AMLO unveiled by the cancellation of Mexico's City new airport

MEXICO - In Brief 29 Oct 2018 by Mauricio González

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Andrés Manuel López Obrador (AMLO), announced today that the construction of Mexico City’s new airport will be cancelled. AMLO has unveiled his personal priorities and it is clear he’ll choose political gain over economic stability. Markets reacted negatively not only due to the importance of this investment project, but mostly because the precedent it establishes by disdaining property rights, reducing the new government credibility, even before taking power, and disregarding the financial turbulence it has caused. The peso has weakened against the US dollar by about 7.5% since USMCA was approved in early October and interest yield on long term Mexican bonds has gone up by 60 basis points. Preliminary public finance loss of these effects added together are in the order of 0.2% of GDP, that will show gradually as part of the annual public sector balance for 2019-2024, since it derives mainly from increasing the value of external debt amortizations for the next six years in peso terms that most likely will be transformed into domestic debt, and will limit the government spending capacity. We can anticipate some preliminary changes to the macroeconomic scenario for 2018. Higher consumer inflation (4.7%), one 25bp increase in domestic interest rate, to an annual rate of 8%, a $21 year end peso-dollar exchange rate and a GDP growth of 1.9%. final figures for 2018 and 2019 will be available once the financial turbulence settles. Also, in our view, the cancellation of the Texcoco airport has four major political implications: The balance of power within the López Obrador coalition shifts to the left. This is a major blow for the moderates within the team, particularly for Al...