Mexico’s 2020 set to be a challenging year for companies, investors, but “AMLOgeddon” unlikely

De mal en peor

The security situation is bad and getting worse. This in large part reflects organised crime dynamics in the country; these have never been as complex as they are right now. The media in particular continues to speak of ‘drug cartels’. This is an anachronism:

1. This implies that organised criminal groups (OCGs) are focused on drug trafficking, and drug trafficking alone. This is a fallacy – they are now involved in a wide array of illicit activities.

2. The word ‘cartel’ implies an agreed division of market share – or ‘pax mafiosa’ – between the pre-eminent groups. This dynamic was obliterated when then-president Felipe Calderón (2006-12) kicked the hornet’s nest back in 2006.

This state of affairs is driving ever-increasing crime rates and the spread of insecurity to parts of the country that were hitherto considered all but immune to this. Successive governments have systematically failed to effectively and comprehensively address rising insecurity. The AMLO administration is no different; for example, the establishment of the National Guard last year was poorly conceived and poorly implemented. This situation has been compounded by a clear lack of leadership on security matters within the federal government. This was most dramatically exemplified by the botched operation in October 2019 in Culiacán (Sinaloa state) – which led to the arrest and subsequent release of Ovidio Guzmán, the son of Joaquín Guzmán (alias ‘El Chapo’).

Control Risks believes the security environment will continue to deteriorate in 2020, though not to the extent that will make it an insurmountable obstacle to doing business in the country.

Economic malaise

The economy contracted by 0.1% in 2019; the first time this has happened since the global economic downturn in 2009. Of course, there are external factors at play, including a slowdown in global trade and a fall in manufacturing production in the US, both of which have had direct implications for Mexico’s export-led economy.

However, the contraction also in part reflects modest investment levels since AMLO took office. These in turn point to adverse investor sentiment amid the implementation of a policy agenda that is deemed detrimental to private companies in certain sectors. This situation began with AMLO’s decision to cancel the project to build a new international airport in the capital Mexico City. Adverse investor sentiment has not only persisted but has been aggravated, above all by the rolling back of the landmark energy reform implemented by the government of former president Enrique Peña Nieto (2012-18).

The economy is expected to grow by 1% in 2020. Despite this inauspicious state of affairs, AMLO appears (at least in public) buoyant on Mexico’s economic growth prospects over the course of his sexenio (six-year term). That said, his previous forecasts of 4-6% annual growth are wildly optimistic. Yet, Mexico’s broader macroeconomic fundamentals are robust, all but precluding a more marked downturn. Public finances are in a reasonably healthy state (facilitated in part by AMLO’s fiscal conservatism), a comparatively strong peso (defying many pessimistic prognoses), low inflation, stable (if not spectacular) levels of investment and increasing trade certainty following the ratification of the US-Mexico-Canada-Agreement (USMCA) in the US.

Pragmatism vs dogma

In response to the economic malaise, AMLO has called on his Chief of Staff Alfonso Romo to lead on plans to promote investment and growth going forwards. Such a move will (once again) set pragmatists like Romo and Finance Minister Arturo Herrera on a collision course with the administration’s leading ideologues, above all Energy Minister Rocío Nahle and Federal Electricity Commission (CFE) Director Manuel Bartlett. In this ‘battle of the wills’, the latter two currently have the upper hand.

The latter was exemplified in October 2019 when the Energy Ministry (Sener) announced changes to the Clean Energy License (CEL) market that have considerable and adverse implications for the financial viability of privately-owned/operated renewable energy projects.

Both Romo and Herrera have attempted to act as bulwarks against Bartlett and Nahle’s machinations by pushing for further private sector participation in strategic sectors – including through public-private partnerships (PPPs) and joint ventures – but with little success. Romo has lost credibility, while Herrera has been publicly contradicted by AMLO on more than one occasion. The ability of investors and companies to influence policymaking by lobbying these two is likely to be limited in the coming months.

A tale of two elections

The insistence of continuing on a policy path that appears to have direct and negative implications for the economy also reflects AMLO’s obduracy. When it comes to policy and politics, he rarely changes his mind. And he is certainly unlikely to do so this year. However, economic and/or electoral matters may eventually force him to do so. In this respect, we believe that 2021 will be the key year for his administration:

Poor performance on either (or both) may force a policy rethink.

Before that, we have the not-so-small matter of a presidential election in the US. To his credit, AMLO’s fabled pragmatism has been most evident in his management of the relationship between Mexico and the US, and North America more broadly. Despite this, the election in the US is likely to be characterised by the anti-Mexico (and anti-Mexican) rhetoric that was the hallmark of Trump’s campaign in 2016. In what became known as the ‘Trump Effect’ (el efecto Trump), derogatory social media posts by Trump often led to a nosedive in market sentiment, exemplified by a weakening of the peso. We can expect this to happen again

AMLOgeddon

In this context, the perception of Mexico will likely take a hit (again). But this does not presage some sort of ‘AMLOgeddon’ scenario whereby the economic (and political) situation in Mexico deteriorates to the extent that the country becomes ‘the next Venezuela’ and/or regarded as a pariah among international investors. Yes, of course, there will be challenges – the business environment/investment climate at this moment in time is not as propitious as it once was – but these are not insuperable.