Investors Only Seem to Like AMLO When They Forget Who He Is

(Bloomberg) -- Mexico’s new president, unlike his U.S. counterpart, isn’t likely to score his performance by how well the markets are doing. As it happens, they’re doing fine -– except when President Andres Manuel Lopez Obrador behaves like he’s always said he would.

The leftist leader can point to a world-leading rally during his six-week-old presidency, but he knows that’s not what he was elected to deliver. Financial investors in Mexico have been making decent returns for a couple of decades now. The problem is the economy. Living standards for most Mexicans have barely advanced in that period -- one reason why Lopez Obrador won in a landslide last July.

Investors Only Seem to Like AMLO When They Forget Who He Is

Since then it’s been a bumpy ride on the markets, where the new president is widely viewed as dangerous when he pursues his long-held and voter-endorsed agenda, though perhaps harmless when he can be persuaded not to. But not all investors see it that way. Some argue that Mexico’s glacial economy and gaping inequality –- the worst in the 35-member OECD -- leaves plenty of room for AMLO to do better. That would enable both Mexicans and foreign investors to share a bigger pie.

“The chances that his policies will lead to an increase in GDP growth are actually pretty good,’’ said Josephine Shea, a senior portfolio manager at BNY Mellon in Boston, who cites Lopez Obrador’s goals of lifting lower-income families out of poverty and generating jobs through large-scale projects. Both should help the economy, she said. “The question is, by how much, and when?’’

In the days after the vote, AMLO repeated his pledge to put poor Mexicans first, while also hitting the right notes from a market point of view. He promised to respect private capital and keep a tight grip on public spending. Investors breathed a sigh of relief, then celebrated -– and promptly forgot everything else Lopez Obrador had advocated in the course of a seven-month campaign and a four-decade career.

They’ve subsequently been served a couple of sharp reminders.

There was a slump in October when AMLO, then president-elect, scrapped a $13 billion airport plan for Mexico City –- something he’d been flagging all year. There was another dip in November when his party took aim at high fees charged by Mexican banks. The mood only lightened in December when Lopez Obrador delivered a fairly orthodox budget for 2019 and settled with holders of the airport bonds.

Investors Only Seem to Like AMLO When They Forget Who He Is

Big Spender?

Lopez Obrador talks like a big spender. Projects he campaigned on, and has reaffirmed since winning, include an $8 billion oil refinery in his home state of Tabasco and a Mayan train route for tourists that will link five mostly impoverished southern states. He also promises to find another $8 billion to boost pensions and student scholarships.

With several Latin American economies still suffering the aftereffects of budget blowouts, such talk makes investors nervous. “The main challenge is making space for these policies while sticking to an overall fiscal envelope that inspires market confidence,’’ said Sergi Lanau, deputy chief economist at the Institute of International Finance.

That’s what Lopez Obrador’s 2019 budget did, at least on paper –- promising a surplus of 1 percent of GDP before interest payments, in line with his conservative predecessors. AMLO says he can balance his new spending with savings from lower government salaries and a crackdown on graft, though many economists are skeptical.

“The goal is to have economic growth,” and it can be achieved “without deficits, without debt, without taxes,” the president told El Financiero Bloomberg TV last week. Then he sent finance minister Carlos Urzua to New York to deliver a similar message to investors: there’ll be no reckless rush for growth.

That may be welcome news on Wall Street, though perhaps less so among Amlo’s voters. Urzua said the economy could expand about 2.5 percent this year, the top end of the range forecast in his budget. That’s what the IMF expects too. It’s in line with Mexico’s average over the past quarter-century or so -- a record Lopez Obrador has publicly lamented as a failure.

If he’s going to raise the bar, AMLO needs to find some cash. There’s evidently no appetite for more public borrowing at this stage, but private credit could help out. Mexico is under-banked by the standards of its peers, with little lending to households or businesses.

Investors Only Seem to Like AMLO When They Forget Who He Is

So there’s potential to finance some growth that way. Lopez Obrador’s government teamed up with bankers last week to promote a package aimed at juicing loans and equity financing.

But blocking the cheap-money route is a central bank that’s famously independent and has been hawkish in recent years. If anything it became more so in 2018, pushing real interest rates higher as Lopez Obrador went from poll frontrunner to president-elect and then took office.

Investors Only Seem to Like AMLO When They Forget Who He Is

AMLO will soon have allies on the bank’s rate-setting board: He sent the names of two nominees to Congress for approval last week. Still a minority, they’ll likely be making the case for more emphasis on growth, in a country that hasn’t seen much of it lately.

©2019 Bloomberg L.P.