Previous Quarterly Editions
Expropriation Risk: 62 62 62 59 ▼Political Violence Risk:60 60 60 57 ▼Terrorism Risk:65 65 65 65 ►Exchange Transfer and Trade Sanction Risk: 45 45 45 45 ►Sovereign Default Risk:47 37 47 47 ►
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Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
President Andres Manuel Lopez Obrador (AMLO) has followed a signally different foreign policy than his predecessors. Since the late 1980s, Mexican governments sought greater nearness to the U.S. The most significant project towards greater integration was the 1994 North American Free Trade Agreement, that created a Canada/Mexico/U.S. free-trade zone. The Agreement was succeeded in July 2020 by the US-Mexico-Canada Agreement (USMCA).
Despite that endorsement, AMLO has rather followed what was Mexico’s typical foreign policy until the 1970s: disagreeing openly with Washington on some issues and seeking greater nearness with Latin America. The main cause of this change is AMLO’s nationalism. Moreover, he has shown inclination to be nearer with authoritarian governments, such as in Bolivia, Nicaragua, and Venezuela.
The main area of contention with Washington has been energy, with AMLO’s attempts to favour state-owned companies Pemex (oil) and CFE (electricity) breaking the USMCA’s non-discrimination stipulations. The issue may end up in a dispute panel that, if it went against Mexico, would allow the U.S. administration to impose tariffs on billions of dollars of Mexican exports. Canada has also requested consultations with respect to electricity. In that area, the government has also clashed repeatedly with another traditional Mexican ally, Spain. AMLO has stated repeatedly his policies do not violate any agreements and Mexico’s sovereignty must be respected.
All these clashes do not mean that Mexico will seek to get nearer to China or Russia. AMLO is against greater foreign investments in energy, regardless of the country of origin. The 3,000-kilometre Mexico/U.S. land border also precludes the government spurning its northern neighbour in favour of a more distant one. Moreover, Chinese and Mexican exports, notably manufacturing ones, compete in the U.S. market.
There have not been any signals from the administration that it seeks to counterweight U.S. influence with that of any other countries. The greater proximity to some Latin American countries is real, but limited and political in nature. AMLO apparently toyed with the idea of confronting the
U.S. more openly, but greatly toned down this stance after a visit to Mexico by U.S. Secretary of State Antony Blinken in mid-September.
The only initiative that AMLO has taken recently with respect to Russia has been to propose an unsophisticated “peace plan” calling for a five-year truce between that country and Ukraine, apparently allowing the former to keep any occupied territory, with direct talks between Russian President Vladimir Putin and Ukrainian President Volodymyr Zelensky being overseen by the Pope, the UN Secretary General and the Prime Minister of India. The plan has not received any serious consideration anywhere.
While the expropriation risk is greatly concentrated in the energy sector, foreign investors should expect problems associated with greater corruption in the whole of the government apparatus, at municipal, state, and federal level – 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.
Since the president announced, before taking office, the cancellation of the massive new airport to serve Mexico City, which was already somewhat advanced in its construction, he has repeatedly shown 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, including the USMCA.
Arguably, a failure of AMLO’s administration has been violence. The reality of 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 former leader who is imprisoned in the U.S.
Increased activities by drug cartels and other criminal groups may cause added Mexico-US tensions. The U.S. administration has not openly questioned the government’s actions and apparent support for criminal groups, but it cannot be unaware of them.
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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 (that is, protection rackets), which has become a widespread problem even for small and medium-sized firms, consequently depressing investments further.
While AMLO has shown some preference for a strong peso, he has not 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 to obtain monies from Banxico for the exchequer, including part of the profits from its operations.
AMLO showed a cavalier attitude when designating Victoria Rodriguez as Banxico governor, and who took office in January. She had been undersecretary for public expenditure but never worked at Banxico nor had any direct experience on monetary matters, violating what was required by the central bank’s law. Rodriguez was confirmed regardless, thanks to the government’s majority in the Senate. Nonetheless, the central bank continues to maintain a strict monetary orthodoxy, including several interest rate increases to arrest inflation. The central bank’s benchmark rate has increased from 4% in June 2021 to 8.5% in September 2022.
The government still has two years to run and AMLO has shown a tendency to radicalise his policies, as evident in the energy sector. He has shown extraordinary determination in maintaining his strategies and programmes even when, after more than three years, their failure is evident. Spending cuts, including in education and health programmes, have been implemented to finance his projects including investment in oil exploration and production, and building a new refinery that is not expected to produce any gasoline for several years. Usually, oil giant Pemex and its six working refineries in Mexican territory show heavy financial losses. Despite the increased investments, during January-July crude production was 3.5% below that of 2018 when AMLO took office in December of that year.
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, with GDP contracting by 8.2% in 2020. The rebound of 2021 was 4.8%. GDP in 2021 stood at about the same level recorded in 2016, nearly 4% below the 2018 figure. The economy is expected to grow by only 1.9% in 2022 and 1.3% the following year. The need to reduce the high inflation from the expected at around 8% at the close of 2022, should push the central bank to tighten monetary policy more, further dampening growth.
Pemex is the world’s most indebted oil company. The administration’s insistence on increasing oil production and refining has caused the firm’s financial losses to increase greatly, although high oil prices during 2022 have meant a temporary windfall. Pemex has needed significant capital injections by the government, which has also agreed to cover part of Pemex’s debt service from 2021. Two of the three main rating agencies classify Pemex’s bonds as junk. The most significant danger for the government is its own debt may be downgraded, due to the need to rescue the company.
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