Will Mexico’s Andres Manuel Lopez Obrador, who in December assumes the presidency of Latin America’s second-largest economy, become a new Hugo Chavez (the man who ruined Venezuela’s once-prosperous economy) or a new Luiz Inacio Lula da Silva (the leftist firebrand who in the end implemented relatively pragmatic economic policies and presided over Brazil’s best economic performance in 25 years)?
What is certain so far is that Mexico is in for more uncertainty than it has seen in a while. Although Lopez Obrador (popularly known as AMLO) was seen as a pragmatic mayor of capital Mexico City in 2000 to 2005, he has scared investors with his threats against Mexico’s historic energy liberalization and construction of the new, $13 billion Mexico City international airport.
While his anti-corruption pledge wins widespread praise – and was likely a key factor behind his resounding election victory -- his other policies less so.
Some observers are taking comfort in that AMLO’s ambitious plans to boost social spending will depend on making the economy grow, forcing him to follow traditional pro-growth economic policies.
“In order for many of AMLO promises, he needs money -- for example subsidies for younger people, to overcome extreme poverty,” says Juan Francisco Torres Landa, office managing partner for Mexico City at Hogan Lovells. “That’s all good, but you need the economy to grow, you need activities to be fluid.”
However, investors are deeply concerned that AMLO will roll back Mexico’s recent energy liberalization.
Outgoing president Enrique Peña Nieto opened up the energy sector by ending the monopoly state oil giant Pemex had held since the oil sector was nationalized in 1938 by then-president Lazaro Cardenas from the same Institutional Revolutionary Party (PRI). He also allowed competition in the distribution of gasoline, leading to a rush in foreign oil companies operating in upstream and downstream business.
But some observers like Torres Landa believe AMLO will leave the core of the reform in place.
“Everything indicates that substance of the reform will not be modified,” he says. “At its core, the substance, the architecture, the design is embedded in the constitution. Amending that is not impossible, but difficult without a big political cost. They will not mess up the reform as such. The commitment is to wait a couple of years.”
The AMLO team’s concern is that some of the oil awards were tainted by corruption.
“Our own independent research [shows that] it’s not fairly easy to contemplate that actually any of the bidding procedures were tainted with corruption,” Torres Landa says.
Any suggestion that contracts are being unfairly revoked will be met with deep concern by investors, and not only those in the energy sector, points out Duncan Wood, Director of the Mexico Institute at the Wilson Center. “As AMLO is determined to avoid financial volatility, he must step carefully on this front,” he says (See AMLO & Mexico’s New Energy Model).