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Mexico is facing a serious debt problem, potential downgrades by ratings agencies, and a high degree of investor uncertainty.
BNamericas spoke with Marco Oviedo, head of economic research for Latin America at Barclays, to discuss how investors are starting to focus more on Mexico's upcoming electoral cycle than on potential threats to trade and remittances from the US administration.
All eyes will be on the state of Mexico, the nation's most populous, where the ruling PRI party candidate will seek to retain control to avoid an upset by the conservative PAN or the left-wing Morena party.
The state of Mexico has been an unquestioned PRI stronghold since the formation of the party in the 1920s. However, an April 10 El Universal poll has the PRI candidate Alfredo del Mazo taking 21% of the vote with Morena's Delfina Gómez in second at 17.4%. Former presidential candidate Josefina Vázquez Mota of the PAN received 14.1% in the poll, and traditional leftist party PRD candidate Juan Zepeda Hernández took 12.7%.
The interview with Oviedo also focuses on the weakness of the Mexican peso, which traded at around 18.6-18.8 to the US dollar during the first week of this month.
BNamericas: The peso has recovered to levels not seen since before the US election. Looking forward, do you see the peso as under or overvalued? Does it have much room to go lower?
Oviedo: At this moment, the peso probably is incorporating the fact that the potentially protectionist policies that were aimed at Mexico [by the US] most likely won't happen now, like tariffs or cancelation of Nafta or other aggressive policies against Mexico.
Also that the central bank has increased the [key] rate in a substantial manner ahead of the risk to inflation derived from the depreciation of the currency ... and also the fact that it seems like the outlook for public finances and particularly [state-owned oil firm] Pemex seems less vulnerable.
So, it seems that those factors have been correcting.
From a long-term perspective, we believe the peso should be close to 17 [pesos to the US dollar], but there are other shocks and other factors that probably are constraining the peso from going to that level again.
Those are the risks related to the political outcomes in the upcoming elections. It could be the fact that Mexico might be facing pressures from the oil balance, given that oil production has decreased in a substantial manner, the gasoline problem has continued to grow. What [gas] is not produced domestically has to come from outside, and your export base is lower, so you have a permanent and persistent deficit in the current account that you didn't have three years ago. And the other thing is that we still need to see what the outcome will be of for the fiscal reform discussions in the US.
We cannot rule out the potential approval of a border adjustment tax, not focused on Mexico that would be a general tax, but this should definitely put pressure on the currency down the road.
BNamericas: When might we be seeing the final outcome of fiscal reform in the US?
Oviedo: That's the question it seems, and this is what they've been saying in the US that the negotiation of this fiscal reform is going to take a long time, and the market will be reacting either to advancements or setbacks to the discussions.
For example, if the discussions go well, and suddenly it looks feasible that there could be a border adjustment tax, then the peso could react.
BNamericas: What do you mean 'take a long time'? Not during 2017?
Oviedo: There is some question. It seems like its finally going to be by the end of this year or the beginning of the next year.
And in the meantime, we are going to have local elections in Mexico, particularly in the State of Mexico, [which] will tell you how strong the radical left is to win the [federal and presidential] elections in 2018.
BNamericas: What would it say if Morena were to win or even perform strongly in the State of Mexico's gubernatorial elections on June 4.
Oviedo: I think if they lose, markets won't react. Markets right now are counting on the PRI to win. I think if Morena wins then definitely we are going to have a reaction with the peso, because it's going to tell you that Morena is in much better shape than we thought – and is probably on a good track [with leftist presidential candidate Andrés Manuel López Obrador] to win the election in 2018.
BNamericas: What risks to the economy and investment are the most worrisome as we move into the election cycle - in the next 12-15 months?
Oviedo: The economy is doing relatively well. We got the numbers for the production of cars for March [auto production up 36.2% year-on-year to 363,687 vehicles – the highest single-month production figure in history].
Exports are going to have a very good year. Maybe the deceleration in consumption is not going to be that strong, and the question remains of how much investment is going to decelerate given all the uncertainty that we had at the end of last year and the beginning of this year, regarding US policies. But if investment follows the manufacturing cycle with a lag, definitely investment is going to recover by the end of this year.
The question, as you mention, is whether this relatively stable economic activity cannot be derailed with additional uncertainty from the June elections. If we see, for example, that López Obrador is in better shape, definitely, we are going to see again firms waiting or delaying investment projects, probably maintaining cash, taking into account the possibility of an aggressive reaction of the markets in the scenario that López Obrador wins.
Even though he has been selling [the message] to the market that he is now more moderate and is responsible in terms of public finances, he has a very peculiar character, and we cannot rule out anything.
Markets are definitely not going to [wait] to react. Firms are going to plan ahead of that, and maybe we could see some deceleration of investment again at the beginning of next year. So, I think that's the risk.
On the other hand, if we hear that the PRI wins, and it seems López Obrador doesn't have enough structure, [we'll see the other candidates]. We don't have the candidates [set] for the other parties. We'll have those probably at the end of this year, and then we'll probably not see a delay in investment as much.
BNamericas: Why is López Obrador seen as a peculiar figure in the business community and by the market?
Oviedo: He hasn't been consistent. At times, he tries to sell a more moderate face, but then he has some radical declarations. Within his campaign for example, they say they're not going to derail energy reform, but then on the other hand, in an interview, he says that he's going to have a referendum in order to pull back the energy reforms, so it's not clear.
And, it seems in the end, that he would decide economic policy. And given that he has very strong ideas, on energy reform for example, the simple fact that he could probably block or not allow advancement in the energy reform is going to be taken negatively by markets, and there could be a reaction.
So, we've seen this also with Trump. One thing is campaigning; the other is that, once you get into power, trying to implement your policies. That's another story.
About Marco Oviedo
Marco Oviedo received his PhD in Economics from Yale University in 2005 and in 2008 he became undersecretary in the Mexican finance ministry's public debt unit.
In March 2011, Oviedo began serving as economic advisor to former President Felipe Calderón and in June 2012 he became chief economist for Mexico at Barclays Plc. Oviedo held this position until being named chief economist for Latin America in October last year.
About the company
London-based Barclays is a global financial services provider engaged in retail and commercial banking, investment banking, wealth management and investment management services. It also participates in the credit card business through its Barclaycard division.
The company has a presence in more than 50 countries. After closing its Argentine operations in 2012, the bank's presence in the Americas includes Brazil, Cayman Islands, Puerto Rico, Canada, Mexico, and the US.