Fiscal, political realities would hold an AMLO govt in check

Wednesday, January 24, 2018

BNamericas spoke to Anna Szterenfeld, the LAC regional manager for The Economist Intelligence Unit (EIU), about the frontrunner in Mexico's presidential race, Andrés Manuel López Obrador (AMLO), and his decision to announce Carlos Urzúa as his finance minister should he be victorious in July.

In its latest report, the EIU said Urzúa "is likely to be well received," being credited as being a fiscal conservative as an economist and researcher at the country's top business school, Instituto Tecnológico de Monterrey. Urzúa also worked with AMLO during the candidate's time as mayor of Mexico City.

BNamericas: AMLO says that he will be able to generate significant room in the budget by cutting salaries and excessive expenditures, in addition to ending corrupt practices. However, it remains unclear as to whether he would be able to achieve these goals. How strictly will his economy pick Carlos Urzúa hold AMLO to reducing the deficit?

Szterenfeld: What AMLO has promised in his policy platform is that he will be fiscally responsible. We know he was pretty fiscally responsible when he was mayor of Mexico City and Urzúa was his finance minister, who is known to be a responsible, orthodox economist from the best technical economic program in Mexico.

AMLO has said that he won't raise taxes and he won't increase the debt. Those are two things that certainly happened under the [Enrique] Peña Nieto administration. The public debt as a share of GDP went up quite a bit and, of course, they had a tax reform that increased tax.

So, he said he's not going to do those two things, and, as you mention, with his anti-corruption drive, he would be able to generate additional revenue, and he's also talked about reallocating some revenue within the budget towards more social spending. Between the reallocation and the savings he hopes to achieve through these anti-corruption measures, and other things like lowering public sector officials' pensions and similar steps, he hopes to generate enough savings to fund his expanded programs.

There have been some concerns as to whether he'd be able to do that. For example, he's talking about expanding pensions to lower income Mexicans, and that would be very costly. There's some concern generated around that.

Our assumption is that over the AMLO administration you won't see any progress on fiscal consolidation. That means we're looking at government deficits to go back to above 2% of GDP. We estimate that the deficit did go down in 2017, but that was due to a one-time transfer of the surplus from the central bank.

We don't think he's going to make a lot of effort to reduce the deficit and, again, that's because he made certain promises about social spending.

BNamericas: How will AMLO fund the social programs then?

Szterenfeld: Unless the measures that he's talking about actually work, we're looking at the debt increasing. Assuming that the fiscal deficit does increase to above 2% per year, then he'll have to incur more debt. We're looking at increased public sector debt as a share of GDP in the AMLO administration.

BNamericas: Will the additional debt be manageable?

Szterenfeld: It will be manageable, because Mexico doesn't have any trouble getting financing [or] placing bonds in the marketplace. It also has a very large US$88bn flexible credit line from the IMF, which will probably be renewed when it expires next year. So that's a pretty hefty cushion.

It's not going to get into some sort of unmanageable situation, but yes, there are some questions as to how he will achieve some of his pledges, while at the same time not raising taxes.

BNamericas: How much authority is Urzúa going to have?

They worked together. We only have the history of when AMLO was mayor of Mexico City, which had fairly responsible fiscal management. So, we can make some assumption that he's not going to go too crazy.

BNamericas: What else are people worried about with AMLO?

Szterenfeld:I think that some of the other concerns about AMLO have to do with how aggressively he will continue pursuing the structural reforms and, to a lesser extent, there are some about macroeconomic policy management.

[There are fears about] what he might want to do, for example, with the energy reform. There are fears that he would try reverse it or at least slow it down. But on the macroeconomic front, I don't think he's going to try to risk the reputation for stability that Mexico has achieved over recent years.

Some of [the concerns about AMLO] are fairly ridiculous – people trying to compare him to Hugo Chávez or Nicolás Maduro, and I don't think he's that type of radical person. There's some populist rhetoric, but not like Chávez or Maduro.

He has been very careful to try to offset that kind image of himself and he's way ahead of the other presidential candidates by issuing a 400-page policy paper, which nobody else has done, and in selecting his cabinet to send a signal to the market that he would be pretty responsible.

BNamericas: What about his cabinet picks?

Szterenfeld: He named 16 worthy cabinet members. Most of them are moderates, one of them Urzúa. Most of the others are also technocrats. The only concern I've heard raised is about his pick for energy minister [Rocío Nahle], who's a Morena [party] lawmaker and who has been critical in the past of Peña Nieto's energy reforms.

But other than that, he's really trying very strongly to send a message that he would be a moderate leader.

BNamericas: What about congress? It doesn't look like his party [Morena] will have control of either house. Will that slow down any major agenda items for AMLO?

Szterenfeld: Precisely, it will slow it down substantially, because he won't have a majority. This will act as a restraint on any populist tendencies that AMLO has exhibited in the past. He won't be able, for example, to reverse the energy sector reform because it's a constitutional reform, and in order for him to do that, he'd need to have a two-thirds majority, which he's not going to have. It will put substantial restraints on pushing through any controversial reforms.

Where he will have some authority, of course, is in slowing down some of the reforms. Going back to the energy sector, the energy ministry will control the pace of any kinds of tenders for private sector participation. It could slow down changes to Pemex.

[Nahle] was particularly critical about how the reforms were intended to undermine Pemex. Any kind of big changes there could be slow.

BNamericas: Do you think the expected demonization of AMLO in the media could spill over into market volatility during the electoral cycle?

Szterenfeld: Much of this has already been priced in, because he's been out there for a while with his party's nomination, and they've been trying to demonize him for some time.

Yes, there's uncertainty about the elections and that's going to feed into volatility with the peso. But that's also being fed by the Nafta talks. If the Nafta negotiations aren't concluded by March, and it looks like they could drag on into the election period, then I think that could be negative for the stability of the peso.

The recent fluctuation in the peso also had to do with US tax reform, and there was some impact and concern about an outflow of capital from Mexico as a result of that. So, there are other factors in play.

They'll try to demonize AMLO, but I think it'll also be important to watch how [José Antonio] Meade's [presidential candidate of the ruling PRI party] position may shift as the campaign progresses. There's enormous anti-establishment, anti-PRI sentiment in Mexico, but the PRI has very formidable political, electoral machinery. We saw that in the Mexico state elections, where it performed pretty well.

I think when they activate that electoral machinery we're going to see that Meade comes a lot closer to AMLO in the polls. He has a much better reputation as being clean in comparison to other PRI candidates in the past, and I think they'll try to capitalize on that.

BNamericas: How will the PRI combat Meade's very low familiarity with the public?

With that machinery, they can get the vote out. They can spend money locally in ways that we know that incumbent political parties do throughout Latin America. The PRI has enormous control over the media and many media outlets. They have levers that they can use to raise his profile.

Our scenario is that AMLO will win and that it's really his election to lose. He could screw up, as he's done in the past. He has very high disapproval ratings. He may be in the lead in terms of voter preferences, but his disapproval rating is higher than anyone else's.

That does leave him vulnerable. But I think that he's learned from his past campaigns and he's being very cautious, as we've seen with his latest moves.


About Anna Szterenfeld

Anna Szterenfeld is an editor and senior analyst on the country analysis team at The Economist Intelligence Unit. She is responsible for covering and forecasting political, economic and business trends in various Latin American and Caribbean countries. She writes daily events-driven analysis for The Economist Intelligence Unit's and sites, and edits monthly Country Forecast and Country Risk Service reports, working with a network of regional contributors. She also contributes to specialized research reports and white papers, and collaborates on customized client research and consulting projects.
Szterenfeld's previous work experience includes serving as an analyst at an international business research firm and at an international bank, and as a researcher on issues related to the criminal justice system. 
Szterenfeld holds has a Bachelor's degree in foreign languages and Latin American history from the City University of New York and an interdisciplinary Master's degree in Latin American studies from New York University.

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