Uncertainty, Tepid Optimism Mark AMLO-Private Sector PartnershipWed, 05/08/2019 - 17:32
For most of its modern history, Mexico has been among the steadiest countries in the Latin American region. Since its last economic crisis in 1994, the country has become a model of economic stability and since 2000, smooth political transitions have become the rule. Despite changes in the governing party, the country’s economic ideology remained more or less the same. However, the election of President Andrés Manuel López Obrador, who ran on an electoral platform of anticorruption and reversing iconic projects such as NAIM and Enrique Peña Nieto’s structural reforms, generated uncertainty among investors and business leaders. For most of his electoral campaign, the private sector did not see eye to eye with President López Obrador but after his win on July 1, 2018, with 53.2 percent of the vote, both agreed to move forward and work together toward the country’s development.
“The 2018 presidential elections illustrated the country’s strong desire for political change,” says Raúl MartínezOstos, Chairman of the Board and Director General of Grupo Financiero Barclays México. “Policy continuity has been a hallmark of past presidential changes, particularly in the economic and financial spheres. This is no longer the case.” As part of the promised change, President López Obrador has built a strategy that at its center plans to battle corruption and favor economic growth and austerity, all with a social focus. A few days after his victory, AMLO declared to the media that the country was bound to experience 4 percent annual GDP growth during his administration. He suggested that the country’s 2 percent average growth during Enrique Peña Nieto’s administration created poverty, insecurity, violence and migration. For the past eight years, the country has averaged 2.98 percent yearly growth, which is in line with the global average. According to data from the World Bank, between 2010 and 2017, global GDP grew an average 2.96 percent.
AMLO’s forecasts were challenged by analysts from the private and public sector. According to Banxico’s February 2019 Survey of Economic Growth Expectations from Private Sector Specialists, the country’s GDP is expected to grow 1.8 percent in 2019 and 1.91 percent in 2020. The starkest contrast between the government’s estimates and private-sector forecasts came from Bank of America, which lowered its growth expectations from 2 percent to 1 percent. Yet, President López Obrador vowed that during his first year in office, the country would experience a 2 percent increase in GDP.
Economic growth never comes easy, however, especially in the first year of a new administration. In 2006, when Felipe Calderón won the presidential elections, the country experienced 4.5 percent GDP growth. However, during Calderón’s first year in power, the country underwent an economic deceleration and grew 2.3 percent. The same happened in 2012 when Enrique Peña Nieto won the presidency. In 2012, the country’s economy expanded 3.6 percent, while in 2013 the economy’s expansion equaled 1.4 percent. Martínez-Ostos says this is completely normal. “We are aware that in terms of economic growth, the first year of López Obrador’s administration will be difficult and the country will experience deceleration. This will be the result of 2018’s uncertainty and changes in how the country operates. However, this is just part of the adjustment.”
Government transitions also generate a significant dose of uncertainty among investors and the period between the Peña Nieto and AMLO administrations was no different. Despite promises from the incoming government that contracts would be respected and macroeconomic stability would be preserved at all costs, markets and investors remained wary. Nevertheless, the presentation of the economic package for AMLO’s first year in office convinced markets that even if the government enforced different policies, macroeconomic stability would be maintained. “We have to understand that there is and there will be uncertainty, so we must find a way to work with it and clarify as much as possible. The government’s economic program, at least in its first year, is going in the right direction, which has had a calming effect. The landscape will gradually clear. The federal administration is thoroughly reviewing the state of the country,” says Martínez-Ostos.
Maintaining fiscal discipline has been key for the country in past years and has been the backbone of Mexico’s macroeconomic stability. “We need to gauge the price paid for Mexico’s economic stability. We need to evaluate all elements that are a consequence of the financial crises that Mexico suffered in the 1980s and 1990s. The first thing that must be done is to preserve the country’s macroeconomic stability and its capacity to absorb external shocks,” says Guillermo Ortiz, Partner and Board Member of BTG Pactual and former Minister of Finance during Ernesto Zedillo’s administration. The fall in oil prices is an example. The country was able to absorb this development from a fiscal point of view thanks to the exchange rate. “Mexico has become a more resilient economy and we must properly recognize the elements that have fostered this resilience,” says Ortiz.
AMLO’s promise to bolster the population’s quality of life and purchasing power also led him to increase by decree minimum salaries when he became president. Nationwide, the minimum salary increased by 16 percent and in the northern border, salaries increased 100 percent. Although the discussion surrounding minimum wage in the country is long overdue, experts agree that an increase by decree was not the answer. “Salaries must increase based on collective negotiations and this must respond to a productivity element,” says Oscar de la Vega, Managing Partner at De la Vega & Martínez Rojas. Moreover, an increase by decree can have significant negative consequences in productivity costs and the country’s inflation rate. “Given the conditions established in collective contracts, an increase in minimum wages represents an increase in the entire payroll of these companies, generating a significant cost issue,” says de la Vega.
Above all the promises the government made, the fight against corruption has taken a central role in AMLO’s articulation of his political administration. The implementation of the National Anticorruption System has been a pending issue since the Peña Nieto administration, which is why the entire business community has closed ranks to ask President López Obrador for a speedy implementation. “Corruption costs us at least 1 percent of the country’s GDP. However, there are studies that put this cost between 1 and 10 percent of the national GDP,” says Juan Pablo Castañón, former President of the Mexican Business Council (CCE). “As this was a key topic for President López Obrador, we would like to see the rapid implementation of the National Anticorruption System and specific measures from the federal government to address this situation.”
OVERSPENDING AND CORRUPTION AMLO’s
campaign and the first months of his term in office have been marked by a fight against corruption and the implementation of austerity measures that will have longlasting effects. AMLO terminated ProMéxico, the government agency created in 2007 to oversee the country’s international promotion as an investment destination. Although the decision was heavily criticized by the private sector, AMLO split ProMéxico’s functions between the Ministry of Economy and the Ministry of Foreign Affairs. “Economic promotion is important to the federal government and the Ministry of Economy. This will not change now that ProMéxico no longer exists. Our goal is to take the best practices developed by that organization and others and apply them to continue stimulating economic development,” says Gilberto García, the newly appointed Director General of Direct Foreign Investment at the Ministry of Economy.
According to García, the FDI strategy of past years was not as successful as it could have been. “FDI has remained stagnant for the past few years, with a few peaks caused by acquisitions of local companies, such as Banamex or Grupo Modelo,” he says. “Mexico captured about 1.8 percent of the global FDI in 2007 and in 2018 the country captured 1.3 percent. There is a myth that previous activities to attract FDI led to continuous growth of investment in the country but the data proves otherwise.” García says that the current administration will enforce a different strategy. “In previous years, there was only a vague definition of the strategic areas and products that should be a priority in investment and trade promotion, which led to poor use of resources and results. Now the parameters will be very clear. We will use data mining to accurately determine Mexico’s strategic products and sectors and to identify how we can better intervene to promote growth. We will analyze each region to evaluate their capability to produce added value products, which will in turn generate better jobs with better salaries for our population. Our strategy will also take into account an analysis of the global supply chains in which Mexico participates.”
ProMéxico was not the only promotion agency that disappeared. The Mexican Tourism Promotion Board (CPTM) suffered the same fate and elicited a significant number of complaints from the private sector. However, AMLO has stated that the money used for the promotion of the country will instead be destined for the construction of one of his administration’s flagship projects: the Tren Maya, or Mayan Train. Still, the private sector argues that tourism promotion should not be taken lightly and that the country cannot do without it. “We have been working for almost 25 years to position Mexico as a tourism destination and it often takes times to see the tangible result of these promotional efforts, sometimes years. If the new administration wants to build the Mayan Train, the tourism sector will welcome it but the government will need to find new budgetary sources to pay for it, rather than use the money used by CPTM for promotional purposes,” says Erika García, CEO of Vacacionante and Vacations with a Cause Foundation.
Although the federal administration has argued that the Mayan Train itself will be a promotional tool and visitor magnet, compensating for the lack of tourism promotion, representatives of the private sector argue that CPTM's disappearance also terminates a successful cooperation model between the public and private sectors. “CPTM’s promotional mechanism has been internationally recognized and even replicated. CPTM does not work alone and decides how and where to spend the money jointly with the trusts that have been set up by different destinations,” says García.
UNDOING PEÑA NIETO’S LEGACY
Most of AMLO’s efforts during the transition period and his first months in office targeted Peña Nieto’s accomplishments. NAIM’s cancellation was among his most controversial decisions and sent the markets and international investors scrambling. “Actions such as the decision to cancel NAIM, which is politically motivated and not justified by technical reasons, generate distress that not only impacts macroeconomic indicators such as interest rates but also generate a loss in competitiveness,” says Castañón.
Most analysts agree that the popular consultation carried out to cancel NAIM was not optimal but they also agree that the country will survive the project’s cancellation. “It is important to remember that an investment project, regardless of how important it is for the country, should not define Mexico’s risk,” says Raymundo E. Enríquez, National Managing Partner of Baker McKenzie. “The airport consultation was not optimally conducted and as a consequence, it generated a great deal of doubt. But in the end, Mexico is more than just one project and I think the new government will comply with all its obligations and will honor all the contracts that were awarded. We need to put matters in the right perspective.” Despite the backlash the cancellation generated among business leaders, AMLO’s administration has decided to move forward with the construction of the Santa Lucía Airport. The government assured the general population this was the better option to improve Mexico’s infrastructure and air connectivity, yet technical, environmental and affordability studies are still due.
Similar to NAIM, canceling or changing the Energy Reform has been a constant in AMLO’s agenda that has also generated doubt among investors. Still, many believe the government must be allowed to review the contracts and AMLO has assured on several occasions that during his first three years in power, the constitution will not be altered. “Regarding the Energy Reform, the administration is analyzing the conditions under which contracts were signed. It wants to maintain good practices and correct those elements that could be done better. This is not a seamless process but we also need to give the administration the benefit of the doubt. Clearly, some investors are nervous, which is understandable as this is unprecedented,” says Martínez-Ostos.
US, MEXICO AND CANADA
One of the last tasks Peña Nieto’s administration undertook was the renegotiation of NAFTA. Though slandered by US President Donald Trump, María Fernanda Garza, Chair of ICC Mexico, says the treaty remains an example of a successful free-trade agreement. “NAFTA is a perfect example of a positive commercial agreement. Moreover, it anticipated the moment we are living right now, in which countries are coming together in blocs to compete effectively, such as the European Union bloc. North America is already an integrated region; production chains are so articulated that even without the treaty, it would have been impossible to disentangle the economic relationship between Mexico, Canada and the US.”
After over a year of negotiations, North American mandataries announced they had achieved a successful renegotiation and presented the USMCA treaty. The agreement gave relief to national and international investors, although for Mexico it was more of a wake-up call. “It is undeniable that Mexico’s interaction with the world will have to change. The renegotiation of NAFTA, now known as USMCA, was a wake-up call for Mexico and for everyone in the private sector to diversify contacts and to lessen our focus on the US. That is the main challenge: to diversify our market and our sources of investment,” says Enríquez. Despite critics, both the former and current federal administrations believe that USMCA offers competitive advantages for the Mexican industry, particularly for the automotive sector, which was severely attacked by President Trump. “The changes agreed in rules of origin will boost a greater degree of integration for this industry in North America. An increase in the regionalcontent value (VCR) from 62.5 percent to 75 percent in light vehicles reinforces and consolidates production chains further and promotes greater use of inputs sourced in North America, providing greater opportunities for Mexican suppliers,” says Graciela Márquez, Minister of Economy