Six months after being battered by Hurricane Otis, Acapulco is barely recovering. Piles of rubble, derelict buildings once worth millions and dozens of broken traffic lights represent not just an economic and humanitarian catastrophe, but also a national embarrassment.
However, you would not know it from the drone of complacency emanating from the massive Palacio Mundo Imperial resort, where Mexico’s top bankers were meeting for their annual summit six weeks before a critical national election.
Mexico’s elite seems a little too comfortable with an eventual win by favorite Claudia Sheinbaum, the protege of nationalist Mexican President Andres Manuel Lopez Obrador, also known as AMLO. Business leaders see her as a technocratic, less vituperative leader who would implement more effective policies — some even expect her to put in place a comprehensive plan to fix Petroleos Mexicanos (Pemex), the ailing state oil company with more than US$105 billion in total debt.
Illustration: Yusha
In the unlikely case that rival Xochitl Galvez surprises with a win, this view goes, that would also turn out to be a bonus for business given her market-friendly bias (I counted 15 rounds of applause during her passionate presentation to bankers, compared with Sheinbaum’s three). In any case, they are glad they can finally say goodbye to AMLO: Notwithstanding the record profits they enjoyed during his term, his interventionist style proved abrasive.
This relatively sanguine view underestimates the political and financial risks ahead for Latin America’s second-largest economy.
Sheinbaum has enjoyed a two-digit lead in polls for months. She has AMLO’s full support, unlimited resources and a campaign built on the idea that she’s the natural successor of a popular president (she bills her government as the “second floor” of the country’s current “transformation”). Her strategy has focused on avoiding unforced errors, repeating a scripted presentation that puts the state at the center of all her big plans and remaining light on specifics on most controversial issues.
She also has no 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 whenever we do not agree on some issues, we always have dialogue to move forward,” Sheinbaum told the bankers.
Promising an influential audience that everything would be fine is what you need to do to win elections, but it leaves huge question marks over her approach to tackling some of Mexico’s most urgent issues, from Pemex’s unsustainable finances to insecurity, corruption and the militarization of the state.
There is also the thorny issue of fiscal slippage: After preaching austerity for most of his six-year term, AMLO leaves Mexico its biggest budget imbalance since the 1980s. The next government would be forced to put in place a painful fiscal tightening of almost three points of GDP that is likely to stall the economy.
If Sheinbaum wins, she would have to sweat over how to put the finances back on a sustainable path. My guess: She would spread the adjustment over years instead of boosting taxes or making a sharp budget cut right away, even if that increases the risk of a debt rating downgrade.
True, Mexico has a sound current account and ready access to international financing, but the economy faces the unusual combination of an expansionary fiscal policy, slowing growth, ultra-high real interest rates, a super peso that hurts exports and sticky inflation projected to outstrip the central bank’s target until at least 2026. The doctor would prescribe being extremely careful with patients like these.
On top of all that, do not underestimate the possibility that Donald Trump returns to the US presidency and recycles the anti-Mexico rhetoric that helped him so well in 2016 — remember, the US-Mexico-Canada Agreement trade treaty is up for review in two years.
The elite sees Sheinbaum as someone more pragmatic, receptive to ideas and focused on procedure compared with her predecessor, for instance in the key topics of energy transition and climate change. That might well be the case given her academic background — but such thinking amounts to a leap of faith. It would all depend on the political circumstances and her ability to lead, because the reality is that this is an unusual transition. For now, she repeats her boss’s mantras even when they represent bad ideas, such as electing Supreme Court judges by popular vote.
After his iron-fist governing gave Mexico political stability for the past six years, AMLO has set the path ahead for Sheinbaum to follow and expects no major diversions. He wants to remain very much present in it. Even in the middle of the election, five months before leaving government, he is pressing ahead with controversial policies, from impeaching the Supreme Court chief to expropriating the hydrogen plant of a French company. Obsessed as he is with his legacy, he is unlikely to give up power until the last moment.
Mexico needs change in several areas, including education, infrastructure planning (especially for water) and security strategy (over 60 percent of Mexicans feel unsafe in their cities). If Sheinbaum attempts to change course from AMLO’s trajectory, including the needed resumption of private investments in clean energy, would her party follow through Morena, where realists coexist uneasily with radicals, is a vertical movement built by AMLO in his likeness: Will it follow the incoming leader’s new book? Will AMLO stay away at his Chiapas ranch without overshadowing her as promised? None of the bankers seemed to be dwelling on these questions.
Do not get me wrong. No immediate crisis is brewing, and my underlying optimism about Mexico’s prospects endures. Mexico is close to full employment, AMLO’s social plans have helped sustain consumer demand and the truly massive risk for the country — a recession in the US, its largest trading partner — seems off the table, and in the end, what country does not have challenges?
However, a significant degree of political and economic uncertainty lies ahead. Despite increases in real wages and social spending, AMLO is ending his mandate with little more than 1 percent of average annual GDP growth, underperforming the US and Brazil, the other regional leaders. That nearshoring opportunity of supply chains relocation is real, but it can also slip through Mexico’s fingers without effective policies to sustain it — or if the White House’s next occupant decides he wants these companies in the US.
Growth next year is expected to slow to only 1.4 percent according to the IMF, a sour welcome for whoever wins the election. The next president should therefore do much more to speed up activity and find a development model that puts Mexicans closer to prosperity. It would require bold decisions and, given the fiscal constraints, the private sector’s deep engagement.
Anyone walking around Acapulco can see ample evidence of the risks of complacency, both in preparing for a potential disaster and recovering from it. All the more reason for Mexico’s business leaders not to sleepwalk through this political transition, expecting a president to deliver a business-friendly framework instead of pushing harder for the planning and details needed to make it happen.
JP Spinetto is a Bloomberg Opinion columnist covering Latin American business, economic affairs and politics. He was previously Bloomberg News’ managing editor for economics and government in the region. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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