One year later, AMLO still needs investors

Andrés Manuel López Obrador (AMLO) won a landslide victory in Mexico’s presidential elections last year on July 1. Ever since, the popular support that brought him to power has remained high, with approval ratings just under 70%.

Investors, on the other hand, continue to entertain doubts, despite the president’s notable efforts to engage with the private sector.

Coming to power, AMLO has turned out a moderate, not the socialist radical some feared.

He governs the country similar to how he governed Mexico City as mayor (2000-2005) – including a zeal for balanced budgets and daily morning press conferences.

One of his top policy priority is restoring state-owned oil giant Pemex to its former glory, even at a high cost.

The question then becomes: Assuming he keeps his campaign promises of fiscal responsibility, no deficits and no new taxes this year, how will AMLO fund the Pemex rescue, launch social and infrastructure programs, and still balance the budget?

AMLO’s answer so far has been a repetitive and elusive discourse on ending corruption, implementing austerity and closing tax loopholes for big business. But the private sector isn’t sure he can pull it off, much less within the context of a decelerating global economy.

To whit, the central bank’s latest private sector survey, released Monday, showed that 72% of respondents believe it is a “bad moment” to invest in Mexico, up from 62% last month.

For AMLO to balance the budget, he must juggle savings from anti-corruption efforts and austerity, higher tax revenue, social spending including pensions, debt payments, and infrastructure spending.

How has he done so far?

While savings from anti-corruption efforts are difficult to quantify this early, the private sector seems to have given him leeway on the matter. Certainly, AMLO’s expectations of saving 300bn pesos (US$15.7bn) in 2019 seem overly optimistic.

But the finance ministry’s monthly fiscal report, released Monday offers some guidance.

Tax collection, for example, was up 4.7% year-on-year to 1.43tn pesos (US$74.6bn) January-May, while non-oil revenue was up 5.0% to 1.86tn. Oil revenues, however, were off 17.4% January-May to 343bn pesos, and with this, total revenue barely climbed 0.7% to 2.20tn pesos.

To boost tax revenue, his administration has moved away from street-level inspections to focus more on closing loopholes for large firms and international conglomerates, and efforts appear to be paying off. Revenue has also been rising steadily since the 2014 tax reforms.

Budget spending, on the other hand, shrank 5.1% to 2.20tn pesos with a 13.2% drop in administrative spending. Austerity cuts clearly are having an impact.

“Spending cuts have more than compensated for a relative slowdown in income, driving the better-than-estimated result for the period,” wrote Banorte in a note following the release of the data.

“Excluding investments in projects of high economic and social impact – such as those in Pemex and CFE of up to 2% of GDP – the balance showed a 257.6bn-peso surplus. In addition, the primary balance surplus stood at 217.9bn pesos, above the 142.1bn pesos budgeted surplus.”

The bank also highlighted the 73.2bn-peso surplus in the public sector borrowing requirements – which is the broadest measure of the public balance. This is equivalent to 0.3% of GDP and a serious improvement from the 54.4bn-peso deficit during the same period of 2018.

The improvement in the bottom line, however, also impacts the economy. In recent months, programs were canceled, federal entities eliminated, and other budgets cut nearly every day, and formal job creation has fallen heavily through May.

These in combination with major external impacts – including the US-China trade war and the recent US threat of blanket tariffs on Mexico tied to immigration – have fostered the recent flurry of lowered GDP forecasts, with Barclays last week cutting its forecast to 0.5% from 1.2%.

On the other side, AMLO’s social initiatives might have greater spending priority than others, but the president may yet have to pare back or delay programs, including major infrastructure projects.

Also read AMLO prioritizing Oaxaca road projects

However, delays in public spending would only further slow the reactivation of private sector investment and hence broader economic expansion, an unwelcome development as Mexico’s economy already looks to see a strong deceleration in 2019.

COSTLY RESCUE

Ultimately, it could come down to how flexible AMLO can be with the Pemex rescue, and this must address his flagship initiative of a massive refinery in Dos Bocas, Tabasco, capable of refining crude at a capacity of 340,000b/d.

The Pemex campaign got off to a rocky start in January.

AMLO spooked investors with a disastrous roadshow in New York, right after a clumsy reshuffling of Pemex’s management at the start of his term. Investors, furthermore, have largely written off Dos Bocas as a boondoggle saddled with unrealistic cost expectations and an impossible timeframe for construction.

And yet AMLO has only doubled down, making an open-ended commitment in February to revitalize the troubled oil giant with public funds.

Dos Bocas hit a major snag in May, when AMLO declared no winner to a bid to oversee the project, as firms balked on cost and timeline questions. The construction now looks to be overseen by Pemex itself and the energy ministry, drawing concerns over their expertise and ability to do so.

Fitch’s downgrade of Pemex to junk status, with other possible downgrades in the offing, will make revitalizing Pemex more expensive, and AMLO’s commitment to saving the company was a key trigger for Fitch downgrading the sovereign on June 5.

In a rebuke of the downgrades last month, AMLO decried Fitch’s “methodology of the neoliberal period,” adding “I have my own data and elements that show the experts of the ratings agencies were not objective, they were not professional.”

Ostensibly directed at the ratings agency, the comments were a clear play to his voters, and the rhetoric only adds to the perception that he is insensitive to market realities, a view that has kept investors at arm’s length.

Hitting the ground running after last year’s election, the president has made important strides to bridge the gap between his agenda and the private sector, but with fiscal pressures tightening, it will be up to AMLO to win the latter’s trust.