Mexico: A look at the past, present and future as elections yield AMLO victory
With Mexico's general elections ending as expected with an AMLO victory on 1 July, Economist Christopher Thomas takes a look at Enrique Peña Nieto's legacy, the biggest challenges that face the new incoming president, and of course, NAFTA, among other issues.
Enrique Peña Nieto's legacy and what his administration will be remembered for
Enrique Peña Nieto’s legacy will be a polarizing one, accentuated by unrestrained corruption in the country and soaring crime rates. On the economy, however, he will be remembered as a liberalizing figure, one who opened up Mexico’s energy markets to the private sector and pushed through education reforms.
When Peña Nieto took the reins six years ago, the economy had only recently begun to show signs of life. Oil revenues were down, infrastructure lagged behind the country’s peers and poor educational standards plagued students. In the years since Peña Nieto took office, the economy firmed up but growth has been underwhelming, most recently posting 2.0% growth in 2017. His reform agenda faced headwinds, most notably oil prices that collapsed midway through his term. Meanwhile, some analysts argue his reforms will only be fully felt over the longer term; foreign investment in the oil sector will take years to stem output losses, while it is only the next generation of students that will reap the gains of a stronger curriculum.
What currently represents the greatest threat Mexico's economy?
The unwinding of NAFTA is by far the greatest threat currently facing the economy. The significance of this year’s general election and the recent tit-for-tat tariffs between the United States and Mexico are in part symptoms of the ongoing renegotiation of the trade pact. Both the upcoming election and the nascent threat of a trade war are most often seen through the prism of NAFTA—how will they affect talks? Do they signal a worst-case outcome?
The main issues in the NAFTA renegotiation and what's in store the next president
The successful renegotiation of NAFTA is hinging on three main sticking points, all of which the U.S. has been pushing for: the rules of origin with regard to the automotive sector, the introduction of a five-year sunset clause and whether to maintain the dispute-resolution mechanism. These have each held up talks at various times in the negotiations. How the winner of the 1 July vote will factor into current talks is as-yet unclear, as they will only take office in December. AMLO, the frontrunner, has stated his intention to respect any deal agreed to ahead of his election, while also pushing to appoint his loyalists to the negotiating team in the interim.
How to stem the fall of the peso
The peso has shed more than a tenth of its value against the dollar since mid-April as the future of NAFTA has grown more uncertain. As talks have hit a standstill in recent weeks, analysts increasingly fear the unraveling of the trade pact. Moreover, politicking has weighed on the currency as traders have begun pricing in an expected AMLO victory. As a wildcard on NAFTA, his probable victory on 1 July has left the deal’s fate increasingly unclear. Although he has stated his hope of remaining in the trilateral agreement, he has also made it clear that he is skeptical of the existing pact and reportedly stated he would sooner exit the deal than sign onto a bad one.
The peso is likely to recover in the weeks and months following the 1 July vote as the country adjusts to its new leader and, in all likelihood, his newfound pragmatism. Once elected, most analysts see AMLO tacking his platform to the center in a move that would likely calm investors’ fears—and halt the fall of the peso. Moreover, analysts currently expect the economic recovery to persist, which should bolster the peso’s gains against the dollar in the second half of the year.
The potential effect of an AMLO victory on the peso
AMLO’s victory on 1 July has been increasingly priced into the exhange rate since mid-April. The currency has fallen by more than a tenth against the dollar in that time as traders have come to expect a win for the leftist politician. Although his election risks alienating foreign investment, which could devastate the peso over the longer term, our current forecasts show the peso stabilizing in the weeks and months after the vote as the country adjusts to its new leader and, in all likelihood, his newfound pragmatism.
The economy and corruption: What awaits the next president regarding the two issues?
Corruption in Mexico is entrenched, and whoever wins on 1 July will face massive obstacles as they move to reform the country’s politics. On the economy, Mexico’s next president will face growing uncertainty over the future of NAFTA and the country’s frosty relationship with its northern neighbor. Should NAFTA fall apart, the economy will face a period of severe pain compounded by the expected collapse of the peso. If, however, NAFTA is successfully rewritten—currently analysts’ most likely outcome—the economy will still face the twin headwinds of slowing growth in the United States and weaker global trade dynamics. High inflation, notwithstanding where the peso is trading in a year, will continue battering consumers.
5-year economic forecasts for 127 countries & 30 commodities.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.
Date: June 29, 2018
Tagsinterview MENA Agricultural Commodities Canadian Economy United Kingdom Asean Euro Area Healthcare economic growth Trade Precious Metals Commodities Economic Debt Canada Turkey chile Exports South Africa Eurozone Inflation Investment Ukraine election Mexico Greece European Union China Bitcoin Oil Company News oil prices India Venezuela Russia Cryptocurrency Sub-Saharan Africa OPEC IMF Australia Germany Infographic Housing Market Africa Resource Curse TPP Spain United States Unemployment rate Banking Sector Energy Commodities Base Metals Base Metals Commodities TPS Eastern Europe UK Nordic Economies Political Risk scotiabank Brexit Economic Growth (GDP) Lagarde Portugal Central America Consensus Forecast France Vietnam Copper Argentina Exchange Rate Economists Asia Asian Financial Crisis Nigeria G7 Major Economies Colombia Iran Palladium precious metals Japan Economic Crisis Draghi Emerging Markets Gold Tunisia Forex GDP public debt Brazil Cannabis Latin America Israel Commodities Italy USA
Panelists now see Lebanon inflation averaging 66.8% this year, with this figure likely to be revised upwards in sub… https://t.co/Rf3tbSHHyw
1 week ago
Our panel of forecasters remain divided on what will happen to inflation in the United States in 2020. The consensu… https://t.co/A8DxMjEQDr
1 week ago
See the latest Oil and Gold price projections from 40+ world leading forecasters, banks and think tanks.… https://t.co/3NXfukp0gb
2 weeks ago
The Covid-19 fallout is set to plunge the Eurozone economy into its worst contraction on record this year. Learn… https://t.co/BNpBUDvWHO
2 weeks ago
India’s economic outlook has deteriorated markedly in recent months, with our panel of leading forecasters now expe… https://t.co/4ZPTztQuuQ
2 weeks ago