Brazil could take back Mexican flows


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Concerns over president-elect Amlo could see investors rethink their Mexico exposure.

Battle cry: Mexico's president-elect Andrés Manuel López Obrador

“We created Mexico between 2012 and 2014, because Brazil was uninvestable and, as the second largest market in Latin America, investors went to Mexico instead.”

So says Fábio Nazari, head of ECM at BTG Pactual.

He concedes that Mexico helped the relative attraction during this period, by enacting many structural reforms, but his point about investors seeking an alternative market is valid.

Now that trade could unwind quite spectacularly.

Should Brazil enact pensions reform, the country will be the new regional darling. And just to compound Mexico’s challenge, its president-elect Andrés Manuel López Obrador (Amlo) appears to be willing to end the entente he had created with the markets immediately after his election victory.

Now we have a double whammy – because we have expectations that Brazil will be in good shape while Mexico’s [outlook] is deteriorating 
 - Fábio Nazari, BTG Pactual

If investors and bankers had been caught off-guard by Amlo’s decision to hold and then abide by a referendum on the fate of the half-built Mexico City airport – and many were – they were bowled over by his performance at the press conference.

His blunt statement that he didn’t care about the markets, which sent a shockwave through them, poses important questions about the approach of his coming administration. Fears of a radical Amlo emerging are increasing.

All eyes will now be on the appointments to his cabinet, to be announced on December 1. That should give important clues as to the control that moderates will have in the next government – or their lack thereof.


The other touchstone will be the budget.

Amlo and his economic team have repeatedly promised to deliver a primary fiscal surplus of 0.08% of GDP, but improving this year’s deficit of 1.2% on the back of an expected 7.5% increase in spending by clamping down on corruption seems fantastical.

Markets may have been willing to give Amlo some time to move to a primary surplus, but if he continues with his belligerent tone – and his approach to energy policy is adding to investors wobbles – then that benefit of the doubt will probably be withdrawn, adding peril to the situation.

What does seem sure is that Mexican assets will attract higher risk premia in the coming months.

However, bad news for Mexico is good for Brazil.

“Now we have a double whammy – because we have expectations that Brazil will be in good shape while Mexico’s [outlook] is deteriorating,” adds a buoyant Nazari.