“May you live in interesting times” is a Chinese curse that seems apt to describe Mexico at its current political juncture. Times are certainly interesting. With the election of Donald Trump in the U.S., much focus in recent months has been outward-looking. Indeed, political risk in the diplomatic sphere is perhaps higher than at any time in living memory.
Domestically, the current administration is on the cusp of its final year in office, and the lame-duck status that goes with it. The pre-campaign to elect a new President in 2018 is well under way, with a very real possibility that Mexico will elect its first ever leftist President. At the same time, recent high-profile incarcerations of former high-level government officials and narco-traffickers has shone a spotlight on corruption and organised crime like never before.
With imminent – and important – state-level domestic elections in June 2017, seen by many as a prelude to the Presidential elections taking place in July 2018, the scope for political and policy change in Mexico over the period to late-2018 is significant. In light of the single term limit on the Mexican Presidency, the incumbent, Enrique Peña Nieto, will give way to his successor on December 1st, 2018. Opinion polls suggest a three-way fight between Peña Nieto’s PRI, the opposition PAN – which held the Presidency from 2000 to 2012 – and Andrés Manuel López Obrador (AMLO), at the head of Morena, the movement he left the PRD – traditionally Mexico’s 3rd party, and for whom AMLO twice contested the Presidency – to form.
While the President is sure to change, a change in the party in control – and therefore the policy outlook – is, as the polls mentioned above suggest, more uncertain. Moreover, the polls may shift once the identity of the PAN and PRI candidates – and their policy platforms – become known following these parties’ respective internal selection processes. Election of a PRI President in 2018 would signal continuity, and little change in the policy trajectory around important themes – such as implementation of the energy reforms and the open stance regarding trade and foreign investment. While a win for the PAN candidate would herald more uncertainty, it is likely that this would be in a positive direction viewed from the point of view of the business environment, whether for domestic or foreign firms. Having said that, the neither of the leading contenders for the PAN nomination have any executive experience.
Having gone close to winning the Presidency in 2006, and running again in 2012, AMLO is in some respects a known quantity in Mexican politics. Many remember his actions in the wake of narrow defeat in 2006, when he refused to accept the results, proclaimed himself the ‘legitimate’ President, and orchestrated street protests in Mexico City for several months. These actions had been perceived as one of the reasons for his failure to challenge more closely in 2012. There are fears – stirred not least by his campaign rhetoric – that his election could herald significant policy change, not least because he would represent Mexico’s first leftist President. Undoubtedly, there is some truth to this. The Presidency would be more hostile to trade and foreign investment than any Mexican President in decades, for example. Sectors at particular risk include energy and infrastructure, both of which have been becoming increasingly dependent on foreign investment and know-how On the other hand, there are some signs that he has moderated his policy stances and rhetoric somewhat since 2006. As well as Mexico’s increasingly robust – if still far from perfect – democratic and legal institutions, another important check on AMLO’s ability to enact policy unilaterally is that his Morena movement – even in coalition with likeminded parties – are highly unlikely to control the Mexican Congress post 2018 (the elections are contemporaneous with the Presidential election), necessitating the building of coalitions and alliances in order to legislate. In fact, this is also true of any putative PRI or PAN Presidency, given that polls suggest a further fracturing of party support, such that neither they alone, nor with their traditional allies, are likely to secure a Congressional majority. This dynamic would be sure to further moderate AMLO’s leftist tendencies, given the likely make-up of Congress is any reasonable scenario, but could also lead to greater risk of policy paralysis irrespective of who wins the Presidency. Finally, it should be remembered that AMLO’s executive experience – as mayor of Mexico City from 2000 to 2006 – was characterized by relatively good governance, policy innovation and moderate policies.
Electoral politics aside, the homicide rate linked to organised crime, has been on the rise again in certain regions of the country, partly due to struggles for control and territory both within and between Mexico’s drug cartels in the wake of the high-profile capture of leading players in organized crime. Notable among these was ‘El Chapo’ Guzmán, head of the Sinaloa cartel, who was extradited to the U.S. in the final days of President Obama’s Presidency. This can translate into higher security and operational costs for firms operating in the effected regions, even where foreign investments are considered to be primary targets for organized crime syndicates. A resurgence in organized and violent crime, coupled with high-profile cases of fraud and corruption in government, may feed into a heightened sense of social mistrust in the country’s executive, legislative and judicial institutions. This dynamic could manifest itself over the coming 18 months in low turnout in elections, increased support for candidates perceived to be ‘anti-system’ (such as AMLO, or independent candidates), or a spike in protest and civil unrest such as that seen in January 2017 following the government’s increases in gasoline prices. All of these could give rise to increased policy uncertainty, as well as more direct threats to the human and physical resources of firms operating in Mexico.
External political risks arise primarily from the nascent administration of President Obama’s successor, Donald J. Trump, who came to power on the back of strong rhetoric and campaign promises relating to Mexico. These pledges included inter alia renegotiation of NAFTA, building a border wall, and taxing remittances, the latter being one of Mexico’s most important sources of foreign currency (as well as tourism and oil exports). Of these three areas, renegotiation of NAFTA is not only the most likely to happen – with the highest possible impact – but it is also the one for which President Trump has a freer hand to act unilaterally (i.e. without recourse to the U.S. Congress for the appropriation of funds etc.). Construction of the border wall appears to remain a priority of the Trump administration, although he has not yet been able to secure more than nominal funding – through minor re-appropriations – from Congress. In any case, the border wall is largely symbolic, and unlikely to cause a great deal of substantial change that would impact on businesses operating in Mexico. Similarly, policy changes affecting the flow of remittances could have a big impact on the macro-economy (notably domestic consumption and the current account), but pose little in the way of broad-based political risk for businesses operating in the country. However, any drastic renegotiation – or even unilateral abrogation by the U.S. in a worst case scenario – could put at risk vast swathes of the Mexican manufacturing sector, particularly those firms operating cross-border supply chains. President Trump has signaled his intention to proceed with renegotiation, and has been reported to be readying an executive order which would put Canada and Mexico on notice of the U.S. intention to withdraw from NAFTA within six months, as is required under the Treaty. The President would not need to resort to Congress to issues any such order (although Congressional support would be required to approve any renegotiations of the Treaty).
Until greater clarity as to the Trump administration’s priorities become apparent, these bilateral issues – and NAFTA renegotiation in particular – are likely to continue to feature heavily in the Mexican government’s diplomatic and communications strategy, as well as in the early and ongoing skirmishes ahead of the 2018 Presidential election.
vicduggan 