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What Does the New Mexican President's Policy Mean for the US?

What Does the New Mexican President's Policy Mean for the US?
Mexico's President-elect Andres Manuel Lopez Obrador (AMLO) shakes hands with a supporter as he leaves the party's headquarters in Mexico City on July 9, 2018. (Pedro Pardo/AFP/Getty Images)

By Thursday, 12 July 2018 03:42 PM Current | Bio | Archive

After all the campaigning, the polls, the hopes and the fears came the waiting. But ultimately, much less waiting than was expected. At 8 p.m. Lorenzo Cordova, the head of Mexico's national election agency, appeared with the preliminary results. It was an Andrés Manuel López Obrador (AMLO) landslide beyond all predictions, with an estimated 53-55 percent of votes. Considering this was a four-horse race it was a jaw-dropping result.

Almost immediately after, Jose Antonio Meade appeared. The candidate of the incumbent PRI party gave a brief, emotional and dignified speech conceding the election to Obrador. He was soon followed by the left-right coalition candidate Anaya. Up next was the leader of the country´s largest business lobby, Juan Pablo Castañon Castañon, who congratulated AMLO despite campaigning strongly against the man.

Obrador himself was the last to appear. Amid the celebrations were barely disguised reassurances to the financial markets. Oil contracts would be honored. The Banco de Mexico would remain independent. Government spending would be kept under control. The presidency was going to prioritize the poor without penalizing business. "For the good of all, first the poor," Obrador said.

Markets reacted well to the news, the peso made solid gains and the celebration started.

In the week that followed, Obrador came good on his promise to start preparations in earnest, rectifying his infamous 6 a.m. cabinet meeting from his time as mayor of Mexico City. Alfredo Romo, a key member of AMLO's team hinted that the Hacienda Hedge, or the national government's purchase of Wall Street oil futures would continue. The announcement that Carlos Urzua will head up the Finance Department, although widely expected, was welcome news. The Wisconsin-educated man is popular with the markets and is widely seen as a steady hand. This, plus the "conciliatory tone" according to Erik Nelson of Wells Fargo, was a signal to the markets Mexico would continue its structural reform.

As much as Obrador is left-wing he is not blinded by the ideal. Steeped in political education and with an enviable political resume, Obrador gives the impression of a man not tied to strict ideology. Guided by socialist and nationalist leanings, arguably rooted in his humble upbringing, he is likely to adopt a means-justifies-the-end approach.

As his reaction to victory shows, plus his track record as mayor of the largest city in the Americas, he knows how financial markets operate and absorb news. Mexico's national debt is predominantly offshore (in Dollars and Yen) and a weak peso makes balancing the books increasingly hard. Poor growth and irresponsible fiscal management over the last decade saw the peso fall from 12 pesos per $1 to almost 21 pesos as of the end of 2017, and 18 pesos now. In real terms, this has increased debt repayments by 50 percent. AMLO cannot risk rocking the boat, and he knows it.

There are some major differences between the Mexican and U.S. economies that need to be understood in order to appreciate the situation. As much as Obrador's headlines might bring Robin Hood to mind (taking from the rich to give to the poor), it is not really the case. The typical worker earns $370 per month and the federal minimum wage is $4 per day. Any increase in these would be inconsequential internationally but could generate some economic growth at the vital lower end of the Mexican economy. More money means more spending, something missing from the country's 37 million people who survive on less than $5 per day. If this is funded, as AMLO has promised, by cutting the high salaries and lavish spending of those at the top of the government workforce (in other words, draining the swamp), and not via taxes, then this could be a big win with little cost to private business.

Another thing to note is the vastly uneven spread of poverty between the urban and rural areas. The majority of Mexico's poor have rural origins. Many of these migrate to the cities, but a large number move north to the USA. To tackle this division, Obrador intends to move many of the federal agencies out of the capital and into the regions. Decentralization is not an easy task, I witnessed firsthand the difficulties Ireland experienced attempting the same project during the last decade, and it is likely to require much more political energy than is expected here. However, if it does work (even partially) the benefits generated would be well worth the effort.

Both north and south of the border, there is a desire to reduce migration from Mexico to the USA. Higher salaries in Mexico, a broader spread of economic opportunity and an attack on the culture of corruption will be vital in order to achieve this aim. Right now the signs are that AMLO might just be the man to do it.

Liam P. Browne is an economist by education and a financial consultant by trade. He is a specialist in derivatives contracts, currently working in London and splitting his time between there and Mexico City. Liam studied in Newport, Rhode Island, as well as in Ireland and Belgium. He graduated cum laude from The Katholieke Universiteit Leuven in 2011 as a Master of Business Economics. He is a self-professed expert on all matters EU; especially how its workings impact financial markets and economies. Any questions or requests can be sent to @EUderiv on Twitter for an (unaffiliated) answer or discussion. To read more of his reports — Click Here Now.

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As much as Obrador is left-wing he is not blinded by the ideal. Steeped in political education and with an enviable political resume, Obrador gives the impression of a man not tied to strict ideology.
mexico, obrador, trump, national debt
Thursday, 12 July 2018 03:42 PM
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