Mexico: A Political Risk Assessment

Here is the final paper for my course in ‘Managing Political Risk’ at Columbia with Ian Bremmer, Preston Keat & Ross Schapp. I enjoyed learning from the best!

Ten takeaways:

1. Enrique Peña Nieto is long odds-on favourite to be elected President on July 1st, the first time PRI will hold the Presidency since losing it in 1997 after 71 years of unbroken rule.

2. Current polling suggests the PRI-PVEM alliance will comfortably secure a Congressional majority, raising the prospect of unified government for the first time since 1997 (NB: this did not subsequently come to pass; November 2012).

3. Unlike at past Presidential elections, no significant political or economic instability is anticipated to ensue, chiefly because Mexico’s macro fundamentals are now far stronger.

4. No major change in internal security policy is expected through 2013. Organized crime will remain a challenge beyond a 5 year time horizon, even in a best case scenario. Colombia provides a model of how economic growth can take off once internal security and organized crime challenges have been overcome.

5. Comprehensive energy reform, including constitutional change that would allow private sector ownership of oil & gas assets, is inevitable in the long term, but unlikely in the short-to-medium term without a sustained collapse in oil prices.

6. No significant policy change is expected with respect to economic openness and bilateral US relations.

7. Retail banking is likely to prove a profitable medium-to-long term play in Mexico, the forthcoming IPO of a partial stake in Santander Mexico providing an interesting short-term entry opportunity.

8. With the world’s fourth largest reserves, Mexico is well placed to profit from the shale gas revolution, but will need comprehensive energy reform in order to seize the opportunity. This is therefore an interesting long-term play for potential investors.

9. A new President could be tempted to adopt a less robust posture vis-à-vis organized crime, thereby alleviating the security situation somewhat. While this may mitigate violence in the short-term, reducing the likelihood of capital flight and improving the investment environment, such a Faustian pact is unlikely to facilitate broader consolidation of the rule of law or long-term economic development.

10. With rapidly rising wages in China, Mexico may soon become a cost competitive next-door alternative for US manufacturers. The coming economic transition in China, not to mention future geopolitical tensions, will pose risks to the prevailing social and political equilibrium there. As Mexico has already come out the other side of economic and political transition, the balance is further tilted in its favour.