Mexico – AMLO Looking Vulnerable

President Andrés Manuel López Obrador, popularly known as AMLO, has had a rough go of it since taking office in December 2018, despite benefiting from a strong popular mandate and the reliable backing of majorities in both chambers of the bicameral Congress. His approach to tackling key problems confronting Mexico—whether the plague of violence created by competition among rival drug cartels, pressure from the US to stem a tide of northern migration, or the financial risks associated with dependence on steadily diminishing oil production—has been incoherent and ineffectual, and he has proven to be no more adept at managing the crisis created by the COVID-19 pandemic.

AMLO delayed launching an emergency plan to tackle the crisis and the administration has stopped short of imposing a complete lockdown on non-essential activities and business operations. The president will be vulnerable to politically damaging second-guessing if the already apparent increase in COVID cases creates pressure to tighten restrictions in the coming weeks, even as the US and Europe move cautiously in the direction of returning to some form of normalcy.

Most surprisingly, AMLO has embraced fiscal austerity at a time when advocates of liberal orthodoxy the world over are running up massive budget deficits as they rely on robust stimulus measures in a bid to limit the economic damage from the pandemic and create a foundation for a rapid and strong recovery. Declaring his refusal to incur additional debt amid a steep economic downturn, AMLO specifically ruled out any bailouts, tax relief, or other assistance for large corporations (with the notable exception of Pemex, the state-owned oil company).

There is not much AMLO or his legislative allies can do at this point to soften what figures to be severe near-term damage to the economy, and there is little evidence that the president has much of idea how Mexico might position itself to make a strong recovery if the global economy rebounds in 2021. That prospect has potentially significant implications for the outcome of the mid-term congressional elections that will be held in mid-2021. Were the governing coalition to lose its claim to majority support in the Congress, the risk of debilitating political dysfunction would increase significantly, and recognition of that danger would likely result in damaging market volatility that would reinforce the structural impediments to reviving an exhausted economy.

Even without the assumption of new debt, the anticipated shrinking of the economy is likely to increase the public debt-to-GDP ratio above 50% for the first time in more than 30 years. The poor outlook for a near-term economic rebound means that external demand is likely to show signs of revival ahead of domestic demand, resulting in faster growth of exports vis-à-vis imports that will have a positive impact on the external balances. However, that assumes the government succeeds in containing the spread of COVID-19, which will be crucial to ensuring the free flow of goods that will enable Mexico to take advantage of the revised free-trade agreement with the US and Canada, which is scheduled to come into force in the second half of 2020.

Since 1979, The PRS Group Inc., has been a global leader in quant-based political and country risk ratings and forecasts. This commentary represents a sneak peek from our upcoming political risk reports. For more information please contact us at (315) 431-0511 and sales@prsgroup.com, or explore a subscription to PRS Online and/or ICRG Online today to receive political risk updates.

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