Mexico’s elite remains sleepwalking in these elections

Six months after Hurricane Otis, Acapulco is on the ground. Its streets are still full of rubble. Buildings once worth millions of dollars are abandoned. And dozens of traffic lights don’t work. This is not only an economic and humanitarian catastrophe, but also a national shame.

But none of this seemed to matter at the sprawling Palacio Mundo Imperial hotel, where Mexico’s top bankers were gathering for their annual summit, six weeks before a critical national election.

Mexico’s elite seems too comfortable with an eventual victory for Claudia Sheinbaum, the protégé of President Andrés Manuel López Obrador. Business leaders see her as more technocratic, less inflammatory, and that she will implement more effective policies; some even expect her to put in place a comprehensive plan to fix state oil company Pemex and its heavy debt load of more than US$105 billion.

And in the unlikely event that his rival Xóchitl Gálvez wins, that would also be good for business given his pro-market bias (I counted 15 rounds of applause during his impassioned presentation to the bankers, compared to three for Sheinbaum). In any case, they are happy to finally say goodbye to AMLO: despite the record profits they made during his mandate, his interventionist style never went down well.

This relative optimism underestimates the political and financial risks ahead for Latin America’s second-largest economy. I will explain:

Sheinbaum has had a double-digit lead in the polls for months. She has AMLO’s full support, unlimited resources, and a campaign based on the idea that she is the natural successor to a popular president (she considers her government the “second floor“from the current”transformation” from the country).

His strategy focuses on avoiding unforced errors, repeating a script that places the State at the center of all great plans, and not providing many details on the most controversial issues. Nor does he have any incentive to fight with Mexico’s business class, as I witnessed in Acapulco: “We are going to have good relations, we need to work together, and where we do not agree on some issues, we always have dialogue to move forward.”Sheinbaum told the bankers.

Promising influential people that everything will be fine is a sure recipe for winning elections. But it does not clear up doubts about how it will address some of Mexico’s most pressing problems, such as Pemex’s finances, insecurity, corruption and the militarization of the State.

There is also the difficult issue of fiscal accounts: after preaching austerity for most of his six-year term, AMLO leaves the country with the largest fiscal deficit since the 1980s. The next Government will have to implement a painful adjustment of almost three points of GDP which will probably paralyze the economy. If Sheinbaum wins, he will have the difficult task of returning finances to a sustainable path. My bet: He will spread the adjustment over years rather than raising taxes or making a sharp budget cut, even if that increases the risk of a debt downgrade.

It is true that Mexico has a solid current account and easy access to international financing. But it also faces the unusual combination of expansionary fiscal policy, slowing growth, high interest rates, a “super weight” which harms exports and persistent inflation that according to analysts would exceed the Bank of Mexico’s goal until at least 2026. The doctor would recommend being very careful with patients like these.

Furthermore, we should not underestimate a possible return of Donald Trump to the presidency of the United States. His anti-Mexico rhetoric already helped him in 2016 and remember that the T-MEC trade agreement is subject to review in two years.

Compared to her predecessor, Sheinbaum is seen by the elite as pragmatic, receptive to ideas and focused on procedures, for example on key issues such as the energy transition and climate change. It could well be so, given her academic background. But she is also an act of faith. Everything will depend on the political circumstances and her leadership capacity, because the reality is that this is an unusual transition. For now, Sheinbaum repeats his boss’s mantras, even the bad ideas, such as electing Supreme Court judges by popular vote.

AMLO’s iron hand has ensured political stability in Mexico during his six-year term, and he surely will not want Sheinbaum to deviate from that path. In fact, AMLO wants to remain very present. Five months before leaving office, he proposes controversial measures, such as dismissing the president of the Supreme Court of Justice of the Nation or the expropriation of the hydrogen plant of a French company. As obsessed as he is with his legacy, he won’t give up power until the last moment.

Mexico needs reforms in several areas, such as education, infrastructure (especially water issues) and security (more than 60% of Mexicans say they feel unsafe in their cities). If Sheinbaum tries to change AMLO’s course, such as resuming necessary private investment in clean energy, will his party follow his orders? Morena, where realists coexist with radicals, is a vertical movement built in the likeness of AMLO: Will the new leader follow the script? Will AMLO keep his promise not to upstage her and stay at her ranch in Chiapas? These issues did not seem to worry the bankers.

Don’t get me wrong. There is no immediate crisis brewing and my optimism about Mexico’s prospects remains strong. The country is close to full employment, AMLO’s social plans have helped sustain domestic demand and the biggest risk for the country – a recession in the United States, its largest trading partner – seems ruled out. And in the end, what country doesn’t have challenges?

But a significant degree of political and economic uncertainty remains. Despite increases in real wages and social spending, AMLO will end his term with just over one percent average annual GDP growth. This is a lower performance than the United States and Brazil, the other regional leaders. The opportunity provided by ‘nearshoring’ is real, but it can also slip through the fingers without effective policies to sustain it, or if the next resident of the White House decides that he wants these companies in the United States.

The International Monetary Fund predicts that Mexico’s growth will be just 1.4% next year. It will be a bitter welcome for whoever wins the elections. Therefore, the next president should do much more to accelerate activity and find a development model that brings Mexicans closer to prosperity. It will require bold decisions and, given fiscal constraints, will also need to involve the private sector.

On the streets of Acapulco you can see evidence of the risk of complacency, both when preparing for a natural disaster and during reconstruction. All the more reason for Mexico’s business leaders not to continue sleepwalking through this political transition, waiting for a president to offer a business-friendly framework. Instead, they should push harder to achieve the planning and details necessary to make it happen.

By Juan Pablo Spinetto