Left-leaning Andres Manuel López Obrador (also known as AMLO) won the Mexican presidential election with 53.7% of the country’s vote – with his party, Morena, and its coalition partners together securing a majority of seats in the congress.
Emboldened by this strong mandate, AMLO has set out the priorities for his first year in office, all of which are drawn from his pre-election platform. Although we have seen few surprises policy-wise, it is important to underline we are now looking at an assertive AMLO, unconstrained by capital markets, the Mexican business elite or other stakeholders. And while it may be wrong to extrapolate too much from the last few months of his campaign, a confident AMLO has overruled or contradicted his advisors with increasing frequency – not entirely unlike someone north of the Rio Grande.
For the first time, private sector leaders lack a guaranteed ‘voice’ at the President’s table.
It is clear from his objectives that he will be seeking to build political capital straight away, focusing on areas that resonate with his voter base. At the highest level AMLO’s priorities span budget & austerity, presidential rights & responsibilities, the minimum wage, security, water and education. Corruption and inequality are key themes where he wants to burnish his credentials, starting with the public sector. Indeed, not only is he taking the axe to his own salary, but to that of all high-level public servants (who will now be capped at his more-than-halved pay). Belt-tightening will also come through a bureaucratic overhaul, including merging municipal areas and moving many ministries from the capital into the regions. Separately, he has committed to freeze petrol price rises (tethering them to inflation) for the coming three years and then driving them downwards, as he plans to build six refineries, which will help reduce the cost of fuel at the pump.
Bark louder than the bite?
In fact, while disruption cannot be ruled out, we believe AMLO will use the next 12 months (he takes office on 1 December) to pacify the capital markets. Rather like Brazil’s former president Lula during his first administration in 2003, he will probably maintain a moderate rhetoric and focus on non-controversial policy pronouncements. However, unlike Lula, he has a six-year mandate and it seems highly improbable that he holds back completely, not least because his platform will require a lot of groundwork early on, so that he can begin to deliver by the end of his term.
The business community was already thoroughly spooked by the prospect of a very assertive AMLO, and the degree to which this could lead to a hardening of his policy promises. For the first time, private sector leaders lack a guaranteed ‘voice’ at the President’s table. The Mexican corporates with high dependency on the North American Free Trade Agreement (NAFTA) are at risk, as although they expect AMLO to be a strong proponent of Mexican interests, they worry that he may lack the pragmatism required to deliver a good outcome.
For investors, the signposts to look out for are the treatment of energy sector reforms and infrastructure projects, Bank of Mexico independence, debt issuance and the balance between increased social spending and the ‘no tax increases’ commitment. Most observers are skeptical of the likelihood of success in either security improvements or the anticorruption drive.
The safeguard for investors would seem to stem largely from the economic constraints he will have to operate under. The Mexican economy is very open to trade, and very dependent on long-term capital flows – imports are around 40% of GDP, the daily volume of trading in the Mexican peso roughly US$60 billion and approximately 60% of government nominal fixed-rate bonds are in the hands of foreigners. In other words, even if he wanted to, AMLO cannot totally disregard the potential blowback from the markets – which would hurt his supporters too.
Change the only constant
Mexico is now unquestionably in a higher category of political risk, because AMLO represents a major change in the way that economic and social policy has been managed over the past three decades. While economic constraints look likely to push ALMO toward moderation, his policy orientation and ideology, especially in areas such as energy, differs significantly from the approach of recent administrations and could prove unpleasant for the capital markets. To be clear, we don’t think we are looking at Venezuela-style turn here, but we will nonetheless be monitoring developments closely for any signs that our base-case of a more pragmatic approach does not play out.