLO considers sovereignty issues, as defined by him, are superior to legal stipulations or even international treaties.
Foreign investors should also expect problems associated with greater corruption in the whole of the government apparatus – at municipal, state, and federal levels (the latter was rarer in previous governments) – in addition to less expertise and know-how from government bureaucrats. AMLO has appointed numerous officials due to their personal loyalty, with scant attention to their knowledge or experience.
Arguably, a major failure of AMLO’s administration has been violence. In reality the ‘hugs, not bullets’ policy has represented a shortcoming by the state in the fight against criminal groups, particularly drug cartels. Such groups practically control territorial enclaves and greatly influence some municipal and state governments. The President himself has shown public sympathy towards the Sinaloa Cartel and its U.S.-imprisoned former leader.
Increased activities by drug cartels and other criminal groups are causing significant Mexico-U.S. tensions. U.S. In March, U.S. Secretary of State Antony Blinken said parts of Mexico are controlled by drug cartels. Some U.S. Republican legislators are openly calling for U.S. military action against those cartels in Mexican territory, particularly aiming to arrest the illegal trade of opioid fentanyl coming from Mexico.
Although Mexico has little experience of international terrorism, many drug cartels use terrorist tactics to intimidate local communities and businesses. They have also branched out into other criminal activities, such as the selling of ‘security’ to businesses (protection rackets), which has become a widespread problem even for small and medium-sized firms, consequently depressing investments further.
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attempted to alter exchange rate policy (that can be modified by the finance ministry) nor curtail the Bank of Mexico (Banxico)’s independence. However, he has tried, and failed, to obtain monies from Banxico for the exchequer, including part of the profits from its operations.
However, AMLO has shown a cavalier attitude when designating top Banxico officials. Governor Victoria Rodríguez and a Deputy Governor Omar Castelazo were designated despite their lack of significant experience on monetary matters, violating what was required by the central bank’s law. Both were confirmed regardless, thanks to the government’s majority in the Senate, subsequently taking office in January 2022 and 2023, respectively.
Nonetheless, the central bank continues to maintain a strict monetary orthodoxy, including several interest rate increases, aiming to arrest inflation. The central bank’s benchmark rate has increased from 4% in June 2021 to 11.25% in March 2023.
The government still has 18 months to run and AMLO has displayed a tendency to radicalise his policies, as evident in the energy sector. He has shown determination to maintain his strategies and programmes even when, after more than four years, their failure is evident.
Spending cuts, including in education and health programmes, have been implemented to finance his projects including investment in oil production, and building a new refinery not expected to produce any gasoline for several years. Usually, oil giant Pemex and the six working refineries in Mexican territory (there is also one in Texas) show heavy financial losses, and a risk for the government should it need to step in to alleviate Pemex-related debts.
Private investment has fallen due to the pandemic and presidential attacks against the private sector. Public investment has also fallen, other than for AMLO’s projects. The restrictive fiscal policy worsened the economic impact of the pandemic, and GDP contracted by 8% in 2020. The rebound of 2021 was 4.7% of GDP in 2021 and 3.1% in 2022. Thus, GDP is still below the 2018 figure.
The economy is expected to grow by about 1.5%-2% in 2023. The need to reduce inflation (still above 7% in March 2023), should push the central bank to tighten monetary policy more, further dampening growth.
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