Investment: Twisting Mexican risk


Rob Dwyer
Published on:

Many investors are misreading the risks in Mexico.


According to bankers and analysts in New York, the first questions that corporate clients and investors always ask about Mexico relate to Nafta. Questions about the political risk from this year’s election are secondary, almost an afterthought.

However, this is getting Mexico risk the wrong way around in terms of importance. 

That is because, first, the Nafta risks have been broadly overstated. Even if Nafta negotiations break down and US president Donald Trump terminates the trade deal (and that is a big ‘if’, given the growing recognition among the border states of the inter-connectedness of supply chains), Mexico would likely revert to most-favoured nation WTO status. 

There would be disruption, but because of Mexico’s competitiveness as a manufacturer today, it would not be catastrophic.

Second, the risk of a presidential victory by leftist candidate Andrés Manuel López Obrador, or Amlo as he is known, is both important and growing. 

An Obrador presidency could be catastrophic for Mexico

For an interconnected set of reasons, it is beginning to look like Amlo’s third attempt at the presidency could be lucky for him. But not so for Mexico – it would likely be catastrophic. 

Amlo advocates nationalizing the banks. He proposes reversing all of Mexico’s recent reforms, including the energy reform. He has ambitious – and unfunded – proposals aimed at creating almost two million more public-sector jobs. 

Comparisons abound between Amlo and Brazil’s Lula da Silva. For example, Lula won the presidency at his third attempt. However, whereas Lula became markedly more moderate with every campaign, Amlo is becoming increasingly belligerent. 

Lula’s Workers Party calmed the markets on taking power and the fiscal deterioration only really hit the country in its third administration. Amlo would likely cause an economic crisis much more quickly.

At the moment investors remain calm. If they realize the threat – Amlo has a double-digit lead in many polls – they discount it because they reason it is still early days. The election campaign doesn’t formally start until the end of March. 

Support ceiling

Wise heads point out that although Amlo has a 98% recognition rate in the country, his support seems to have a ceiling in the early 30 percentage points, with nearly 70% likely to vote against him. 

The argument goes that during the campaign the quality of the PRI’s candidate, Jose Meade, will come through. After all, Meade has been a secretary in five different ministries under two different presidents from two different parties. 

As well as unrivalled experience, Meade holds two bachelor degrees (economics and law from prestigious Mexican universities) and a PhD in economics from Yale. In contrast, bankers sniff that it took Amlo 10 years to get a bachelor degree in political science.

Perhaps a slightly more practical point is that the incumbent PRI party has the better organization. In last year’s election for the city of Mexico, Amlo’s candidate Delfina Gómez was narrowly beaten by the PRI’s Alfredo del Mazo. Many credit that to the machinery of the PRI getting people out to vote. The logic is that this will apply nationally in July. 

That logic would hold – normally. Except this is not a normal time in Mexico. Seldom has there been such disconnect with the incumbent party than there is today. 

This isn’t an economic phenomenon; economic growth is satisfactory, inflation is low and the peso has been performing. The problem is corruption and safety. Mexicans blame both of those issues – fairly – on the current administration. 

Mexicans have been left reeling recently: several governors are in jail or indicted or are on the run because of theft. 

Understandably the population is very angry and ready to vote against the administration.

Public safety has also got much worse under the current government. 

Last year, murders reached a record level. And now the problem is in all parts of the country. Areas that have to date been relatively insulated from the violence have been engulfed – Mexico City and tourist areas such as Cancun, for example. Acapulco is also now one of the most dangerous cities in the country. 

Not only does this do great damage to the country’s reputation, but it also has direct impact on tourism and investment. 

There is also precedent for a PRI defeat. Vicente Fox’s presidential victory in 2000 came despite the PRI’s machinery; people then were not nearly as angry with the government as they are today.

One long-time Mexican expert, Rafael Elias, director of LatAm research at Exotix, has now made an Amlo victory his preferred outcome. 

It is one to watch closely because if Amlo’s lead remains strong ahead of July’s one-round, winner-take-all election, investors will begin to wake up to the risk. Even if Amlo has a minority position in congress, he can use presidential decrees to great effect – as was done in 1982 with the nationalization of the banking system.

In comparison with the huge sell-off in the markets that would accompany an Amlo win, the cancellation of Nafta would be the merest shrug.