CEO Executive Summary
Welcome to our Fall 2018 Newsletter. Many of you have noticed that we have not been publishing our regular monthly newsletter. In fact, we have changed the focus of our newsletter to a quarterly format while we have been publishing our subscription-based bi-monthly, the AMLO Transition Report. We hope you enjoy this last installment of our regular newsletter for 2018 – it has certainly been a busy time in U.S.-Mexico relations.
For all the threats, brinksmanship, and missed deadlines, the NAFTA renegotiation was finally completed in late September, and a new, modernized trilateral trade agreement was signed on November 30 on the margins of the G20 summit. The United States-Mexico-Canada Agreement, as it is called in the U.S., is intended to replace, not update NAFTA. Yet the new agreement’s 34 chapters and 1,000 pages suggest more of a NAFTA 2.0, albeit with tighter rules of origin in the auto sector and a watered-down sunset clause, rather than a wholly new trade agreement. With the agreement negotiated, all eyes are now on the new Democrat-controlled House of Representatives and their willingness to approve the deal. Meanwhile, the Section 232 tariffs on Mexican steel and aluminum exports to the U.S. – once thought to be a barrier to concluding any new agreement – remain in place.
Beyond trade, the Central American migrant caravan has dominated the bilateral relationship. The Trump administration took its standard hard line against the migrants, calling them a threat to national security and ordering military units to reinforce the border. The Mexican government offered the migrants work visas and asylum, which most have turned down preferring to try to gain entry into the United States. About 4,000 migrants remain in Tijuana hoping to gain asylum in the United States.
On December 1, Andrés Manuel López Obrador (AMLO) was sworn in as President of Mexico and was greeted, as all newly-elected Mexican presidents are, with a wave of popular support. His inaugural address emphasized the ideological side of his political persona but was consciously tempered with pragmatic overtones, something we suspect will persist throughout the early phase of his presidency. The Morena-dominated Congress, which was seated on September 1, approved two of AMLO’s legislative priorities before he took office – a bill slashing the salaries of Mexico’s high-level bureaucrats and another recreating the Ministry of Public Security. The former legislation has been stayed while the Supreme Court hears a challenge to its constitutionality. Meanwhile, AMLO reinforced the recent security legislation with a controversial decision to increase the role of the military in domestic law enforcement in a bid to quickly reduce Mexico’s high levels of crime and violence.
In the early days of his presidency, AMLO has governed with a strong nod to his populist instincts, primarly by resorting to public referenda he calls “consultas.” In late October and again in late November, AMLO held consultas on a series of policy initiatives he proposed during the campaign. In October, less than 1% of the electorate voted to reject continuation of the new international airport project, and in November, this same segment of the electorate voted in favor of ten high priority infrastructure and social welfare projects. Soon after the airport referendum, AMLO announced that he would, indeed, cancel the new airport, and this was quickly followed by a series of leftist legislative proposals in the Morena-dominated Congress. Taken together, these actions helped tank Mexican markets. By inauguration day, markets had stabilized, but stocks traded at three-year lows, the 10-year government bond was yielding over 9%, and the peso stood at 20.4 to the dollar. This was the backdrop challenging AMLO’s economic team as it struggled to produce a budget by December 15 that is based on realistic economic expectations but that also funds AMLO’s many priority projects while sticking to his promise of fiscal austerity.
In the energy sector, AMLO confirmed that his government would respect the 107 oil and gas exploration and production contracts already signed with private companies but would suspend the auction process for at least three years to give the government time to evaluate if the arrangement is working for Mexico. If there is minimal increase in investment and resource production, then there will be no more auctions. AMLO’s expansive plans for Pemex in refining and production remain unchanged, raising concerns among ratings agencies about the credit-worthiness of the highly indebted national oil company.
Full Newsletter: Monarch News – Fall 2018
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