Mexico’s Balancing Act
Latin America’s second largest economy faces its most important political change in 35 years. Whether for good or bad is still to be seen, but it will depend on the new government’s ability to find the balance between ending crony capitalism and maintaining an investment friendly status.
Andrés Manuel Lopez Obrador (AMLO) will soon become the most legitimate president in the history of Mexico after winning the presidential election by more than doubling the runner up’s votes. Although AMLO ran with an anti-establishment agenda, he moderated his rhetoric in comparison to the previous occasions he ran for president in 2006 and 2012. This strategy became bullet-proof against his fiercest critics, who have compared him to Venezuela’s late Hugo Chavez for years, and it also demonstrated Mr. Obrador’s political expertise is indisputable. Nevertheless, his ability to successfully guide the fifteenth largest economy in the world remains an unknown.
While Mr. Obrador is not president yet (he will take office on December 1st), he made his first controversial decision in late October when he announced the cancellation of Mexico’s new Norman Foster-designed $13 billion airport. The project is supported by dozens of technical studies and a construction progress of more than thirty percent. AMLO backed his decision with the results of a quasi-unconstitutional referendum, organized by his own party in less than a month and with a participation of less than two percent of registered voters. Several pundits argue that AMLO held the referendum to send a strong signal of who’s in charge to financial markets and businessmen who lobbied for keeping the airport.
AMLO’s quick decision to cancel the airport in face of these interests is based on his interpretation of Mexican history. In the past, Mexico’s President Elect has declared that just as Benito Juarez (his personal hero in Mexican history) separated religion from politics, he’ll separate political power from economic power. To make this point clear, AMLO tweeted a picture of himself next to a book titled “Who’s In Charge Here?” just one day after confirming the cancellation of the airport. AMLO is right to advocate the separation of political from economic power in Mexico, a country that ranks sixth in The Economist’s crony capitalism index.
But is cancelling a much-needed infrastructure project the best way to achieve this separation? Is a demonstration of power needed when nobody doubts he’ll be the most powerful Mexican president in at least thirty years? This decision seems ideologically charged, a striking contrast to the pragmatic approach he showed during his term as the mayor of Mexico City.
While AMLO has no doubt showed considerable success on the political front, he must also remember that the rules of the global economy are different from those of politics. Markets play by their own rules, and they reacted negatively after the referendum’s result indicated that the airport located in Texcoco would be cancelled. The Mexican peso lost five percent against the U.S. dollar, the domestic stock market fell four percent and Mexican bond yields, an indicator of a country’s market risk, increased by one percent. Mexicans should not be surprised if financial instability (rating downgrades, a steep depreciation of the Mexican peso and increases in interest rates) follows if similar decisions become a norm.
To be fair, some critics are disproportionate when they mention the referendum opened the door to AMLO’s reelection six years from now, something forbidden in the Constitution and a taboo in a Mexican society haunted by its authoritarian past. In fact, financial markets may have started to forget the airport episode since they partially reversed the referendum-related losses after his first-class economic team announced a balanced budget for 2019. These mixed reactions portray how difficult Mr. Obrador’s mission is.
The challenge ahead involves a delicate balancing act, where it’s imperative to distinguish between fighting crony capitalism and affecting financial stability. Even if the latter is not AMLO’s priority, a simple review of twentieth century Mexican economic history is a reminder of the importance of keeping stable financial markets for people’s welfare, especially for the poorest. Focusing on strengthening the rule of law, instead of demonstrating personal authority, may hold the key to succeed in his long sought power separation.