“Mexican Trump” Noise

Summary: The possibility that AMLO wins in 2018 is significant. And he, as Trump or Sanders, represents an anti-establishment sentiment that has gained strength in recent years. The historical low approval rates of the president finally manifested themselves in the recent local elections on June 5.Although the “U.S. Trump” is the biggest concern for the economy in the short term, the “Mexican Trump” could bring more noise in the long run.

 

Recently, Reuters highlightedthe political risk that the leftist candidate Andres Manuel Lopez Obrador (AMLO) represents for the 2018 general election in Mexico. Political risk firms such as Eurasia and even local newspapers have also warned about this risk.

In a nutshell, the risk stems from the statements that AMLO has made against market-friendly policies put in place since the beginning of NAFTA in the mid ’90s. He has also been critical of the energy reform approved in 2013 by the Peña Nieto administration.

It is true that the possibility that AMLO wins in 2018 is significant. And he, as Trump or Sanders, represents an anti-establishment sentiment that has gained strength in recent years. However, we continue to believe that this risk is low and the institutional framework in Mexico is strong enough to prevent a significant reversal in Mexico’s political and economic systems. Furthermore, although the 2018 presidential election is still far off, recent trends in Mexico’s politics have not favored the leftist candidate.

 

The structural reforms that involved tax increases; Ayotzinapa and corruption scandals, and even external shocks such as the peso depreciation and oil prices have taken a toll in Peña Nieto’s popularity.

The historical low approval rates of the president finally manifested themselves in the recent local elections on June 5. In the election, Peña Nieto’s PRI unexpectedly lost the majority of the state governorships for the first time.

The PRI’s loss was so dramatic that the party had to change leadership and approved an anticorruption reform that put in place a new system to investigate and prosecute corruption crimes. The president had opposed such a reform from the beginning, but now corruption is one of the main issues on the president’s agenda.

The PRI’s defeat in the last election and the fact that AMLO had appeared as front-runner in early presidential polls caused several analysts to highlight an increased political risk.

AMLO has performed well because he has managed to capitalize on Mexicans’ dissatisfaction with the status quo. However, it is also true that AMLO has the advantage of being the only politician that has secured a candidacy in one of the main political parties participating in the next presidential election.

But the election on June 5 was not a victory for AMLO. His party, Morena, stayed where it was in terms of governorships. The center-right PAN was the clear winner this summer, taking all the states that the PRI lost.

This is what the main local pollsters Buendia&Laredo, Mitofsky and Parametria show. Before the election, the three pollsters showed a clear victory for AMLO in most scenarios involving possible presidential candidates for 2018. In polls asking for political party preferences, the PRI used to be named first, followed by the PAN and Morena. Now Margarita Zavala (PAN) wins most scenarios and PAN appears as a front-runner by party preference.

 

Recent days have not been great for AMLO either. He had refused to make public its declarations of assets, taxes and conflicts of interest, optional under the new 3de3 anti-corruption law. When he finally made it, he reported having an annual salary of $30,000 and not owning any property or even credit cards. He has been widely criticized.

 


LATAM PM’s Take: Mexico’s presidential election is still two years away, adding a significant level of uncertainty. But still considering AMLO’s victory, the resulting scenario is not catastrophic. He is not as radical as many analysts have portrayed him. Still, assuming AMLO wins the presidency and his party significantly increases its presence in Congress, he will not secure enough seats to obtain a majority. His party’s presence in the Senate will be minor too, because AMLO’s vote is highly concentrated regionally. And there is still the Supreme Court, where all judges have been named by the PRI and the PAN.

The worst case scenario is six years of political gridlock. This is not minor for a country in need of structural reforms, but radical changes in Mexico’s political and economic systems are not happening either. Despite the Mexico ETF’s (NYSEARCA:EWW) recent rally, equity valuations remain stretched. Although the “U.S. Trump” is the biggest concern for the economy in the short term, the “Mexican Trump” could bring more noise in the long run.

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