At the presidential elections in Mexico, left-leaning Andrés Manuel López Obrador, the former mayor of Mexico City, has gained office with a large majority and will now be having a decisive say in the future fortunes of the country for six years starting on 1st December. A new parliament was elected at the same time for a three-year term, and it would appear that Obrador’s “Morena“ movement, together with its coalition partners, has likewise achieved a majority. What does this dual victory mean for Mexico’s political and economic prospects?
Domestic and social issues were on the front burner during the electoral campaign. Obrador is intent on waging war against corruption in the country, on breaking the stranglehold of the drug cartels, and on engineering a distinct improvement in the standard of living of lower income groups. To this end, he is determined to fight for higher wages and pensions and to link up the south of Mexico, which is where poverty is concentrated, with the remainder of the country with the help of infrastructure projects. By contrast, the trade dispute with the USA and the negotiations over NAFTA were hardly subjects of controversy during the run-up to the election. It is Obrador’s objective to swiftly resume talks with the USA and Canada, and it would seem that he is prepared to make compromises on this score. The new president, who is adopting a conciliatory tone towards US President Trump, evidently believes that a constructive solution here makes more sense than a standoff which may lead to an escalation in the tariff spat. There is evidence that Obrador is also hoping that the pressure being brought to bear by US investors in Mexico will act as a beneficial lever because the latter are urging the White House to back away from its maximalist demands. Obrador finds it quite easy to live with the idea of shifting the share in GDP accounted for by pure contract processing, a strategy pursued by many US companies in northern Mexico, in favour of more domestic value-added. The reasoning here is that such a shift would entail higher wages and incomes in the export sector – as well as a higher volume of imports from the USA.
The incoming president has gone on record as saying that he has no desire to jeopardise the current decidedly stable macroeconomic framework involving comparatively low government-budget deficits of below two percent and a recent trend towards lower inflation (May’s CPI reading – +4.5 percent – was the lowest recorded since December 2016). Obrador professes that he will respect the central bank’s independence. He has also vowed to leave the privatisations in the energy sector largely in place.
This inevitably invites the question as to how he is intending to finance his social-policy agenda. The higher salaries which he is planning to push through for lower-ranking public-sector workers and employees at state-owned enterprises can scarcely materialise without higher budgetary expenditure and thus without a threat of mounting deficits. Pledges to make savings elsewhere in the budget or to tap new sources of government revenue are pretty noncommittal commitments until they are actually put into practice. Can Obrador realise his agenda without tax increases? It would not be sufficient to curtail the privileges and emoluments of the higher echelons of the civil service, including docking (or even “cutting in half“) his own salary. This was presumably more an instance of campaign-trail rhetoric. Obrador has held out the prospect of loans from China to fund his infrastructure projects, but this certainly should provoke controversies. Nor will the new president presumably be in a position to capitalise in advance on the positive economic effects that he is hoping will derive from the war on corruption and the drug barons because it is not yet clear whether his endeavours on these difficult fronts will be crowned with success at all.
The election result in Mexico is a vote of no confidence in the country’s conservative élite, from whose ranks outgoing state president Pena Nieto comes. The Mexican electorate has called for an unambiguous new beginning. In a country marked by many conspicuous social ills as well as by widespread poverty, Obrador’s prestige as a politician who has, in the past, quite openly called on his fellow countrymen to engage in acts of civil disobedience undoubtedly helped him to clinch victory. But he does not have a panacea enabling him to sort out the country’s problems at the drop of a hat. We remain correspondingly cautious with regard to our economic-growth projections for Mexico, and only see GDP expanding by a shade less than two percent both this year and next.