Will Slow Growth Force AMLO to Loosen Mexico’s Purse Strings?

AMLO’s commitment to deliver a primary surplus while not raising taxes or debt reveals a prudent streak at odds with his left-wing nationalist discourse.

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Why you should care

Uncertainty over the president’s policies is causing investors to hold back. Critics say that’s good for Mexico.

In his first year in office, Mexican President Andrés Manuel López Obrador, or AMLO as he is popularly known, has proved a contradiction: a populist who does not like to spend.

His frugal administration lost thousands of seasoned staff because of wage cuts designed to free up cash to plow into social programs. The inexperienced new team has been slow to disburse even the scant funds available. Investors, worried about the direction of policy, have also been restrained. 

As a result, the economy has screeched to a halt: zero growth is expected this year after 2 percent last year. But López Obrador prides himself on his obstinacy and will not abandon higher pensions, grants for unemployed young people or his controversial refinery, airport and train projects. 

They don’t know how to spend, so it’s better that they don’t.

Valeria Moy, México ¿cómo vamos?

That could strain his commitment to maintaining strict fiscal discipline in Latin America’s second-biggest economy. So, will 2020 be the year that Mexico’s Mr. Austerity turns on the spending taps? 

“Abandoning fiscal restraint is not necessarily inevitable if handouts and social programs keep him popular,” says Alonso Cervera, chief economist for Latin America at Credit Suisse.

Indeed, AMLO’s approval ratings remain enviably high — 65 percent, according to Oraculus, a poll of polls — albeit off a peak of 81 percent last February. 

“They don’t know how to spend, so it’s better that they don’t,” says Valeria Moy, head of México ¿Cómo Vamos?, a think tank. She adds that the president’s priorities “won’t provide the structural change this country needs. Sensible infrastructure spending and improving confidence — I don’t see that anywhere.” 

The business sector is bending over backward to be friendly to the government and has pledged to invest in an ambitious infrastructure program that Gabriel Lozano, chief Mexican economist at JPMorgan, says looks “interesting, after a dismal year.” 

But public as well as private investment is needed — and the government has seen a 2.5 percent drop in income tax revenue and a 6.2 percent fall in sales tax collection in the first nine months because of the slowing economy.

“Private investment will remain defensive and public investment will remain subdued because of a lack of revenues and the nature of the projects they are choosing,” says Cervera. 

Even without income constraints, López Obrador’s commitment to deliver a primary surplus while not raising taxes or debt reveals a prudent streak at odds with his left-wing nationalist discourse.

People who have known AMLO for decades say he was so shocked by how financial crises in the 1980s and ’90s hurt Mexicans that he was determined not to repeat history. 

He scathingly refers to the market-driven policies of the past four decades as Mexico’s failed “neoliberal period,” because of rampant corruption and a yawning social divide between the country’s rich north and poor south that he says they spawned.

“I think he will try to maintain fiscal discipline and when that isn’t possible, he can always blame the private sector or rating agencies,” says Lozano. 

The president has accused rating agencies of remaining quiet when Mexico was racking up debt and turning a blind eye to corruption, adding that they were wrong to be critical now that the state was finally addressing problems by pumping money into troubled state oil company Pemex. 

But Pemex is expected to suffer a second downgrade to junk status in the first half as a result of a business plan the market believes is unrealistic, declining output and $100 billlion in debt.

Pemex is heavily reliant on state support and analysts say it needs even more investment than the government has so far made available because of its strained finances. A Pemex downgrade, therefore, could trigger a sovereign downgrade, although Mexico’s coveted investment grade rating is not at risk.

Slower U.S. growth in 2020 will hurt Mexico, which has integrated manufacturing supply chains with its top trading partner, but “Pemex is the weak point,” says Moy. 

AMLO believes that the stability of the peso vindicates his policies. But economists are concerned by weakening midterm growth prospects, fiscal deterioration and a worsening security crisis.

Many have already begun trimming their forecasts for Mexico’s potential growth, and the president will come under increasing pressure to institute potentially unpopular tax reforms that he would rather leave until after midterm elections and a recall referendum in 2021. This could include increased taxes or new ones — something he has pledged not to do in his first three years in office.

The government is expected again to have to dip into a rainy-day fund “and by itself, that’s very bad news — it might be necessary when the U.S. starts growing less,” says Lozano. 

Moy thought the administration would manage to muddle through 2020. But after the government blasted the 2 percent growth rut Mexico has been in for decades as inadequate, “growth next year will be 1.5 percent if things go well for us. It’s ridiculous to argue that is good just because this year was zero,” she says.

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By Jude Webber

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