Mexico will elect a new president in July 2018, as incumbent Enrique Peña Nieto is constitutionally barred from seeking a second term. Anti-establishment sentiment will drive support for anti-establishment candidates, such as Andrés Manuel López Obrador (AMLO), who is leading in most polls. NAFTA renegotiation will remain a principal risk to Mexico’s economic outlook, whilst businesses will continue to face a weak security environment.
Anti-establishment sentiment will drive support for leftist candidate Andrés Manuel López Obrador (AMLO) in the 2018 presidential election. AMLO’s party, Movimiento Regeneración Nacional, led polls in November 2017, with 23% of voter intentions. He will also benefit from the high number of independents running for president, which may mean that a 30% share of the vote would secure the presidency. In 2012’s presidential election, AMLO gained a 31.6% vote share. Despite this, the ruling Partido Revolucionario Institucional (PRI), will remain a player in the election. The party benefits from an effective electoral machine, and performed well in gubernatorial elections in June 2017.
Regardless of the election result, the security environment facing businesses is likely to remain weak in the 12 month outlook. Drug cartels have increasingly turned to express kidnapping and extortion as a source of revenue. There was a 9.5% increase in kidnappings in the first three quarters of 2017, when compared to the same period in 2016, and a 14.8% increase in extortion cases over the same period. The highest risk regions are currently Veracruz, Tamaulipas, Estado de Mexico and Guerrero states. Businesses that do operate in Mexico will require substantial security measures to ensure the safety of people and assets.
A fifth round of North American Free Trade Agreement (NAFTA) renegotiations between Mexico, Canada and the United States ended on 21 November 2017 with little progress made towards reaching a deal. A number of issues raised by the US, such as government procurement rules and the creation of a sunset clause for NAFTA, have not been resolved. With a further round of talks scheduled for January 2018, it is now unlikely that an agreement will be reached by the Q1 2018 deadline.
If no deal is reached, NAFTA will remain in place in its current form, although the US would likely withdraw from the agreement. US Mexico trade would reverse to World Trade Organisation tariffs, and the US could impose a variety of measures to limit bilateral trade. Estimates suggest that US withdrawal from NAFTA could lead to 951,000 job losses in Mexico, weighing on the real GDP growth forecast of 2.1% in 2018. An AMLO presidency would mark a shift away from the broadly pro-business reforms introduced by outgoing president Enrique Peña Nieto. He has pledged significant spending on free education and rural development.
Mexico has made good progress on fiscal consolidation since 2013 and in 2017 is expected to record its first primary surplus since 2008. The 2018 budget sets out a targeted public sector borrowing requirement of 2.5% of GDP, down from an estimated 2.9% in 2017. However, a rapid uptick in spending as part of a more populist government agenda could reverse this trend and elevate sovereign credit risks in the longer term outlook.
In November 2017, AMLO unveiled a proposed national development plan for 2018-24. This includes proposals for public consultations on the continuation of energy sector reforms. Introduced by Peña Nieto in December 2013, energy sector reform has opened up Mexico’s upstream and downstream sectors to private investment, introducing profit sharing and production-sharing contracts for foreign companies. A second round of reforms in 2014 further improved the transparency of bid processes.
An AMLO presidency would likely slow the implementation of further reforms and could elevate contract alteration in the energy sector. Obrador has proposed a review of the status of all oil contracts awarded under the current government and a delay to PEMEX’s involvement in future farm out agreements. He has also announced plans to enhance scrutiny of private sector companies operating in the energy sector. Obrador’s strong anti-corruption agenda would mean that such policies bring an elevated risk of contract alteration if evidence of illegality in the awarding of hydrocarbon contracts is uncovered.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Colombia, Brazil, Mexico and Venezuela all of which have been the subject of recent enquiries from JLT's client base.
The monthly Risk Outlook is supported by JLT’s 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.
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