President elect Andrés Manuel López Obrador (aka AMLO) is not due to take office until December creating an element of uncertainty about changes to Mexico’s energy reform programme. However, AMLO does seem to be taking a pragmatic approach, particularly given the government’s goal to drastically increase oil production: it is targeting to boost Mexico’s oil production to 2.48 m b/d by 2024. Rocio Nahle, the incoming energy minister, stated ‘We will respect the rule of law and the agreements that have been made with the outgoing government’.
As the oil glut continues to weigh heavy on black gold dependent economies, countries such as Mexico have employed spending cuts as a way to shield themselves from the ongoing pressures. A couple of weeks ago, the country’s Finance Ministry announced it will be slashing spending by an additional MXN 175bn ($10bn) in 2017, this is on top of the ~$7.5bn worth of cuts this year; or 0.7% of GDP. The spending cuts in 2017 assume crude will be priced at $35pb, this is above the pessimistic $25pb estimated for 2016, crude is currently ~$44pb; however unlike other oil producing economies, the government has the safety net of the ~$50pb revenue hedge this year.
Australian and Mexican equity and bond sentiments seem to suggest contrasting regional opinions.
If you visit Down-Under the locals may try to frighten you into believing in the ‘drop bear’ - a ferocious predatory koala that drops from above onto unsuspecting prey, be they a wombat or an expat. If you’re gullible you might follow their instructions to smear vegemite on your earlobes or urinate on your clothes to keep them at bay... The drop bear may be a hoax but Australians have a different sort of bear to be concerned about. Today’s headlines suggest that Australian stocks officially entered bear market territory, with the ASX200 at 4775, down over 20% from previous highs of 5997 in March 2015 (In fact they are down over 30% from 2007 highs so technically they haven’t stopped being in bearish territory for the best part of a decade). They join the growing club of global stock indices that are in bearish territory in terms of both 52-week highs and all-time highs including respectively: Euro Stoxx 50 (-27% / -46% Mar’00), French CAC (-22% / -36% Jun’00), German DAX (-27% Apr’15), Italy MIB (-31% / -66% Feb’00), Spain IBEX (-31% / -46% Dec’07), Brazil Ibovespa (-34% / -42% Mar’00), Hang Seng (-32% / -31% Dec’07) and of course Japan Nikkei (-25% / still down -60% from December 1989).
Looking back on 2015 Mexico’s government risks being better remembered for the “El Chapo fiasco” in which the drug lord, Joaquín “El Chapo” Guzmán, escaped from, Altiplano, the ‘maximum security prison’, in July ‘15 and remained on the run until January ‘16. Adding to the humiliation, only following an interview with Sean Penn for Rolling Stone magazine did the authorities finally track him down and arrest him. The media love this sort of story and it has pretty much eclipsed anything positive the government might have done.