Economics: The expanding toll of government uncertainty
The growing uncertainty economic agents have experienced since it became clear Andrés Manuel López Obrador had been elected president has continued to mount and has been echoed by international ratings agencies as they lowered their outlook on Mexican debt. Not all the apprehension and market turbulence of recent months can be laid at the doorstep of the new government, but clearly a lion’s share does correspond to not only to the new administration's policies as they are formalized, but also by the haphazard way AMLO, his top officials and his congressional supporters continue to spring proposals out of left field that have rocked investors, including the possible collapse of the administration’s tender offer for Texcoco airport related bonds. Their actions have also pushed domestic interest rates higher and significantly weakened the peso.
Investors who decided earlier to invest in peso instruments have suffered losses that will take years for them to recoup, making it highly unlikely they will invest additional funds in Mexico until they see clearer economic outlook signals.
Moody’s Investor Services captured the situation nicely with a recent report, noting the new administration’s policies will probably diminish investor appetite for future public projects, a development which, when combined with rising funding costs, will probably lead to a reduction in infrastructure investment, and even in federal transfers to subnational governments.
Notable internal front reflections of this heightened uncertainty include the extent to which we have seen a sequential reversal of the extended recovery in all consumer and business confidence index components and a downturn in the leading index in November.
Internal market lending rates and yields have risen, including those that underpin country risk. The spread on US and Mexico bonds has widened at the long end of the curve, with a more positive yield slope, in contrast to short-term bills. We at GEA, along with most financial market analysts and traders, are expecting both short and long term interest rates to rise further, and a weakening peso to accelerate inflation. We also look for Banco de México to raise its reference rate by at least 0.25 of a percentage point on December 20.
In this context, last Saturday, Mexico’s Minister of Finance, Carlos Urzúa, delivered to Congress the Economic Package (EP) and the Public Sector Budget Proposal (PSB) for 2019. Although we will post a detailed analysis of the EP in the next Economic Outlook, in general we observe a relatively credible macroeconomic outlook - with some side comments - accompanied by an austere budget reflected in a low fiscal deficit/GDP that has accommodated an ambitious social agenda by significantly cutting former government expenditures. However, for achieving a certain degree of stability during 2019 and to recover part of its lost credibility it is very important that the Ministry of Finance stick firmly to fulfill the fiscal goals presented in the EP.
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