The Daily Update - Mexico

The next Mexican Presidential Election takes place on 1 July 2018 and the one term of six years limit means a new candidate will replace the incumbent President Peña Nieto.  Thus, the 2017 gubernatorial election results, particularly in the State of Mexico which voted on 4 June, are of interest as a gauge of public sentiment towards the different political parties.

The State of Mexico or Edomex result is important as the state is one of the most populous (~14 percent of the population) and largest contributors to Mexican GDP.  Plus, it has always been a power stronghold for the Institutional Revolutionary party (PRI) and it is the state where incumbent President Peña Nieto also served as State Governor.  However, given Peña Nieto’s popularity has plummeted to historic lows (~12 percent) and with a perception that the administration has failed to control corruption and crime the PRI candidate and cousin of Peña Nieto, Alfredo del Mazo Maza, faced a tough election.  Other PRI stronghold states of Veracruz and Tamaulipas have also fallen suggesting public frustration with the PRI party.  Andres Manuel Lopez Obrador (aka AMLO), the Morena Party a contender for the Presidential election, and having already stood twice, is known to voters and a serious contender particularly if his party’s candidate, Delfina Gómez Álvarez, won in the State of Mexico.

Based on the official count so far Alfredo del Mazo Maza, the PRI candidate, has won the State of Mexico governorship by a small margin over the Morena party candidate Delfina Gómez Álvarez with 34.3% of the vote versus 32.1%.  The PRD and PAN candidates secured 18.6% and 11.6% of the votes respectively.  It is thought at the time of writing that AMLO is likely to contest the result.

Nevertheless, given the unpopularity of the Peña Nieto administration this result is by no means a good indicator for the Presidential Election. In 1995 and 2005 the PRI won the state by a good margin but lost in the subsequent 2000 and 2006 Presidential elections. The polls suggest PAN and Morena lead the PRI in the Presidential race, although the PAN and PRI and PRD have not yet named final candidates.  One of the questions is whether the PAN and PRD parties form an alliance fielding a single Presidential candidate which statistically speaking would stand a good chance against AMLO. In a press conference on May 20 the leaders of the PAN and PRD parties confirmed that they have not ruled this out.

The peso has strengthened against the US dollar on the back of the result as the Morena party’s policy agenda is seen as less investor friendly in that it increases the uncertainty about any NAFTA renegotiation with the US which the PRI government has been working towards: AMLO has been a harsh critic of it.  Plus, AMLO had been threatening to unwind the energy reform program.

NAFTA remains a key issue for the market and the Mexican authorities are hopeful of getting some kind of agreement in place at the end of Q1 or early 2Q in 2018. Robert Lighthizer, the US Trade Representative has now been appointed which had been one of the factors delaying proceedings.  If the renegotiation is allowed to slip and remains unfinished ahead of the Presidential election this could increase uncertainty, particularly if AMLO were to gain momentum in the polls.  But we see it as being in all parties interests to get the issue swiftly resolved.

We continue to favour US dollar denominated bonds in the state oil company Pemex which is 100% owned by the Mexican government. Pemex’s debt is not explicitly guaranteed by the Mexican government but the producer is of strategic importance and the government has a track record of supporting and injecting capital into the business when required. For example, Pemex 6.625% 2035 issue trades on a yield of 6.06% and is trading ~4.7 credit notches cheap on our valuation models which compares with a yield of  4.72% on the longer dated US dollar denominated Mexican States 4.6% 2046 which is trading ~1.8 notches cheap on our models.