eco TV
Under scrutiny 2/7/2019

Six months after his election, the first steps of Andres Manuel Lopes Obrador raise many questions.

TRANSCRIPT // Under scrutiny : February 2019

3 QUESTIONS

François Doux

Three questions about Mexico, a couple months after Andrés Manuel López Obrador was sworn in as the new president, with an absolute majority in the two houses of Parliament.

Hélène Drouot, hello.

Hélène Drouot

Hello.

François Doux

First question, how has investor sentiment changed in the weeks after the new president took power?

Hélène Drouot

For the moment, AMLO, as the president is commonly known, has provided investors with some reassuring signals. He has pledged to maintain the central bank’s independence and to keep public finances from deteriorating during his mandate. He also approved the signing of the new trade agreement with the United States and Canada, even though he fiercely opposed trade agreements during his campaign. Lastly, he has announced major infrastructure projects designed to boost the country’s attractiveness and to improve productivity.

François Doux

He also made some very populist campaign promises. What about these promises?

Hélène Drouot

He has tried to advance on both fronts simultaneously. In other words, he has combined some reassuring measures for investors with some of his campaign promises, including raising the minimum wage and facilitating access to healthcare and education for low income households. Above all, he made fighting corruption the top priority of his presidency. As part of his anti-corruption campaign, he held a public referendum that resulted in the cancellation of the Mexico City airport project. In his eyes, this type of project is synonymous with corruption.

François Doux

Second question: as an economist, what are the risks of budget overruns in Mexico?

Hélène Drouot

In the very short term – for the year 2019 – the risk seems small. The budget proposal was in line with the budgets presented by the previous administration. In the medium term, in contrast, there are some risks. First, the budget overlooks several items, notably the costs associated with the cancellation of the Mexico City airport project. More importantly, the uncertainty surrounding energy sector reform could strain the public deficit. AMLO and his team have pledged to inject funds into Pemex, the national oil company. The company’s need for capital injections could become recurrent, especially if they were underestimated.

François Doux

We will find out in the months ahead. My third and last question: in general, what are the main risks facing Mexico?

Hélène Drouot

We will be monitoring the uncertainty surrounding the future of the energy sector reform. The previous president, Peña Nieto, opened the oil sector to investment from private investors. For the moment, AMLO’s position is not very clear, and we fear this policy could change during his mandate.

Looking beyond the oil sector, such a move risks driving investors away from the economy as a whole. So we will pay close attention to investor sentiment.

View more videos Eco TV

On the Same Theme

Mexico: Slowing growth 6/19/2019
Prospects for the economic growth in Mexico are deteriorating, owing to slower economic activity in the US, a tight fiscal stance and a persistent weakness in private investment. Real GDP growth for Q1 slowed to 1.2% y/y, from 1.7% y/y in Q4 2018. For the whole year, real GDP growth should reach 1.5% (from 2.0% in 2018) and risks are tilted to the downside. On the one hand, trade tensions with the US (following the US President’s announcement to impose tariffs on Mexican imports) will have a detrimental effect on business sentiment, even if the two countries have so far reached an agreement. On the other hand, both the lack of clarity on the government’s policies and the financial support to the state-owned oil company Pemex (which could heavily damage the fiscal balance over the long-term) are clouding the medium-term outlook. Early June, Fitch downgraded Mexico’s and Pemex’s sovereign ratings, while Moody’s changed the outlook to negative (as well as Pemex and several public companies).
Mixed sentiments 2/7/2019
The election of Mexico’s new president, Andres Manuel Lopez Obrador, raises numerous questions. Although the new president and his team enjoy strong popular support, investors are worried about the policies he is proposing for the next six years. Some of the proposals do not seem to be compatible with his promise to maintain fiscal discipline, central bank independence and economic pragmatism in general. Several existing reforms are being called into question, notably in the energy sector. Given Mexico’s strong economic fundamentals, these contradictions are unlikely to have much of a short-term impact. In the medium term, in contrast, the big risk is that they could jeopardise the government’s capacity to maintain fiscal discipline, keep the energy sector afloat and preserve investor confidence.
Mexico, raising doubts 11/14/2018
While having signaled a pragmatic approach to policy a few days after his election on the first of July, Andres Manuel Lopes Obrador (AMLO) seems to change his words. Late October, after a contested public consultation, the new president cancelled the Mexico City Airport Project. At the same time, he announced his intention to change the Constitution, as soon as he comes to power on December 1st, to broaden the scope of public consultations in particular to budget-related issues. These statements have raised concerns about whether budgetary discipline would be maintained and about the outcome of the energy sector’s reform (initiated by the precedent government). Recent developments have triggered a sell-off in domestic financial asset prices, including the peso.
A good start to the year 5/18/2018
Preliminary data for Mexico’s growth in 1Q 2018 surprised to the upside, with real GDP expanding 1.1% q/q, the highest level since 3Q 2016.
Pending NAFTA 2.0… 4/25/2018
The countdown is on for a new NAFTA treaty before the Mexican general elections on July 1 and the US mid-term elections on November 6. The deadline is set at early-May (180 days before the elections) for the US administration to submit the text to the current Congress. Otherwise, negotiations are expected to last until 2019, with the risk that the next Mexican administration and US Congress somewhat reshuffle the cards. Meanwhile, the US-Mexico trade link still stays the course. Mexico’s nominal exports to the US have performed well in recent months (+8.4% y/y in the 12 months period to February 2018) against the backdrop of dynamic industrial production and consumption in the US. In addition, Mexico’s exporting manufacturing firms such as automakers may have accelerated their activities in anticipation of potential trade restrictions. Mexico’s nominal imports from the US have climbed by the same extent as exports, driven by the strong pace of intermediate good imports that are incorporated in the value chain within the NAFTA market.      
The NAFTA in all its aspects 11/30/2017
In May 2017, Donald Trump triggered a renegotiation of the North American Free Trade Agreement (NAFTA). Some proposals, 23 years after NAFTA came into force, aiming to introduce a chapter on the digital economy and strengthen the agreement’s current arrangements, have been generally welcomed. Others, such as a tightening of rules of origin and changes to trade remedies, have prompted concern.

ABOUT US Three teams of economists (OECD countries research, emerging economies and country risk, banking economics) make up BNP Paribas Economic Research Department.
This website presents their analyses.
The website contains 2179 articles and 574 videos