Mexico’s presidential election is set for July 1st and the wild-card populist candidate, Andrés Manuel López Obrador, also known as AMLO, is the current front-runner. He has a commanding lead over his two main challengers who are seen as the pro-market alternatives. The runner-up Ricardo Anaya heads a right-left coalition under the banner of the National Action Party. The former finance minister for the governing Institutional Revolutionary Party, Jose Antonio Meade, is trailing at a distant third.
Big Government Rhetoric Putting Investors Ill at Ease
AMLO says his economic priorities will be fighting corruption, increasing government investment in infrastructure, and increasing social spending. His proposals such as raising the minimum wage, doubling pensions for the elderly, free internet access and free fertilizer for farmers have helped to earn his reputation as a populist.
AMLO has not provided clear answers on how he will finance the higher social spending without raising taxes or the national debt. His big-government rhetoric has put some investors and members of the Mexican business community ill at ease. They worry that his policies will wreak havoc on Mexico’s relatively stable macroeconomic fundamentals. In particular they fear a repetition of the 1976 and 1982 peso devaluations, which were a result of the untenable public deficits incurred by populist presidents resulting in a decade of stagnant growth and rampant inflation.
The Long Run: Populist Or Pragmatist?
Beyond questioning AMLO’s commitment to fiscal stability, investors fear that AMLO will place unduly tough conditions on the NAFTA negotiation table, making the likelihood of reaching an agreement less likely. Second, there are concerns he may attempt to repeal some of the market-friendly reforms developed by the current administration of Enrique Peña Nieto.
Of particular concern to investors is the energy reform, which opened up the Mexican oil industry to investment from foreign firms. Contracts signed under the reform are currently valued at approximately $150 billion. AMLO has also pledged to revise the education reform, which was an attempt by the current government at restraining the powerful teachers’ union by introducing standardized testing for the hiring and promotion of teachers.
Impact On Emerging Market Assets
Apprehensions about a potential AMLO presidency have already begun to put pressure on Mexican markets. Since mid-April, when the presidential polls began to show a major consolidation of AMLO’s lead over Mr. Anaya, there has been a marked increase in the volatility of Mexican financial assets. The peso had been one of the best performing emerging market currencies of 2018, but in mid-April it began a gradual and sustained depreciation against the dollar. Since April 15, the peso has lost nearly 15 percent of its value. Mexico’s stock index benchmark dropped over 7 percent in May and yields on Mexican government domestic bonds have also been rising since mid-April reflecting investor demands for a higher risk-premium.
Yet the weak performance of Mexican financial assets cannot be attributed solely to concerns about the upcoming presidential election. The last two months have been a particularly sensitive time for the emerging market asset class in general. A stronger dollar and rising U.S. Treasury rates have put emerging market assets under considerable strain. Further, a significant ratcheting up of trade tensions with the United States in the last few months has also contributed substantially to Mexican market weakness.