Global Business

Navigating Business in AMLO’s Mexico

Since December 2018 when Andrés Manuel López Obrador, or AMLO, took office as Mexico’s president, businesses have wondered how the new leader’s campaign promises would translate into policy. As the answer to that question takes shape, learn what challenges and opportunities US businesses could face in Mexico in the coming years.


Several months into his term, Mexican President Andrés Manuel López Obrador (AMLO) holds one of the highest approval ratings in the country’s political history. In contrast to previous administrations, AMLO’s approval rating has drifted higher since he took office. This response likely stems from AMLO positioning himself as a champion for low- and middle-income populations, with plans to boost employment for young people, raise the minimum wage and provide aid to the elderly.

Business sentiment toward AMLO, however, has been more cautious. Business leaders in the country and investors abroad are waiting to see how they can contribute to and benefit from the new administration, and what challenges and opportunities lie in the six years ahead. Some of the key areas of interest include trade, the energy sector, fiscal policy and consumer sentiment.

USMCA Passage to Bolster Trade

One of the main policy challenges in Mexico is on the trade front, particularly the future of the United States-Mexico-Canada Agreement (USMCA). All three countries have to come to an agreement on USMCA, but political gridlock in the US could delay its passage. The Trump administration added a layer of uncertainty to US-Mexico trade relations in May by proposing tariffs on Mexican imports to the US, although they were subsequently suspended in early June following an agreement between the two countries.

In Mexico, AMLO has made it clear since the beginning of his administration that he supports the USMCA. Immediately after winning the election, he appointed a representative of his transition team to work closely with North American Free Trade Agreement (NAFTA) negotiators—a positive sign that he understands Mexico in the context of North American supply chains and the interdependency of the countries involved.

From the time NAFTA was signed in 1994, Mexico has significantly ramped up trade activity. Ever since, exports have risen from 10 percent of the country’s GDP to nearly 40 percent.1 Mexico is now an integral part of US supply chains, and nearly 80 percent of Mexican exports go to the US.2 As such, trade—and the passage of USMCA—remains an important factor in the future of economic opportunity in the country. Although USMCA faces uncertainty in the short term, NAFTA remains in place, providing security and peace of mind for investors.

Pemex’s Stability Key to Energy Sector, Economy

Although Mexico is primarily a manufacturing economy, oil has been an important element as well, representing one-third of the government’s revenues before the 2014 oil shock. However, the national oil company, Pemex, faces heavy tax burdens and significant debt that resulted in Fitch Ratings downgrading its credit rating twice so far in 2019—and there’s concern there could be further downgrades from Moody’s and S&P.

As part of the new administration’s dedication to the energy sector—particularly its goal to strengthen Pemex—AMLO recently announced $7 billion to help the company meet its obligations and bolster its finances.

Although the administration seems likely to do everything in its power to prevent a crisis at Pemex, there’s a risk that further erosion of the company’s credit ratings could force the government to take action for which it’s not yet prepared.

Fiscal Policy Aims for Austerity

AMLO’s administration is also working to prove it can be fiscally responsible, despite the amount of money already committed to Pemex and priority projects such as the Maya Train and subsidies to young people and the elderly. With those commitments in place, other programs are being squeezed—less money is available for the Ministries of Education, Health, Communication and Transportation, and Finance, among others.

The administration seems willing to sacrifice economic growth in the short term to achieve austerity. In the context of ongoing trade negotiations and tariff threats, the Mexican economy is predicted to grow 0.9 percent this year, the slowest annual growth rate since 2013.

Consumer Sentiment Reflects Honeymoon Phase

AMLO campaigned on a promise to improve the living standards of the poor and working classes, which is likely part of the reason the consumer confidence index reached an all-time high in February.

The sudden jump in sentiment reflects the hope that future conditions will materially improve. There’s a belief that the incoming government will provide citizens with opportunities to reach their goal of a better long-term economic situation.

Considerations for Doing Business in Mexico

Despite AMLO’s high approval rating, his administration has had its share of stumbles over the past seven months. He’s struggled with credibility issues following the cancellation of the new Mexico City airport last fall and made hasty decisions to approve or cancel high-impact projects. Additionally, the crowding out of private investment is diminishing investor confidence.

But historically, Mexico’s economy has proven resilient to various shocks, both domestic and foreign. The Mexican economy, which relies heavily on manufacturing production rather than commodities, seems to consistently grow at about 2 percent. This means boom and bust cycles are usually contained—unlike other countries’ economies, Mexico hasn’t faced sharp downturns that cause years-long, profound recessions. In this way, Mexico provides some security for investors who are equipped to navigate the country’s challenges.

Benefit from a bank with longstanding ties and a local presence in Mexico. J.P. Morgan has been doing business in Mexico for more than 125 years.

Sources:
1 Ministry of Economics
2World Economic Forum

 

Chase, JPMorgan and JPMorgan Chase are marketing names for certain businesses of JPMorgan Chase & Co. and its subsidiaries worldwide (collectively, “JPMC”). The material contained herein is intended as general market/economic commentary. To the extent indices have been used in this commentary, please note that it is not possible to invest directly in an index. Opinions expressed herein are those of the author and may differ from those of other J.P. Morgan employees and affiliates. This information in no way constitutes J.P. Morgan research and should not be treated as such. Further, the views expressed herein may differ from that contained in J.P. Morgan research reports. The above summary/prices/quotes/statistics may have been obtained from external sources deemed to be reliable, but we do not guarantee their accuracy or completeness. In no event shall JPMorgan Chase or any of its directors, officers, employees or agents be liable for any use of, for any decision made or action taken in reliance upon, or for any inaccuracies or errors in or omissions from, the information herein.

© 2019 JPMorgan Chase & Co. All rights reserved

Global Business International Trade

Get in Touch and Stay Informed

icon
Loading...