For the first time in decades, Mexico’s recent political twist has the potential to transform the country completely via the elections, as it challenges the economic consensus as well as promising to eradicate corruption and violence.
July 1 was a remarkable day for Mexico as the election results unfolded having had the second-highest voter turnout level of 63 per cent. The two party leaders that have dominated the country’s politics and economy for the last 40 years experienced defeat to the leftist candidate, Andrés Manuel López Obrador (AMLO), even before the official results were published.
In fact, polls leading up to the election resulted in 43 per cent of Mexicans to believe that he is the best candidate to reduce corruption, 41 per cent to improve the country’s economy, 37 per cent to deal with public insecurity and 36 per cent to combat drug cartels and organised crime.
AMLO was thus elected with ample political capital having obtained 53 per cent of the overall votes.
There has been some scepticism about AMLO’s portrayal as a leftist firebrand but it is more likely that he will lead a gradual shift to a more redistributive economic model.
Scepticism was primarily brought about AMLO’s ideology; including the more pre-election aggressive tone in confront of Trump and his views on Mexican immigration but more importantly, the NAFTA agreement. Indeed, domestically this could have been one of the scoring points for AMLO as he gathered sympathy amongst voters.
Transformative changes likely to take place
During his victory speech, the newly elected president repeated his idea that boosting economic growth, reducing poverty and preventing illegal migration to the U.S. required Mexico to be self-sufficient in agricultural production.
Agricultural policy is therefore probable to be central to his administration, and is likely to deepen discussions on farm subsidies should a renegotiated NAFTA not happen soon.
It was also explicitly expressed during the said speech that his government will not become authoritarian, guaranteed the continued independence of the Central Bank and declared that private property would be respected. In addition to that, any nationalization was completely off the table.
On the important energy sector, he assured investors that all agreements made by the state would be respected unless investigations exposed signs of corruption in their making. A comment relatively seen as contrarian through the pre-election view, which in all fairness was important to calm waters for Petróleos Mexicanos, the state-owned petroleum company, as investors were acting quite nervously prior the election speech.
In terms of reducing poverty, AMLO has vowed to renovate current taxation levels and to increase social spending through the resources saved by compressing the country’s incongruous corruption. This is an area in which we are likely to see the most significant change should he succeed at taming corruption.
Market reactions
Gorky Urquieta, co-head of emerging markets debt at Neuberger Berman, believes that the markets had already priced AMLO’s victory and in fact markets have been quiet this week in terms of the
Mexican election. There does seem to be some caution amongst investors but overall the reaction has been positive.
That being said, the movements that were seen include sovereign bond spreads being slightly tighter after having enjoyed a rally right before the election and the Mexican Peso falling last Monday only to keep its positive pace to date. Even Pemex, which stands most to lose in terms of energy performed well last week.
Just because the financial markets were not as impacted, Mexico still faces a prolonged period of uncertainty. For now people might be satisfied in believing what has been promised by AMLO, but actions speak louder than words and that is what the markets are waiting for. Thus the initial positive reaction, might going forward be tainted if AMLO fails to implement any of his promises. We still believe that Mexico has strong potential and selectively we are still seeing opportunities within the bond market. That said, as with all other regions, politics is a crucial preposition for financial markets.
This article was issued by Maria Fenech, investment management support officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.