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Expropriation Risk: 32 32 38 43 Political Violence Risk: 79 79 79 76 Terrorism Risk: 65 65 65 65 Exchange Transfer and Trade Sanction Risk: 54 55 54 55 Sovereign Default Risk: 47 45 46 47
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The election of Andres Manuel Lopez Obrador has moved Mexico into uncharted waters. He not only won the presidency by a landslide in July, but his party, the Movement for National Reconstruction (Morena) and its allies achieved sizeable majorities in both the Chamber of Deputies and the Senate. Subsequent defections to Morena gave the party on its own an absolute majority of 252 in the 500 seat lower house. Although Morena was founded only four years ago, it also secured a number of key governorships and the control of several state legislatures. AMLO (as he is popularly known) begins his single six-year term as president in December with the ability to pass legislation, and even change the constitution, with relative ease. In achieving this success, AMLO and Morena have devastated the traditional parties that had dominated Mexico’s political landscape since the 1930s. Their victory is a tribute to the indefatigable campaigning by AMLO but it was helped by the deep unpopularity of the Pena Nieto administration, which began promisingly but was seen well before its end as ineffective and corrupt. The new Congress convened in September, three months before AMLO takes office, but the prolonged handover should go smoothly as Pena Nieto has little to gain by challenging his successor. But AMLO comes to the presidency with an evident authoritarian streak and controversial economic proposals. Despite efforts to reassure the business community during the campaign, the concern remains that he may interpret his unparalleled electoral support as a mandate to concentrate political power in the presidency. The possibility that he could attempt to weaken institutions that he may see as attempting to check him, notably the Supreme Court or the autonomous central bank, is seen as a significant risk. An additional degree of uncertainty comes from the clash of perspectives within the forthcoming administration. AMLO heads a heterogeneous movement that will require a delicate balancing act between pragmatism and ideology. While he has chosen a respected businessman as his chief of staff, other senior figures in Morena are much more ideological. Party members, and voters in general, will expect quick moves aimed at boosting the economy, reducing crime, and tackling corruption. It is far from certain that AMLO will be able to deliver the numerous pledges he made during the campaign. However, the conclusion of a tripartite NAFTA deal at the end of September has removed an important cause of uncertainty after the bilateral deal reached in August resolved the sticking points around the auto industry. However, the fact that it will be signed before he takes office may allow AMLO to disown the agreement at a later date, particularly if agriculture does not seem to be benefiting.
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AMLO unveiled some cabinet picks before the election and others soon afterwards, so it was quickly known that his energy team had a positive view of economic nationalism. As a result, a reversal of the bold reforms that opened the energy sector to foreign investment during the first years of the Pena Nieto administration is potentially on the table, although it remains very unlikely. While the new government may well seek, and use, a greater role in the economy, and particularly in the energy sector, it acknowledges that with state oil company Pemex practically bankrupt the country desperately needs new investment to boost falling crude production. It is likely to start building a costly new refinery, probably with an unrealistic promise to finish it within three years, in an effort to reduce gasoline imports. However, if AMLO follows through with the cancelation of the new airport for Mexico City which is now 30% complete, another campaign promise that would not seem to make orthodox economic sense, then investors will become seriously concerned.
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AMLO offered greater personal safety as a central campaign promise to an electorate that sees crime as its greatest concern. It is unclear, however, whether he will be able to deliver. He has pledged to create a national programme offering a monthly payment for young people who are not studying and are without work, the group most tempted to join criminal organisations. He is determined to change the long-standing ‘war on drugs’ approach and may try to establish some sort of negotiation with the country’s dominant drug cartels, although it is unclear what economic incentives he can offer to them to achieve a reduction in violence.
While no formal terrorist groups exist in Mexico, many drug cartels use terror tactics to intimidate local communities and particularly local businesses. Five people were killed and eight injured in September when gunmen dressed as a mariachi band opened fire at a tourist location in Mexico City close to the capital's main square. The attack was part of a gang turf war. Despite campaign promises to tackle the issue, it is not clear that AMLO can make any more progress than Pena Nieto.
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The peso remains significantly undervalued, although it strengthened in the weeks after AMLO’s widely expected victory and the prospect of a smooth transition. However, continuing uncertainty about Washington’s policies towards Mexico remain an important factor in keeping the currency weak. The central bank has increased interest rates repeatedly in order to keep inflation in check, reaching 7.75% in June, and these rises should help see inflation fall from almost 5% to slightly above 4% by the end of the year, just outside the bank’s target band of 2-4%.
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Although public debt as a percentage of GDP has increased significantly since the oil price collapse of mid-2014, rising from 38% in 2013 to 49% in 2016 before dropping to 47% last year, this has not been a major concern because it is denominated mostly in pesos and the bonds usually have long maturities and fixed interest rates. AMLO’s choice for treasury secretary, Carlos Urzua, is a respected economist, who has talked repeatedly about the need to maintain confidence. Nonetheless, AMLO’s numerous campaign promises such as the Maya Train for tourists represent significant spending commitments that may become difficult to finance.
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