AMLO 'in driving seat' ahead of Mexican debate

Going into Sunday's first televised debate of Mexico's presidential candidates, leftist leader Andrés Manuel López Obrador (AMLO) of the Morena (national regeneration) party retains a clear lead in the polls.

"AMLO has extended his lead in the opinion polls in recent weeks, largely thanks to a decline in the support for his nearest challenger, Ricardo Anaya [center-right national action party PAN], on the back of corruption allegations. Betting markets put AMLO's chances of victory at almost 70%, up from 50% in March," said research firm Capital Economics in a report Tuesday. "For the time being, AMLO is firmly in the driving seat."

The firm compiled the following timeline of key events in the Mexico election.

While investor fears persist that AMLO, who has been termed by critics as a populist and a ideologue, could upend structural reforms and disrupt investment, holding particularly strong concerns about the construction of Mexico City's new airport, analysts are beginning to adopt a softer, though wary, view of an AMLO win, as reflected in the relative calm of the markets.

Capital Economics noted, "Despite the growing prospect of an AMLO presidency, Mexico's financial markets appear unfazed. Bond yields have fallen by 20-30bp in recent weeks, and the peso has appreciated against the dollar."

"The recent market moves primarily reflect increasing hopes of a favorable Nafta deal being reached. But they may also reflect a growing sense that AMLO's bark might ultimately prove worse than his bite. In a recent letter to [local media outlet] El Financiero, AMLO reiterated that he would respect central bank independence, the fiscal rule, and review energy and construction contracts rather than repeal them."

A Moody's FAQ on key credit-related events in Mexico, released Tuesday, also addressed the election, noting that politics represents a risk factor to the current balance between strengths and weaknesses in Mexico's current credit profile, a balance upon which it based its decision last week to change Mexico's outlook to 'stable' from 'negative.'

WINNING A MANDATE

"Amid widespread discontent with the political establishment, corruption scandals involving government officials, and continued high rates of crime and violence, Mr. Lopez Obrador has gained popularity by presenting himself as the anti-establishment candidate with an agenda focused on fighting corruption, increasing social and public investment spending, and scaling back - or reversing - reforms implemented during the Peña Nieto administration," said Moody's.

"Given the campaign rhetoric, we cannot rule out that the next administration could attempt to change the direction of policy and redefine economic policy priorities. However, elements of the country's macro-fiscal framework (e.g., an independent central bank, fiscal responsibility law) restrict the possibility of a drastic change in policies, while existing financial buffers limit downside credit risks in the event they were to materialize," added Moody's.

Moody's continued, "Strong credit fundamentals and the robust position of government finances following the authorities' fiscal consolidation efforts are important shock absorbers that support the stable outlook. Still, should a new administration implement a shift in policy that jeopardizes improving economic and fiscal trends or undermines economic institutions, Mexico's creditworthiness could materially weaken."

DELAYS AND CANCELATIONS

Dominating headlines ahead of the debate Sunday, AMLO's stated desire to cancel the airport project drew an additional comment from Moody's Tuesday, stating, "Canceling the Mexico City airport project would have negative credit implications for the sector. The opening of the new Mexico City airport would provide Mexico City Airport Trust NAFIN F/80460 (MEXCAT, Baa1 stable) with additional available cash flow for debt service due to added capacity and expected passenger traffic growth."

"The project cancellation, or material delays to its opening, would have credit negative implications not only for MEXCAT but also to the Mexican airport sector more broadly.

"The key long-term challenge for airport companies is capacity constraints that could inhibit growth," says Adrian Garza, a Moody's vice president and senior analyst. "In order to continue servicing the strong demand, many airports will require additional capital investments and debt financing in the next five years."