CEO’s Executive Summary

The last two weeks of May and the first week of June must have felt like an eternity for Mexican President Andrés Manuel López Obrador (AMLO). Between May 22 and June 6, growth estimates for the Mexican economy fell below 2%, U.S. President Donald Trump threatened tariffs on Mexican imports, Fitch downgraded Mexico’s sovereign debt, as well as that of the Federal Electricity Commission and Pemex (the latter to junk status), and two cabinet secretaries resigned. Yet as hectic as this three-week period was, it was more the norm than an outlier given how these past two months in Mexico and in U.S.-Mexico relations have gone. And despite the pace and tension, AMLO has maintained a staggeringly high approval rating (around 70%).

The news on both sides of the border in early June was dominated by President Trump’s sudden threat to impose tariffs on all Mexican exports in an effort to coerce Mexico to, in effect, become the wall Trump has been unable to build himself. Mexico managed to earn a 90-day reprieve by agreeing to accept an expanded “Remain in Mexico” program, to send 6,000 National Guard troops to its southern border to intercept migrants, and to discuss a possible safe third country agreement in 45 days if migrant flows do not fall off. Mexico (as well as U.S. businesses and consumers who rely on imports from there) certainly dodged a bullet, but it came at a fairly high cost. The hope is that summer weather will lead to slower migrant flows as it typically does, and that the U.S. electoral calendar will mitigate a renewed tariff threat in the coming months.

In the midst of the tariff threat, the United States-Mexico-Canada Agreement (USMCA) was approved by the Mexican Senate, Canadian Liberals (the majority party) agreed to call parliament back in session to review and approve the agreement if circumstances warrant, and the Trump administration continues to press for ratification before the U.S. Congress takes its summer recess. Congressional Democrats, however, continue to find fault with the agreement. Regardless, the trade certainty that the NAFTA/USMCA is supposed to provide has been badly bruised thanks to Trump’s tariff tantrum, which damaged the foundations of the U.S.-Mexico partnership that has characterized the bilateral relationship for the past 30 years.

The Mexican economy continued to slow in the second calendar quarter, leading the Bank of Mexico on May 29 to lower its growth estimate for this year to just 0.8%-1.8%. As if to underscore this growth forecast, Trump made his tariff threat the next day, Fitch and Moody’s downgraded Mexico’s sovereign debt a week later, and Fitch capped off the negative news by lowering Pemex debt to junk status. The decision on Pemex reflects what the rating agency considers to be insufficient attention to declining production and reserves, a not very subtle criticism of the AMLO administration’s decision to build a new refinery rather than invest in exploration and production. The decision on Mexico’s sovereign rating reflects the weakness of Pemex, as well as weakness in the global economy, uncertainty created by the U.S. tariff threat, and inconsistency in domestic economic policy. It was a warning shot across the bow of the Mexican economy and AMLO’s strategy for managing it, but it remains to be seen if Mexico heeds it.

During this same frenetic period, the Mexican courts issued rulings that forced the Mexican government to suspend construction of its new Santa Lucía airport and to stop its plan to flood the Texcoco NAIM project site and turn it instead into an urban park. The final disposition of both sites is still very uncertain.

In Mexican politics, six states held elections on June 2. Unsurprisingly, AMLO’s Morena party won the governor’s race in the two states with gubernatorial elections and dominated the legislative election in a third. More surprising was the strong showing of the National Action Party (PAN), which maintained control of three state legislatures and had a very good showing in the other three states. The former ruling PRI party, however, continues to decline, a politically significant trend since the PRI is all that stands in the way of Morena control of two-thirds majorities in both houses of the federal legislature.

Finally, Mexico began to deploy its nascent National Guard in its eight most violent states in May, before having to divert 6,000 guardsmen to southern Mexico. And a huge corruption scandal tied to the previous administration broke into public light. Pemex’s purchase of a bankrupt fertilizer plant from a Mexican steelmaker for a very high price led to arrest warrants for the CEOs of both firms, the freezing of their bank accounts, and a U.S. Security and Exchange Commission investigation of former Mexican President Enrique Peña Nieto.

Full Newsletter: Monarch News – May/June 2019

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