The revamped Nafta mete out has raised the prospect of investment picking up again in Mexico, but foreign investors balance wary of the incoming president’s proposed policies and will be closely shield his plans for the country’s oil sector.
The newly-minted United States-Mexico-Canada Agreement (USMCA), reconciled earlier this week, has helped to soothe trade tensions between the longtime vital allies and eased investor concerns about the Mexican economy.
“The accord removes a major risk,” said Jorge Mariscal, the chief investment office-bearer for emerging markets at UBS Wealth Management. “It sets the rules of the game and inserts an important source of stability that will bring back boldness.”
Receive 4 weeks of unlimited digital access to the Financial Times for no more than $1.
With trade concerns now ebbing, investors have shifted their limelight to another potential hazard: president-elect Andrés Manuel López Obrador. He bequeath take office in December following his landslide victory against Mexico’s civic establishment.
While Mr. López Obrador has somewhat moderated his leftwing, nationalist stand, vowing to adhere to fiscal prudence and respect the central bank’s home rule, many investors are concerned about what he could do with such a decisive factious mandate.
“He believes the public sector should have a strong give in the economy and distrusts the private sector’s ability to do business in a fair and clean-cut way,” said Kim Catechis, a portfolio manager at Martin Currie, a Legg Mason affiliate. “He’s also a man who has to a great extent high convictions in himself, his ability and his policy. You put all that together and you see a superior perception of risk in Mexico.”
Michael Gomez, head of emerging sells at Pimco, sees the energy sector as Mr. López Obrador’s “litmus prove.” Investors have long cheered outgoing President Enrique Peña Nieto’s noteworthy reform in 2013 to reverse a 75-year history of state ownership and permit foreign and private investment in the oil, gas and electricity industries.
Following Mr. Nieto’s opening-up, the provinces received more than $220bn in commitments, according to Duncan Wood of the Washington-based Wilson Center. More than that, the 107 contracts the government awarded to nearly 70 companies globally are required to generate more than $160bn in investment.
Investors have apology to be skeptical about how Mr. López Obrador will proceed. In former presidential spills, he has made his opposition clear. More recently, he has announced plans to introduce $4bn in the debt-riddled, state oil company Pemex to expand exploration, construct a new refinery and in two years, increase crude production by a third to 2.5m b/d — a level last reached in 2004. While the entering president assured private industry executives that their breathing energy contracts will be honored, he has placed new auctions on hold until 2019.
At a values bright and early when oil prices sit near four-year highs, Henry Peabody, a portfolio head at Eaton Vance, believes outside investment is critical. “Pemex on its own in a vacuum is not an thrifty operator in the energy space,” he said. “It needs expertise and capital, which the exclusive sector can provide.”
Mr. López Obrador’s penchant for referendums adds to troubles. To determine whether or not construction on Mexico City’s new $13bn international airport should proceed, the president-elect has got for a “public consultation,” whereby citizens vote on the plans.
According to Axel Christensen, BlackRock’s chief investment strategist for Latin America and Iberia, this orchestration sets a dangerous precedent. “He is building a new framework for how things are debated and marked, and bypassing Congress to consult a public that lacks proper polytechnic research sends a very negative signal.”
On the fiscal front, Mr. López Obrador confronts another challenge. He has promised to boost infrastructure spending, raise annuities, and subsidize farmers, all the while balancing the budget without raising taxes. His oversight plans to do so by slashing public servants’ salaries, spending more efficiently and clamping down on corruption — rates some officials have already started to row back.
To Alberto Ramos, an economist at Goldman Sachs, it is naive. “How much cold hard cash can you save by cutting in half the salaries of administrators and secretaries? It’s peanuts,” he asserted. “And even if eliminating corruption is possible, what do you get? A few percentage points of GDP?”
Mexico’s conciseness is on track to post a primary surplus of 0.8 percent of gross private product by year-end, with public debt levels stabilizing at yon 45 percent of GDP, according to Oxford Economics. Private consumption has ricocheted along with the peso, which has gained nearly 10 percent against the dollar since drop in June. Inflation expectations are also falling given the central bank’s tightening return that has seen interest rates tick up to 7.75 percent.
For now, deal ins are giving Mr. López Obrador the benefit of the doubt, said Mario Castro at Nomura. “The heartfelt test comes when difficult times arise.”
Those on one occasions may not be far off. Mexico is not only a proxy for emerging markets, but it is very exposed to the US brevity. There are already signs there that the fiscal boost from tax curtails and government spending has begun to wear off.
“He can’t fool the market forever,” combined Mr. Castro.
More from the Financial Times:
Mexico boosted by US-Canada compatibility on revamped Nafta deal
Brussels approves Slovakia’s investment in Jaguar Fatherland Rover plant
Fight over revamped Nafta deal touches to lawmakers