Campaign buttons are displayed for sale during a rally with Andres Manuel Lopez Obrador, presidential candidate of the National Regeneration Movement Party (MORENA), in Tijuana, Mexico. (Photographer: Cesar Rodriguez/Bloomberg)

Citigroup Warns Mexico of Deficit, Price Surges if Obrador Wins

(Bloomberg) -- Mexico’s peso would swoon as its deficit balloons under Andres Manuel Lopez Obrador, the presidential candidate who’s leading in polls by double digits, Citigroup Inc. warned in a note to clients.

The economic platform of the front-runner in the July 1 elections would cut 0.7 percentage points from projected economic growth and raise inflation estimates by 23 percent, wrote Sergio Luna, chief economist for Citibanamex, the bank’s Mexico unit. The widening fiscal deficit would impact Mexico’s credit rating and lead to higher interest rates across maturities, Luna wrote.

The statement marks a stark shift in tone from financial institutions as elections near and Lopez Obrador’s lead has widened to 20.5 percentage point from his nearest opponent in Bloomberg’s Poll tracker. The candidate has pledged to halt gasoline-price increases in real terms, cancel a $13 billion new airport project and suspend oil auctions in a landmark reform that opened crude drilling to private companies.

While he’s pledged to maintain Mexico’s primary surplus and cut government spending to pay for his programs, some bank economists began to show skepticism -- though none as powerfully as Luna.

"The changes proposed by AMLO regarding reforms would eventually generate macroeconomic inconsistencies in terms of monetary, fiscal and commercial policy, as well as distortions at the micro-economic level," Luna wrote.

The peso took sharp a dip last week after rallying on news that a deal to rework the North American Free Trade Agreement may be reached within weeks. That, along with a high carry trade, led the currency to rally most among majors and ignore electoral risk, Luna said, who warned that the rally won’t last and will reverse as July 1 draws closer.

The peso will weaken by 19 percent by 2022 as the deficit widens to 4 percent by that same year, Citigroup predicts.

©2018 Bloomberg L.P.