- Mexico has taken a deep political turn: the left comes to power with broad backing at the polls and in Congress.
- For markets the question is not the result but the actual economic policy applied from December.
- Companies operating there should review their exposure to the peso, to energy and to trade with the United States.
On Sunday 1 July 2018, Andrés Manuel López Obrador, the candidate of the National Regeneration Movement (Morena), won Mexico’s presidential election with more than half of the votes and a lead of more than thirty points over the runner-up, Ricardo Anaya. His coalition also won a broad majority in Congress. He takes office on 1 December.
It is the first time in decades that a left-wing candidate has won the presidency of Latin America’s second-largest economy, and he has done so in the middle of the renegotiation of the trade agreement with the United States and Canada. Many Spanish companies, from banks to energy and telecoms, have an important part of their business in Mexico, which is why the news is followed closely from Barcelona too.
A result with plenty of margin
The 2018 election had an evident element of weariness: corruption, violence and growth that did not reach much of the population. López Obrador, who had already run twice before, promised to fight corruption, reduce the privileges of the political class and put the least well-off first, and his message resonated. A win this broad gives him legitimacy and, in practice, few parliamentary obstacles.
For investors and companies, that political strength has two readings. On one hand, it favours stability and the ability to carry out reforms. On the other, it concentrates decisions in a single project, and during the campaign there was talk of reviewing contracts or projects already awarded, including the capital’s new airport and the opening of the energy sector. Until appointments and the first budgets are known, everything is announcements rather than rules.
The peso and the relationship with the US
The currency is the first thermometer. The Mexican peso had been highly volatile during the campaign and since the election of Donald Trump, mainly because of uncertainty around the North American trade agreement. An unstable exchange rate makes imports more expensive, complicates planning for any subsidiary and changes the euro value of results earned in pesos.
The other factor is the relationship with the United States. Mexico is one of the main US trading partners and much of its export industry depends on that access. Any change in the treaty’s rules, in tariffs or in migration policy affects supply chains and prices. The prudent course is to follow the negotiations before drawing conclusions about margins or investments.
What to review
A company with a subsidiary, customers or suppliers in Mexico can start by mapping its exposure: how much of its revenue and costs is in pesos, which contracts depend on public concessions or licences, and how much room there is to renegotiate terms or prices. It is also worth checking whether currency hedging is adequate and whether credit or political-risk insurance covers the scenarios now considered possible.
Families with investments in Mexican funds or securities, or with assets denominated in pesos, should review how much that part weighs in their overall portfolio and whether it is still consistent with their horizon and risk tolerance. This is general information and not a recommendation: each situation needs its own analysis with your adviser.
The political change is a fact; its economic effects will depend on the decisions taken from December onwards.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
