Andrés Manuel López Obrador (AMLO) holds the strongest presidential mandate in a generation. With control over both houses of Congress, AMLO will continue to pursue a left-wing agenda, staging informal referendums against mining, hydropower, or other projects facing local community opposition.
AMLO is also highly likely to revise contracts awarded by the previous administration on corruption or ideological grounds. The growth outlook will be constrained by investor uncertainty over policy direction and tight fiscal and monetary policies.
Violent crime broke records in 2018. 33,334 homicides were recorded, the highest level since comparable records began in 1997. As a result of the unprecedented violence, AMLO is expected to prioritise a flagship security proposal.
There are indications that the ruling Morena party intends to centralise the country’s police forces by creating a new National Guard and withdrawing the military from a decade-long fight against organised crime.
The recent upsurge in crime is a barrier to business activity and investment, particularly for small firms. It is reported that spending on security measures and direct losses resulting from acts of crime account for 0.7% of GDP.
Strikes and protests by anti-mining movements, labour unions and landowners are common and are highly likely to disrupt private companies and supply chains nationwide.
Guerrero, Michoacán, and Oaxaca states frequently experience blockades of federal highways and rail lines by striking teacher unions.
In January 2019, a five-week rail blockade by teachers’ union Coordinadora Nacional de Trabajadores de la Educación (CNTE) led to estimated losses of US$1.5 billion.
Rail routes, especially the Veracruz-Mexico City line, face frequent disruption from thieves who use obstacles to force trains to stop and then steal their cargo.
Real GDP growth is expected to accelerate modestly to 2.3% in 2019 and gradually converge to 3% over the medium term, as the economy benefits from economic growth in the United States.
Growth will also be supported by private consumption and a small contribution from net exports, while investment will remain weak in the short-term outlook due to uncertainty about the future course of the AMLO administration’s policies.
Core inflation declined to 3.7% y-o-y in September 2018, with medium-term expectations falling within the Central Bank’s 3% target.
Mexico’s economy remains dependent on the United States, which receives approximately 81% of Mexico’s total exports. This leaves Mexico highly vulnerable to the performance of the US economy and protectionist measures implemented by the US.
The United States-Mexico-Canada Agreement (USMCA), agreed in November 2018, removes a measure of uncertainty that had paralysed investment decisions in North America.
External debt in Mexico amounts to US$341 billion, not including foreign currency-denominated debt held by foreign investors, which as of the end of Q3 2018 amounted to US$115 billion. Sovereign credit risks will remain elevated in 2019 if fiscal deficits persist in the region of 3%.
The 2019 budget approved by congress outlines significant spending increases, including MXN5 billion for pensions and MXN30 billion for transport infrastructure.
Given these spending increases Mexico’s fiscal deficit will widen to 2.6% of GDP in 2019 and 2.9% in 2020.
The near-term outlook for the Mexican peso is one of volatility, driven by the likely non-market friendly policies of the AMLO administration and the potential spill over effects of US-China trade tensions. The exchange rate is forecast to reach MXN20.88/USD1.00 by the end of 2019.
Morena controls both houses of Congress, granting AMLO the power to implement a populist agenda.
The cancellation of a new US$13 billion Mexico City airport by way of public poll is a red flag for investors. It has raised concerns over the strength of the rule of law and the new administration’s respect for contracts.
The incident suggests that contract alteration risks will remain elevated in the 12-month outlook, given AMLO’s preference for informal referendums as a means of deciding investment decisions. In March 2019, AMLO also ordered the cancellation of the Los Cardones mining project in Baja California Sur.
However, Mexico’s continued membership of USMCA and bilateral agreements with 46 other countries assure the right to an arbitration process in the event of a dispute between an investor and the Mexican state.
The monthly Risk Outlook is supported by our proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.
5 Key Takeaways
- Violent crime broke records in 2018 with 33,334 homicides were recorded
- In January 2019, a five-week rail blockade by teachers’ union Coordinadora Nacional de Trabajadores de la Educación (CNTE) led to estimated losses of US$1.5 billion
- Mexico’s fiscal deficit will widen to 2.6% of GDP in 2019 and 2.9% in 2020
- Mexico’s economy remains dependent on the United States, which receives approximately 81% of Mexico’s total exports
- In March 2019, AMLO ordered the cancellation of the Los Cardones mining project in Baja California Sur.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Brazil, Egypt, Ghana and South Africa, all of which have been the subject of recent enquiries from our client base.
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