The Daily Update - Mexico: NAFTA and AMLO

The Mexican peso has been one of the better performing currencies against the US dollar YTD (+6.5%). Progress on the renegotiation of NAFTA has helped investor sentiment, and while agreement still needs to be reached on certain contentious issues, US Vice President Mike Pence commented at the Summit of the Americas: ‘I’ll leave this summit very hopeful that we are very close to a renegotiated Nafta’. That said, the Mexican peso has seen some selling into the end of this week perhaps as investors focus on the Mexican Presidential Election to be held on 1st July where the hard-left candidate Andrés Manuel López Obrador (often referred to as AMLO) is leading in the polls.

AMLO has said he intends to review energy reform if he were elected President creating some policy uncertainty. However, to enact significant changes to a key policy area such as Energy Reform AMLO would require at least a majority in both the Chamber of Deputies and the Senate and a constitutional amendment would require two-thirds of the votes from each chamber. At this stage it looks unlikely that AMLO’s Morena Party would have sufficient votes to achieve this (both the Senate and Chamber of Deputies also have elections on 1st July). AMLO has talked of holding a referendum on energy reform at times but in 2014 the Supreme Court quashed a proposed referendum by his party on this issue.  Moreover, a more pragmatic approach seems to be emerging from his campaign, talking of a review of the reforms but to respect existing legally obtained contracts. Earlier this week, Carlos Urzua, AMLO’s pick for finance minister if he wins, also emphasized ‘absolute support for Nafta’ noting ‘Lopez Obrador has said that hopefully it’s held up so we can finish it, but there are advantages because the market could become a bit nervous if there’s no Nafta and there are presidential elections at the same time.’

Moody’s in their April upgrade of Mexico’s outlook to stable from negative and affirmation of the A3 rating note receding risks to the NAFTA renegotiation and they do not see the election result as derailing positive fiscal and economic trends: ‘Whichever candidate and party wins the presidential and legislative elections, it is by no means clear that the new incumbent will be able to alter the direction of policy or reverse already-implemented reforms. The country's institutional framework, with its array of checks and balances, limits downside credit risks from potential policy reversal.’

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