Mexico’s president Andrés Manuel López Obrador (or AMLO, in short) is celebrating his first 100 days in office. After “occupying” Los Pinos on December 1st of last year, AMLO already put his own stamp on the presidency (first, by opening Los Pinos to the public as the newly elected president prefers more modest housing). Unfortunately, the first signs are not very promising. This already came to the fore even before taking office, as he decided to abandon the construction of a new airport, worth US$ 13 billion, in Mexico City after he consulted voters through an ill-prepared referendum (“consulta”). Even though less than 1% of the electorate showed up, this was sufficient for AMLO to ditch a fully-funded project, already one-third built, for a poorer alternative of keeping the outdated existing airport and converting a nearby airbase (maybe expecting long queues, the presidential plane was put up for sale). International bondholders, who financed US$ 6 billion of project cost, were initially left in the cold and were told they had to take a discount on bond buybacks. Later on, a more sensible deal was negotiated but investors are likely to be more cautious to finance infrastructure projects going forward and the central bank had to increase its key interest rate to calm financial markets.

Where is the tarmac…?

Although the previous government under Enrique Peña Nieto did not deliver a substantial increase in growth (real GDP growth was 2.4% on average during his term) and a decrease in poverty and inequality, it did embark on a promising economic reform program. For example, he introduced more competition in the telecom sector. Especially, abolishing the monopoly that Pemex, a state-owned company, had on Mexico’s oil & gas resources was, in our view, a sensible move to address the gradual decline in oil production (-50% since the peak in 2004/05) as foreign oil companies could offer both funding and exploration expertise to buck this declining trend. AMLO is reversing this policy and on his instigation new auctions of oil fields have been suspended for 3 years. He also wants Pemex to build a new refinery to reduce dependency on foreign fuel imports, despite a glut of refining capacity in the region. Unfortunately, Pemex is already burdened by a debt load of more than USD 100 billion and it is not clear how they can raise more money without losing an investment grade credit rating (Baa3/BBB+). Indeed, S&P recently revised its rating outlook to “negative”, citing reduction of private sector involvement in the energy sector and corresponding higher capex needs at Pemex.

Equally bad for the country is a new law (universally known as the “Balkenende norm”, named after a former Dutch prime minister) that forbids paying civil servants more than the president, who himself admirably took a 60% pay cut. This has led to an exodus of senior professionals from Pemex, the central bank, ministry of finance and other institutions to places north of the Rio Grande. Some believe that the fuel shortage after closure of several pipelines late last year was caused by lack of expertise at Pemex more than by the rampant fuel theft. Maybe, with hindsight, Mexico should have paid for the Wall after all. The newly appointed chief of Pemex, Octavio Romero Oropreza, got the job because he is a close confident of AMLO and (supposedly) incorruptible. However, he doesn’t know much, if anything, about the oil industry. The central bank, hitherto a bastion of monetary orthodoxy, has welcomed two AMLO-friendly new board members, one of which (Mr. Esquivel) saying that the bank should stimulate growth as well as manage inflation, which is like cursing in the church as this dual objective might compromise the bank’s independence. AMLO’s (planned) liberal use of referenda to decide on policy issues (including whether former presidents should be prosecuted for corruption) could erode Mexico’s already weak institutions, although congress, full of representatives of his left-wing Morena party, may in any case not conduct a reliable check on his powers.

Economic growth prospects are muddled. Mexico, obviously, is highly dependent on the economic vitality of its northern neighbour. U.S. growth will certainly decline as the sugar-high from reckless fiscal stimulus will peter out, whereas some analysts even predict a recession next year. The IMF expects economic growth in Mexico for this and next year to come in at just above 2% on the back of lower private investment, and even these forecasts may prove a bit optimistic. Public debt stands at 54% of GDP, leaving little room, if any, for fiscal stimulus. The country has a twin deficit, both the fiscal deficit and current account deficit are around -2%, which further curtails its fiscal and monetary flexibility. Only further structural reforms can lift growth, as Mr. Peña Nieto correctly diagnozed. Much-needed educational reform (breaking down trade union power and resistance to merit-based pay of teachers to improve education quality, for example) is being stopped in the tracks as AMLO rewards his allies on the left (including, embarrassingly, Elba Esther Gordillo, the corrupt former chief of the teachers trade union). Also, economic reforms should be undertaken. Santiago Levy of the IADB argues that current policies (also under Peña Nieto and predecessors, by the way) tax high-productivity sectors and subsidize low-productivity sectors, thereby stifling productivity and dampening growth. It leads to boosting the informal economy (more than 50%, according to the OECD), which more or less by definition implies that companies remain small, also to evade onerous labour laws (inability to fire staff when business drops) and social insurance contributions (by employing independents without labour contracts or paying people a profit share instead of salary), and productivity remains low. Mr. Levy points out that this doesn’t mean that taxation should be lowered, but that it should not discriminate at high-productivity sectors. The tax base should be broadened and tax collection should be improved. Tax proceeds could be used to upgrade infrastructure (a new airport, maybe?) and schooling. Increasing competition also matters. Productivity in the telecom sector increased and better service at lower cost resulted from Peña Nieto’s sector reforms. AMLO’s anti-trade tendency and his policy to let the state play a central role in the economy, exemplified by rolling back liberalization in the energy sector, will hurt productivity. His proposal to set minimum prices for major agricultural crops to support farmers, is ill-conceived as demonstrated in other countries that tried the same (the EU’s milk seas and butter mountains are still fresh in our mind): better to provide income support than to distort market prices.

Yo, no productivo…?

It is unlikely that AMLO turns into a Chávez (despite AMLO’s unwavering support for Chávez’ successor, Nicolás Maduro), simply because Mexico lacks the resources to fund hand-outs and markets will quickly discipline the government. Markets reacted positively on his 2019 budget, which showed a 1% primary fiscal surplus, although in our view with rather optimistic assumptions in respect of the savings that are pencilled in. Exports are already deteriorating and a slowdown in the U.S. will impact Mexico’s economy negatively. AMLO’s Morena party surely will call for more hand-outs to its voter base, although for now AMLO seems to be fiscally conservative. However, if AMLO does not embrace structural reforms, the country’s finances will slowly deteriorate, eventually resulting in a downgrade to junk in 3 years’ time or so.