AMLO tries to make amends
August 2, 2018 |
President-elect AMLO may have alarmed investors on the campaign trail, but now his economic team is promising to pursue policies that put the market at ease
The crowd in Mexico City’s central Zócalo square had swelled to tens of thousands by the time Andrés Manuel López Obrador approached in a white Suburban, the passenger window rolled down and a carefree hand extended to support- ers. “Mexico! Mexico!” the crowd chanted, interspersed with the lilting chorus of the folk song Cielito lindo.
It was the moment that AMLO had been waiting for after two failed attempts to become president. He had finally won the top office. He crisscrossed the country for months in a tireless grassroots campaign and then cruised to an easy victory, propelled by promises to eradicate government corruption and reduce stubborn poverty and crime.
“I won’t fail you,” he assured the roaring crowd.
Behind the scenes, AMLO’s economic team readied assurances of their own. They summoned investors and analysts to dial in to a conference call the morning after the election in an effort to soothe financial markets. AMLO had openly sparred just weeks earlier with top Mexican business leaders, labelling them part of a “mafia of power” that has conspired against him.
The July 2 conference call was jampacked, recounts Gerardo Esquivel, the Harvard-edu- cated economist who cohosted the call with the future finance minister, Carlos Urzúa, and the World Bank official Arturo Herrera. The intention was clear: inform investors and assuage fears. Urzúa floated the goal to increase infrastructure investment by around 1% of GDP and social spending by 0.7% of GDP.
“We will continue working intensely in this five-month transition period,” Esquivel says.
Previous transfers of power in Mexico have led to slow disbursements of federal funds after a new president takes office in December. There is a learning curve as senior staff is replaced.
Private sector lending and investment dries up due to market uncertainty. But AMLO’s team means to avoid such a lag.
“We want to arrive in government with a much clearer idea so that we don’t have the delays in implementation that normally occur,” Esquivel says.
Banorte economists said the conference call was “reassuring.” The bank described AMLO’s economic advisors as experienced, especially when it comes to crafting budgets.
Holding the center
The call was part of a months-long roadshow that began in December, touching down in New York and Washington DC, as top AMLO advisors, including Esquivel, met with more than 450 investors. The message was that AMLO’s administration will adhere to fiscal discipline by either maintaining or lowering the deficit, despite an ambitious social spending program. AMLO’s govern- ment will also respect the autonomy of the central bank and stick with a free-floating currency, the advisors said.
Rather than taking a hard left, the AMLO team has emerged as centrist and pragmat- ic. And as they go deeper into details, the financial community likes what it hears.
“We all think the message has been that they are going to manage public finances well,” says Gabriela Siller, head of economic analysis at Banco Base in Monterrey. The details that emerged the week after the election have been enormously helpful for analysts trying to make better sense of potential spending and cuts, she says, although doubts remain on AMLO’s energy policy.
“We have cleared up doubts, and this has inspired a lot of confidence,” AMLO’s chief of staff, Alfonso Romo, told LatinFinance the Saturday after the election.
Prominent Mexican businessmen, several of whom openly opposed AMLO during the campaign, have sought to make amends. Mining and railroad magnate Germán Larrea published an open letter in Mexican newspapers wishing AMLO “the greatest success” after having urged employees to vote against him.
Mexico’s richest man, Carlos Slim, sent a handwritten letter to the president-elect, AMLO said. Slim held a rare press conference in April to lobby on behalf of the $13 billion Mexico City airport project that AMLO had threatened to halt. “To suspend the project is to suspend the country’s economic growth,” Slim told reporters. A Slim-owned construction firm, CICSA, is working on the airport, while his financial group Inbursa holds more than one-third of the 30 billion pesos ($1.58 billion) in notes issued in March to help finance the project. Also, one of the billionaire’s sons-in-law is a lead architect of the airport.
Investors wonder how AMLO plans to come up with the funds to finance his ambitious social programs. A cornerstone of the president-elect’s economic plan involves cutting government fat and redirecting that money to social security payments for the elderly and education and training for the young. Those two efforts combined would cost $65 billion over the course of AMLO’s six-year term. There are 6 million young Mexicans who are not studying or working, which AMLO views as a waste of talent and a cauldron for criminal behavior.
“We will have to come up with this funding ... even if we are left without a shirt on our backs,” AMLO said the Wednesday after the election.
His economic team feels it can get $25 billion from spending cuts. The administration will eliminate some government jobs and programs. It will stamp out excesses, consolidate purchases across government agencies and stem corruption. Funding for more than 1,000 social programs will be funneled into the two main campaign promises: social security payments and youth programs.
Investors are skeptical. Spending cuts, after all, are standard political rhetoric.
“The numbers have never really added up in terms of being fiscally responsible and cutting spending by lowering salaries and doing it nickel and dime, and then ramping up social programs significantly,” says Jim Barrineau, co-head of emerging markets debt and a portfolio manager at Schroders.
Schroders took a bearish stance on Mexican assets heading into the election, holding on to some corporate debt while shorting the peso.
Along with winning the presidency with 53% of the vote, AMLO’s political coalition also secured a majority in Congress. Inves- tors fear the large mandate may embolden AMLO to pursue social programs even at the expense of fiscal orthodoxy.
Mexican business leaders emphasized the need for checks on power at a meeting with AMLO the Wednesday after the election. Both sides struck a more cordial tone than in the past. “Nothing will be imposed,” AMLO assured the business leaders. “We will argue. We will convince.”
Later AMLO reflected that the business community has been respectful, recognizing the will of the people who voted for him.
Juan Pablo Castañón, president of the Consejo Coordinador Empresarial business chamber, called the meeting “constructive,” with business leaders committing to bring more young Mexicans into the workforce through apprenticeships and other training programs.
Gustavo de Hoyos, president of the Coparmex business chamber, struck a more confrontational tone. “There isn’t, nor will there be, a honeymoon” with AMLO, he said on Twitter.
“The business people that I’ve talked to are guardedly optimistic,” says Mike Fitzgerald, head of the Latin America law practice group at Paul Hastings.
Fitzgerald helped structure green bonds that raised $2 billion in September 2016 for Mexico City’s new airport. AMLO advisors backpedaled in early July on threats to cancel the airport project outright. His team is now mulling privatization, which could result in default for the bonds sold to finance the airport. Other options on the table include moving the project to an alternate site, and thus writing off all the construction costs accumulated so far, or letting the current plan move ahead.
Another sensitive topic is oil and gas contracts. The AMLO team has vowed to extensively review those contracts already awarded to guarantee that they were executed above board, without any exchange of favors or illicit payments to government officials. “It’s better to look through these contracts than to sanction corruption and pretend it never happened,” Esquivel says.
IPD Latin America analyst John Padilla points to lingering questions on energy plans. AMLO’s pledge to lower gasoline prices could be accomplished largely by cutting sales taxes at the pump. But then the government will need to replace that revenue amid falling oil output. The goal of reducing dependence on imported fuel implies building refineries or improving existing ones, both of which require long lead times. Meanwhile, a litany of energy investments is in the works, from transmission line auctions to bid rounds for exploration and production contracts.
“Let’s see how much comfort investors take in what has been revealed so far and whether they are willing to invest major money at this stage,” Padilla says. LF