Mexico is heading towards a crisis. As Andrés Manuel López Obrador, the charismatic former mayor of Mexico City, journeys towards the presidency, foreign investors look set to focus on what AMLO, as he is known, will mean for the country’s risk profile and economic growth.
Chastened by their losses from betting against Luiz Inácio Lula da Silva before he came to government in Brazil by selling the country’s bonds and currency, they are overly cautious in judging the Mexican frontrunner, who boasts a lead over his nearest rival of between seven and 10 percentage points, depending on the poll. But as his policies and governance style are publicised more abroad, those same investors may well sell the securities after a short-lived boom, send the peso into downfall and cause a major crisis in a globalised economy where imports and exports equal about 70% of gross domestic product (GDP).
Alonso García Tamés, undersecretary of the finance ministry, sounds sanguine as he speaks to The Banker: “The [forthcoming] elections have not disrupted the markets. We have stable exchange rates, stable interest rates and the markets are not experiencing any volatility or nervousness. Investors and analysts believe that the election will take place through the proper institutional channels and that there will not be any [big policy] surprises, whoever is elected.”
AMLO, known locally for hand-outs to pensioners in Mexico City and for fighting against a heavy-handed 2005 attempt to ban him from running for the presidency, heads the Democratic Revolutionary Party (PRD). The party was set up in 1989 as a leftist breakaway from the Institutional Revolutionary Party (PRI), which was becoming reformist. The PRD advocates greater state intervention in the economy.
AMLO’s high-spending policies rely on promises to cut waste in government. According to Rogelio Ramírez de la O, an economic consultant and one of AMLO’s top advisers who has been mooted as a potential minister of the economy, more than 1% of GDP can be saved in 2007 through cuts in the bureaucracy, equivalent to $10bn, and another 1% in 2008. These funds would be used on infrastructure to boost growth, as well as social spending.
Policy impediments
Setting to one side the unrealistic aspects of the savings in a country where 90% of the budget is pre-allocated, and where every prospective government that has promised efficiencies has failed due to special interest groups like the powerful unions, there is another impediment to the AMLO programme. It calls for public/private partnerships to build a number of train and airport projects, among others.
Mr Ramírez de la O says: “The success of the projects depends on the participation of the private sector.”
The problem with this is that AMLO’s recent, limited charm offensive in the spring, which consisted of a few private dinners with some of Mexico’s top businessmen, appears to have done little to reassure them about what they perceive as his return to the PRI’s expansionist policies in the past century, which led to a boom-bust economy. Especially when a few days later, AMLO said on television and in a campaign speech: “We face a mafia, a gang, people who have dedicated themselves to taking advantage of the government…” and then specified that he was referring to “the biggest business people in Mexico, who are not even business people. In the strictest sense they are speculators, influence mongers”.
Contradictions
Mr Ramírez de la O and AMLO have been known to make contradictory public pronouncements on economic policy. AMLO was also renowned for riding roughshod over advice from his advisers during his tenure as mayor of Mexico City.
As for AMLO’s policies: cuts in electricity, gas and petrol tariffs are seen as non-viable. And his promises to spend more on energy exploration and investing in up to two new refineries depend heavily on two factors: confidence from the private sector and some sort of change to how Pemex, the state oil company, works with them. President Vicente Fox’s attempt to allow foreign participation with cash-starved Pemex so as to lighten the financial burden of exploration and extraction, foundered. Mr Ramírez de la O insists that AMLO’s programme does not envisage attempting this again, but will try to attract private industry input into some of the services sold into the oil company. That is, however, not where the main impediment and heaviest financial load lies.
Meanwhile, AMLO’s close relations with Carlos Slim, the wealthiest businessman in the country and owner of telecoms group Telmex and the Grupo Carso, with whom he worked on the restoration of the old quarter in Mexico City, are seen as indicative that Mr Slim – among the top five world billionaires in the Forbes list – has not lost his canniness when it comes to dealing with politicians.
Equally, a broadcasting law approved by the legislature in March and nicknamed “Ley Televisa” by politicians and the press who are opposed to it, appears to favour the continued dominance of media mogul Emilio Azcárraga Jean’s dominant broadcasting empire. It also highlights, they say, the monopolistic powers of the small business elite and, as result, the huge inequalities of income in Mexico, which the World Bank sees as one of its main problems.
Danger to business
Another one of Mexico’s best known businessmen, who wishes to remain anonymous, believes that AMLO will be a disaster for business. “He is a danger,” says the prominent CEO. His belief is shared by many businessmen, all of whom insisted (in off-the-record conversations) that the authoritarian former mayor represents a return to the PRI governments of the 1970s, which were high spending, dictatorial, believed the state was more important than private industry, and were exceedingly corrupt.
(It is worth noting, though, that virtually no-one would accuse AMLO of corruption but there is a general perception that he has been unaware of events around him. Among examples, two of his closest confidantes while he was mayor have been charged with corruption offences. One, Gustavo Ponce, head of finance for Mexico City, was captured on video gambling large amounts at the Bellagio casino in Las Vegas, one of 37 visits, and was found guilty of diverting up to $3m in city funds and is in jail. The other, René Juvenal Bejarano, AMLO’s former private secretary, was filmed accepting a bribe and is currently out on bail).
During AMLO’s tenure at City Hall, debt surged from 28.7bn pesos ($2.63bn) in 2000 to 43.5bn in 2005. Despite this expenditure, the economy of the Federal District of Mexico City, which is responsible for more than one-fifth of the Mexican economy, grew less than that of Mexico as a whole. According to the latest numbers available from INEGI, the national institute of statistics, Mexico City grew only 0.23% in 2004 compared with GDP growth of 4.16% for Mexico. In terms of growth from 2000 to 2004, Mexico (excluding the federal district) grew by 8.7%, while Mexico City’s economy contracted by 1.7%. As a result, 99% of the net loss of jobs in the formal Mexican economy during those four years occurred in the federal district, notes a report from Banamex, one of Mexico’s largest banks.
Above the law
“López Obrador does not like to depend heavily on things that need to be approved by Congress, as he may not win Congress. And even if he does, he cannot count on them to make changes that are considered controversial,” says Mr Ramírez de la O.
Congress is where Mr Fox’s main reforms – energy, labour and fiscal – all foundered, although this was as much a result of his government’s lack of negotiating skills as it was a result of there being no governing National Action Party (PAN) majority.
Bypassing Congress in Mexico, a nation that is justifiably proud of its hard-won democracy following 70-plus years of PRI rule, is one of the worries for businessmen and economists.
“In his first three years as mayor of Mexico City, [AMLO] ignored the assembly [where he did not have a majority] when it went against him,” says Luis Rubio, president of independent think-tank CIDAC. “He did not respect the budget and put funds where he wanted while, for contracts, he assigned them to whomever he wanted [instead of through an open system of tender].”
Working majority
There is also a fear that even if, as expected, AMLO’s party does not achieve an outright majority in Congress, the PRD may achieve an effective working majority because the PRI is a divided party at the moment and those who represent the old-style PRI may ally with the PRD, given their shared roots.
Mexico’s foreign minister, Luis Ernesto Dérbez, says as much: “[Any of] the presidential candidates will have to form a grand coalition. Mexican politicians have learned this.”
Two questions arise. First, will AMLO win when there are two months left until the July 2 elections? Mr Rubio argues this is not such a long time because football-crazy Mexico will be concentrating on the World Cup rather than politics during June, which should eliminate the possibility of a big upset. Anecdotally, HSBC, among other banks, has been taking out full-page advertisements in local newspapers to celebrate its new Mexico City headquarters and offer credit cards with the chance to participate in a lottery to fly to “Germany”. No explanation of the destination is necessary; all Mexicans know that this is where the 2006 World Cup is due to take place.
The contenders
The other two main presidential contenders are labouring under serious disadvantages. Felipe Calderón of the PAN has the shortcomings of being the governing party’s candidate, when Mr Fox’s administration is unpopular due to its inability to fulfil the high expectations raised before its 2000 election. These included making inroads into the 50%-plus of the population that lives in poverty. Mr Calderón also lacks crowd-pleasing appeal.
The PRI’s Roberto Madrazo, on the other hand, is perceived as a dinosaur of the old guard, who in 2002 won the presidency of his party amid accusations of vote rigging. Also, infighting in the PRI and corruption scandals have been well publicised. Mr Madrazo is running third. The party’s well-oiled electoral machine could, however, turn out the vote more efficiently than either of the other two parties – although Gustavo Madero, a PAN supporter and president of the government’s Commission on the Economy, argues that the party’s internal divisions will hamper its on-the-ground election day workings.
Crisis scenarios
The second question is how much harm could AMLO accomplish in the presidency. Analysts see alternative crisis scenarios, which differ only in their magnitude. One is that AMLO’s public pronouncements as president-elect in the long interregnum between the July election and his assumption of power in December will receive the sort of foreign publicity they currently lack, precipitating a sell-off in Mexican assets. At this point, AMLO, who has reportedly only travelled abroad to Cuba, realises the power of globalisation and backs away from a radical agenda before taking power. Stability is restored, albeit after a short but relatively containable crisis. Still, yet again Mexico is set back on its road to development.
Another scenario is that the Lula factor continues to give AMLO the benefit of the doubt from investors and he proceeds to apply a high-spending agenda once resident in Los Pinos, the presidential home. This leads to an economic boom but, as the budget deficit increases and inflation takes off, investors realise the unsustainability of the economy and pile out, causing a bigger crisis and a reassessment of policy or, according to more extreme versions, AMLO perseveres in his policies, secure in his own self-belief, and Mexico endures a similarly catastrophic crisis to that of 1994-5.
Tempering but not negating this are some positives. Mexico’s economy is in a relatively healthy state. At end-2005, the budget deficit was at a 10-year record low of only 0.09% of GDP, consumer price inflation was at only 3.3%, while the benchmark central bank interest rate is now at 7.25%. High petrol prices are keeping the current account deficit under control at only 1% of GDP while foreign exchange reserves are at a considerable $66.9bn. Mexico is the world’s ninth largest exporter of crude oil and tax receipts from Pemex amount to as much as 40% of federal revenues.
Less vulnerable
Also on the positive side, the state’s susceptibility to foreign investors has lessened. “Our policy is to reduce our vulnerability to changes in international markets by substituting external debt for internal debt and by extending the maturity of both,” says the finance ministry’s Mr García Tamés. “As a result, the sensitivity of our cost of funding to changes in the exchange rate and changes in interest rates has been reduced by half in the case of exchange rates and two-thirds in the case of interest rates.”
In addition, Mexico’s institutions, although still fragile, are stronger than they were in 2000, transparency has increased and civil society has become more vociferous.
Slim chances of success
Overall, though, the chances of AMLO’s government dealing with the main challenges to achieving higher growth in Mexico, which include labour reform, tax reform, energy reform, vested interests, attracting foreign direct investment, poor infrastructure, high crime rates, narcotraffic and corruption, plus immigration and trade relations with the US, are slim. A crisis of one sort or another beckons.
As a government minister tells The Banker in reference to AMLO and the move leftward in Latin American politics: “ Mexico cannot believe it is immune from the Latin America effect. If foreign investors and national ones believe we are more tied to Latin America…” and he tailed off.
