Earlier this week, Mexico's incoming president spooked investors. Following months of toeing a more moderate line, Andrés Manuel López Obrador shattered market confidence and announced plans to scrap the $13bn project to build a new airport in Mexico City.
The decision came after a fraction of Mexico's population participated in a national referendum where the majority voted to halt construction. Instead of a new airport, citizens endorsed expanding the existing airport, a nearby military one and another in the city of Toluca.
By heeding to the people and upholding what he deemed a “rational and democratic” decision, Mr López Obrador, also known as Amlo, injected quite a bit of volatility into Mexican financial markets. In particular, the $6bn of bonds backing the new airport fell dramatically, due to worries they may not be fully repaid.
Wider markets also undulated. The peso plunged, bond yields rose and stocks sold off. More worryingly, his decision sparked fears that future investments may face a similar fate.
With roughly one month until Mr López Obrador takes office, investors will soon find out if the worst of their fears about the incoming president will be realised. In fact, the reveal may come sooner than many think. Through February, there are a number of events for Mr López Obrador to make his political and financial intentions more clearly known.
First up, his inauguration. (Which vice-president Pence, not Trump as previously floated, is set to attend). On December 1, Mr López Obrador will officially take the reins from sitting president Enrique Peña Nieto. As with all inauguration speeches, it's a president's chance to set the tone of his or her administration. Citizens and investors alike will be closely watching which version of Mr López Obrador rears his head. Will it be the market friendly, pragmatic one, or the nationalist?
Given some of his cabinet and governmental appointments so far, its likely to be a mix of both. Months before he was elected, Mr López Obrador unveiled a cabinet of eight men and eight women, including one moderate-leaning US-trained economist, Carlos Manuel Urzua, for finance minister. The appointment of Jonathan Heath, a University of Pennsylvania alum that previously worked for HSBC, to the board of the central bank has also allayed anxiety that its independence will come under pressure. Heath has already promised to not slavishly conform to the Fed, or any Mexican politician for that matter.
Despite these positive developments, some investors were dismayed when Mr López Obrador tapped Octavio Romero Oropeza as the next chief executive of Pemex, the debt-riddled, state-owned oil company. With no industry experience, the appointment, according to Jorge Mariscal, the Emerging Markets Chief Investment Officer at UBS Wealth Management, is a worrisome sign, especially as the incoming president plans to inject $4bn in fresh capital into the business.
Then, we have the budget. On December 15, we'll find out if Mr López Obrador can achieve the impossible: revamping the county's infrastructure, doubling pensions and increasing farmer subsidies, all while keeping the budget balanced. On the campaign trail, he said these outlays will be financed by eradicating corruption and reducing government salaries. Luckily for Mr López Obrador, he inherits a healthy fiscal balance, per Oxford Economics' Fernando Murillo, so he may have a longer lead here:
Cut to February 14, and we'll also get more clarity on Mr López Obrador's plans for the energy sector, which he promised a $11bn rescue. As a Valentine's Day treat, investors will have the option of opening their wallets to snap up drilling tenders on Pemex soil. This auction was originally supposed to take place this year, but Mexico's oil regulator postponed it until after Mr López Obrador's term starts.
While Kim Catechis a portfolio manager at Legg Mason affiliate Martin Currie, does not believe Mr López Obrador wants to reverse time and nationalise Pemex, he does believe that there is a much higher likelihood that he will freeze, if not roll back, the liberalisation reforms Mr Peña Nieto put in place in 2014.
While the decision on the airport did not play out as many wanted it to, Julio Serrano, the managing director of research and strategy at the Mexico-based Actinver, is not convinced investors should write off Mr López Obrador just yet.
“Yes, it was a tough day after the airport announcement,” says Serrano. “But he knows that he needs good market conditions in order to make good on his campaign promises.”
*This article has been updated to clarify Jonathan Heath's position at the central bank.
Related Links:
AMLO's latest litmus test — FT Alphaville
Nafta la vista, baby — FT Alphaville
The Amlo-wdown — FT Alphaville
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