In Eco-political analysis

Barring some catastrophic event, political maverick Andrés Manuel López Obrador (AMLO) is more than likely to be the next Mexican president.  Without a 2nd electoral round, the norm in Latin America’s other large economies, and with three strong candidates, AMLO can win with 35% of the vote.  The latest polls put him at 42% and climbing, largely at the expense of Mexico’s establishment party, the PRI, which is led by their affable and intelligent but uninspiring former Minister of Finance, José Antonio Meade.

As often happens when a so-called populist is poised to win, the electorates fears are voiced, predicting the next Chávez or Perón, a socialist who will disembowel the nation’s institutions in pursuit of power and fortune.  In today’s Mexico — where social media enjoys massive readership and formal media outlets now fight for declining ratings with an increasingly yellow tinge — objective political analysis is in scarce supply.


Yet, the ever-wise markets are sanguine about what analysts predict is a 60-70% likelihood of an AMLO victory.  In the first half of May, Mexico’s currency took a hit and bond prices fell but most of that can be explained by an emerging market wide sell-off triggered by a rising U.S. interest yield curve which will soon usher in more U.S. Fed hikes.  Mexican risk spreads vis-à-vis its LatAm neighbors have barely budged – in other words, the market feels no worse about Mexico now with AMLO poised for victory than it did two months ago when his chances were far less certain.

The Mexican financial market, made up almost entirely of professionals who will not vote for AMLO, has not suddenly fallen in love or even gotten comfortable with López Obrador.  He remains a political maverick capable of ignoring sound advice and voicing political gaffes. AMLO is not Mexico’s answer to Lula, a measured consensus builder. AMLO’s ego remains largely unchecked, even after two bitter presidential election losses (2012, 2006). The market’s serenity has little to do with AMLO the person and very much to do with the strengthening institutions in Mexico which will force President AMLO (or any other candidate) to walk a centrist path.

The Legislative Branch

According to the latest Mitofski poll of voter intentions in the legislative power, AMLO’s coalition (Morena + PT + PES) would hold between 195 and 262 seats in the Lower House, meaning it would probably fall short of the 251 absolute majority threshold (what you need, among other things, to amend laws and control a budget). However, the alliances of political parties may change after an AMLO victory. Specifically, it is quite probable that the PRD and MC may splinter from the “Frente” coalition, with some members migrating to join the “coalition government,” led by the Morena party. Depending upon the legislative initiative, some PRI members may also vote with the Morena-led coalition.

If Anaya — Frente’s candidate — does not defeat López Obrador, the PRD may find itself with no governors in office (outside of a few it “jointly” governs with the PAN), leaving its legislators with one last shot to negotiate their continued political relevance … by allying with Morena. Such a scenario would grant AMLO’s Morena party a functioning majority in congress, albeit via a multi-party coalition.

It’s also possible some of the PRI unions (and their legislators) would also seek to ally with a Morena government — especially if it has full control of the budget by controlling both houses. This could further strengthen AMLO’s legislative control. A similar case could be made that governors would be more likely to support a president that has full control of the budget, and with it, their discretionary spending through participaciones.

As such, the opportunity likely exists for AMLO’s Morena party to form alliances that provide a voting block majority in both houses of the legislature. But such blocks are a relatively new phenomenon in Mexico’s very young democracy. López Obrador will need to appease diverse political voices to pass his legislative agenda.


Institutional Framework

Mexico is a very open economy, with low reliance on commodities, and which is deeply integrated into global supply/manufacturing value chains. The incentives and interest of a dominant share of Mexican voters and families are aligned with a “globalist approach” for several reasons: multinationals employ millions of Mexicans, free trade guarantees low consumer prices and economic integration bolsters the Mexican peso, effectively boosting household purchasing power. Mexico’s technocratic governance since 1994 (the election of Carlos Salinas) has created both a market economy and institutional safeguards that should limit the populist urges of its next president.

  • Financial markets: The Mexican peso (MXN) has a daily turnover of over US$90 billion (based on the BIS Triennial Survey), making it impossible to control for Banxico (the central bank) – under any currency regime for reserves would be rapidly depleted. Furthermore, about 60% of Mexican sovereign bonds (m-bonos) are in the control of foreigners. Any policy moves considered unorthodox are quickly punished by financial markets, hurting the peso exchange rate, and with it, presidential popularity.
  • NAFTA & other agreements, including ICSID (full name): This year, Mexico concluded its negotiation into TPP, ICSID, as well as a new agreement with the European Union. These are very relevant sources of discipline, especially the modern interpretation of expropriations they include: direct, indirect and gradual ones. Under the new interpretations of international arbitration, foreign investors are not only protected from direct expropriation of assets, but also to forms of “business model expropriation,” or regulatory hurdle-triggered expropriation of cash flows and assets.
  • Banxico: Mexico’s Central Bank will remain an independent body in monetary policy setting, at least until its board turns over, which will take a long time given its tiered long-term membership (deputy governors have 8-year terms, and the governor a 6-year term).
  • Supreme Court: The highest court in the land is widely seen as strong and independent. Appointed for life, the court will not likely lose more than two members during an AMLO presidency.

AMLO’s Proposals That Make Investors Uneasy

There are some proposals voiced by the AMLO campaign that make investors uneasy:

  • Energy reform: There have been different signals about the plans Morena has for the energy reform. Some members of the party, and at times the Presidential Candidate have stated they will seek to reverse it, or subject its overturning to referendum, while at times they have merely said they will look into awarded contracts to determine whether there were irregularities, and if there were, then contracts could be voided. Overturning the Constitutional Reform (that governs Peña Nieto’s energy reforms) has a high bar to clear, needing a 2/3 majority in both houses, as well as a majority of State Level Legislatures – this looks very hard to achieve, at least for the first half of the next Presidency. Foreign investors can also likely resort to arbitration in international courts. There is also a pragmatic hurdle – neither Pemex’s nor the public-sector balance sheet can carry the necessary capex to develop Mexico’s energy sector.
  • Education reform: overturning the spending side of the reform looks difficult (taking budgetary control away from unions, and onto the government), but the teacher evaluation rules are likely to be casualties of Morena’s pay-back to the teacher’s unions for their support.
  • Mexico City’s Airport project: We expect the airport to be concessioned – i.e. the government will divest from funding it further. This was signaled in AMLO’s recent public spat/exchange with Carlos Slim – where he essentially said “if you like the project so much, buy it yourself”. By December 2018 when the next President takes office, many expect anywhere from US$5-6 billion will be sunk into the project. In addition, the bonds which funded the construction, are collateralized by airport taxes.
  • Fiscal issues: The main ways to anchor fiscal prudence are likely to be: 1) markets, 2) legislative negotiation with coalition parties, and 3) Mexico’s relatively small development banking sector limits how much off-balance sheet spending can be used (like what we saw in Brazil with BNDES).

How to Lobby AMLO

López Obrador’s future style of governing remains elusive to political analysts. Is he a Daniel Ortega or a Hugo Chávez? Our take, from chats with those who have worked with him in the past, is that AMLO is part pragmatist, part ideologue, but there are ways to deal with him. Almost universally they agree that open and direct confrontation does not work with AMLO – it tends to radicalize him. Rather, the approach to take is to paint policy proposals in a way that fit and help his own agenda. Those close to AMLO broadly agree that he wants to “make history” with iconic changes. Successful lobbyists will help the president achieve his legacy-building goals while simultaneously serving their own interests. It is also sensible for corporations looking to lobby an AMLO government to do so by boosting the strength of moderates in his government, just as the corporate sector in the U.S. have striven to do within the Trump administration.

The 2019 Post-Election Hangover

For decades, Mexicans have braced themselves for the post-election slump year. Under the PRI’s long and uninterrupted reign (1929 – 2000), outgoing governments drained the coffers both to enrich themselves and facilitate another PRI victory via spiked short-term spending and populist handouts.


Today, a (somewhat) greater sense of fiscal prudence governs the actions of outgoing administrations but the first transition year of a new sexeño continues to underperform. Having never developed a deep pool of professional civil servants, many government positions change hands with the new president (who cannot be re-elected). The learning curve for a government of rookies is slow and Mexican investors know it. They park their money in bonds and sit tight for a year before placing their bets, often in concert with government policy announcements. Mexico’s economy is growing, thanks to the US economic locomotive. However, that growth will stall later this year and drop in 2019 — most analysts predict under 2% growth in 2019.

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