Over the last 12 months, Mexico has found itself in the spotlight of the investment arena, with the financial community paying close attention to the nation’s general election. The victory by Andrés Manuel López Obrador – known as AMLO and Mexico’s first ever left-wing president – goes way beyond the political arena, and may signal a change in how the nation faces its fiscal and macroeconomic challenges.
For SURA Investment Management, one of Latin America’s biggest asset management firms, these challenges are significant. The new administration will need to focus on certain issues to convince investors that this government is targeting structural changes, without disrupting the macroeconomic stability seen over the last 12 months. For SURA Investment Management, the topics that need to be addressed by AMLO’s government are fiscal discipline, combating corruption, and the PEMEX financial situation.
The fiscal front
The budget for 2019 was released in December 2018. It was met with concern among the investment community, as some populist policies, such as doubling pensions for the elderly and monthly economic aid for the young population, could threaten fiscal discipline. However, the budget had a prudent feel, with a primary surplus target of 1% of GDP. Even though special attention should be given to the oil output and MXN performance to accomplish the 2019 fiscal targets, the budget was generally accepted by investors, who offered
a vote of confidence to the new administration.
In terms of preventing and combating corruption in Mexico, it seems that the Mexican president is eager to fight illegal activities that threaten the country’s stability. A clear example is the strategy to tackle fuel theft, which was implemented during the first month of AMLO’s administration. Even though the first steps of the strategy were implemented wrong – causing gasoline shortages in many cities – support for AMLO’s actions outweighed those critical of the strategy.
Apparently, the savings from fuel theft are close to $2bn, which investors will confirm in the following releases of PEMEX financial statements. It will be important to confirm these savings, and even more essential to know what the next steps in combating corruption will be, as it’s inherent in almost every political activity in Mexico.
PEMEX: The financial situation
The financial situation of the state-owned oil company PEMEX will be critical during the government’s administration, as AMLO’s national energy strategy puts the company at the very centre of his plans. The new administration plans to stabilise the oil output, provide major maintenance to existing refineries, and build a new refinery with an estimated cost of $8bn. A very ambitious plan that remains questionable, as there is seemingly no money to implement this strategy.
The situation gets even worse if we add to the equation the recent downgrade FITCH gave to PEMEX, increasing the cost of debt for the company. At this point, the recent savings from fuel theft become more relevant as they may help PEMEX to diminish its financial needs for 2019, delaying its necessity to tap international markets. The challenge is big, as the state company would be technically bankrupt once taxes are paid. Moreover, PEMEX debt is close to $200bn once pension liabilities are considered.
Although, the PEMEX’s financial affairs have been critical for several years, for SURA Investment Management, the plan to address this situation needs to be decisive as it threatens Mexico’s fiscal discipline and its macroeconomic stability. The upside is that the PEMEX situation is being rigorously analysed and the new administration is conscious of the risks that a bad outcome may cause.
Finally, for SURA Investment Management Mexico, it is evident that the country has many challenges to be addressed, but the positive side is that the new government seems determined to tackle structural problems. If not all, but some benefits from these strategies can be capitalised without disrupting the macroeconomic stability, which is good news for Mexico going forward. ν