Previous Quarterly Editions
Expropriation Risk: 50 53 54 55 Political Violence Risk: 78 76 76 78 Terrorism Risk: 65 65 65 65 Exchange Transfer and Trade Sanction Risk: 57 58 56 54 Sovereign Default Risk: 40 52 54 55
TREND ▲ OUTLOOK ▲
Now one year into his six-year term, President Andrés Manuel López 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. The result so far has been an uneasy combination of orthodox and heterodox economic 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, he has also rejected several private investment projects for political reasons, most notably a new airport for Mexico City, while championing public sector projects of questionable value. The largest of these is the 6.3-billion-dollar Maya tourist train project, to which he gave the go-ahead in December. While setting ambitious goals for increased oil production and more capacity for domestic refining, he has taken steps to dismantle his predecessor’s liberalisation of the energy sector, which had been attracting significant amounts of private capital, and there is no sign that he will agree to re-open the sector to private investments. Instead, he appears convinced that Pemex, the state-owned energy giant, can again play a central role in the country’s economic development despite widespread fears that its parlous economic condition may yet require a bailout that the state cannot afford. The overall result has been a fall in investor confidence and diminished economic growth during AMLO’s first year. Revised figures from the National Institute of Statistics show that the economy actually contracted during the first half of 2019 before managing growth just above zero in the third quarter for a final annual figure of 0.2%. Although 2020 should see growth above 1%, the country’s economy continues to underperform and AMLO has abandoned his mid-year talk of averaging 4% during his presidency. During 2020, his emphasis is likely to be on income redistribution rather than growth. In December, the government announced a further increase of 20% in the minimum wage in 2020. It was increased by 16% in 2019 without a rise in inflation and ALMO is confident that this increase will also be safe. However, in the absence of growth, the inflationary risk of the latest rise is higher.
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 as new regulatory bodies, whose staff often appear to be chosen for their political loyalty rather than sectoral expertise, challenge the terms of some existing contracts. Pemex continues to struggle with chronic inefficiency and crippling debt but is denied the possibility of pursuing more resources, along with technology and know-how, through partnerships with other oil companies. After President Trump’s threat to impose tariffs on all Mexican imports in mid-2019, 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 border controls. The quick move, together with his support for USMCA, shows that despite his rhetoric AMLO is keen to prevent any further obstacles to bilateral trade.
Despite establishing a new National Guard, AMLO has avoided active confrontation with drug cartels or other criminal mafias. The government suffered a humiliating, high-profile defeat in mid-October when Ovidio Guzmán, the son of Sinaloa Cartel leader Joaquín "El Chapo" Guzmán who is now in jail in the United States, was arrested by security forces in the city of Culiacán. He was liberated by cartel members within a few hours, after violent confrontations across the city and the families of army officials had been taken hostage. The reputational cost was substantial, not least in terms of Washington’s assessment of Mexico’s capacity for security, although President Trump’s talk of designating cartels as terrorist organisations quickly blew over. By the start of 2020, it was widely accepted that the AMLO administration is no more capable than its predecessors of dealing with the continuing increase in cartel-related violence.
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, including the dangerous practice of stealing petrol directly from Pemex pipelines in order to resell it. The selling of “security” to businesses has become a widespread problem in many cities and, while the magnitude of such extortion activities is impossible to quantify, they are having a significant and depressing impact on investment among small and medium-sized businesses. The Culiacán fiasco has only added to the impression of a weak government that does not have a coherent strategy for confronting crime.
TREND ▼ OUTLOOK ►
In November, the central bank cut its benchmark interest rate by 25 basis points to 7.75%, continuing a loosening cycle that started in August. Reductions by the Fed, a stable peso, and falling inflation have allowed the bank to cut rates without fear of fuelling price increases. The steady exchange rate and an inflation rate that is right on target at 3% should discourage AMLO from any inclination to alter the free-floating exchange rate regime or reduce the central bank’s independence.
With the company’s debt now rated as junk by one rating agency, the financial state of Pemex continues to be a major threat to the government’s economic stability. A similar rating from Moody’s or S&P would unleash a massive selling of Pemex bonds. However, a new injection of five billion dollars from the government in September to ensure it met upcoming debt payments, together with its own, attractively priced 7.5-billion-dollar bond issue for a similar purpose should put off a second downgrade, at least for the short term. The fiscal conservatism that stems from AMLO’s aversion to deficits has also won support from the IMF, which renewed Mexico’s Flexible Credit Line for an additional two years at the end of 2019. This makes 60 billion dollars available and represents an additional cushion to foreign exchange reserves of around 180 billion dollars.
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