Previous Quarterly Editions
Expropriation Risk: 38 43 50 53 Political Violence Risk: 79 76 78 76 Terrorism Risk: 65 65 65 65 Exchange Transfer and Trade Sanction Risk: 54 55 57 58 Sovereign Default Risk: 46 47 40 52
TREND ▲ OUTLOOK ▲
Since Andres Manuel Lopez Obrador, popularly known as AMLO, began his single six-year presidential term on December 1, he has already succeeded in shaking up government policies. The Movement for National Reconstruction (Morena), which he founded in 2014, enjoys large working majorities in both houses of Congress. By contrast, the political parties that have dominated the Mexican scene since the 1930s are greatly diminished and in deep disarray, offering no effective opposition. As a result, AMLO wields a degree of political power unseen in decades, and this absence of constraint has uncovered an authoritarian streak. He is both a left-wing economic populist with a clear belief in the primacy of the public sector while also being a strong social conservative, expressing both traits with a formidable popular touch. In addition, as a former mayor of Mexico City he is also a pragmatist who is familiar with budgetary and macroeconomic constraints and has chosen a respected academic economist as his finance minister. By contrast, other senior members of the government, notably in the energy sector, are radical statists. As a result of these contrasts, the policies unveiled and pursued during his first six months in office have been an uneasy combination of orthodox and heterodox measures. The president has voiced support for free trade, sending members of his team to join the final negotiations over the new US Mexico Canada Agreement (USMCA) that is intended to succeed the North American Free Trade Agreement (NAFTA). Despite the reluctance of all three leaders, changes to the new agreement may be necessary to ensure its passage through a sceptical US Congress. However, despite acknowledging the country’s economic needs, he has also rejected private investment for political reasons. Once in office, he surprised the business community by ending work on a new airport for Mexico City even though 30% of the 13-billion-dollar project had already been completed. While setting ambitious goals for increased oil production and championing new refineries that are intended to reduce the current need to import 80% of petrol used in Mexico, he appears keen to dismantle his predecessor’s liberalisation of the energy sector that has been responsible for attracting private capital. Without it, there is little indication of how Pemex, the moribund state-owned oil company, is expected to make Mexico self-sufficient in petrol by 2022. AMLO has the benefit of entering office with a strong economy as Mexico became the world's twelfth-largest exporter in 2018, surpassing Canada for the first time in history, primarily due to the robust US economy. However, while the depth of bilateral economic integration negates threats from the Trump administration about closing the border, it also shows the inherent risks if relations continue to deteriorate.
The cancellation of the Mexico City airport project shook investors, many of whom had been prepared to accept AMLO as essentially pragmatic despite his campaign rhetoric. This shock has been compounded by the slower but more significant repudiation of the ambitious liberalisation of the energy sector implemented by the previous administration. AMLO’s government has imposed a three-year freeze on the granting of new concessions for oil exploration, also postponing the scheduled auctions for electricity generation, arguing that the private sector was unreliable and prone to corruption. Resource nationalism now looks likely to be a central pillar of his presidency, its scope limited only by legal rather than political challenges. However, even legal checks may be in question as many of the appointments already made to the judiciary and to regulatory commissions have emphasised political leaning and loyalty over technical expertise.
TREND ▼ OUTLOOK ▲
Having suggested a more civilian-led approach to the country’s security challenges while campaigning last year, the new government now plans to set up a fully militarised National Guard that will increase the military’s role in domestic security operations. AMLO has pledged that this approach will show a positive impact on crime by the end of the year. He has also begun a national programme that will offer one year of monthly payments to young people who are not studying or working, the group most tempted to join criminal organisations, to help them enter the labour market.
TREND ► OUTLOOK ▲
While no formal terrorist groups exist in Mexico, many drug cartels use terror tactics to intimidate local communities and businesses. They have also branched out into other criminal activities, which increasingly include stealing and reselling petrol from Pemex pipelines. The danger of this practice, underscored by an explosion at an illegally tapped petrol pipeline north of Mexico City in January that killed more than 100 people, remains a challenge for the government. Its initial response, to move petrol by tanker rather than pipelines, quickly caused shortages, but tackling the problem more directly risks violent clashes between security forces and well-armed criminal groups.
The peso has become a short-term indicator of market sentiment towards the AMLO administration, forcing the central bank to take measures to counter its volatility. However, there are no expectations that AMLO will tamper with the free-floating exchange rate regime, despite the popularity that would come with a stronger peso, or that he will follow his protectionist instincts and seek to enact barriers to trade. In December, the central bank raised the overnight interest rate target to 8.25%, the highest level in a decade. Inflation reached 4.5% in May, taking it outside the upper end of the bank’s target band of 2-4% for the first time under AMLO.
The major loan of eight billion dollars secured from a consortium of international banks in May will allow Pemex to refinance 2.5 billion dollars of debt and renew some credit lines. However, it was also announced in May that the company, which has borrowings of more than 100 billion dollars, that AMLO has made the company responsible for building a refinery costing eight billion dollars after private financing fell through. In early June, Moody’s lowered its outlook for both Pemex and Mexico from stable to negative, while Fitch downgraded its sovereign debt rating from BBB+ to BBB and cut Pemex to junk status. These moves will place considerable strain on federal government finances.
Return to contents Next Chapter