Reality checks await investors enjoying Mexico’s party

Mexico’s party is in full swing. As more manufacturers shift production from China to the US southern neighbour, the economy is growing and wages are rising. Industrial parks are running out of space and the peso was one of the world’s strongest currencies last year against the dollar. The peso is now up 53 per cent against the US currency from pandemic lows in 2020.

“I came here optimistic,” said the chief executive of one large US company wrapping up a recent trip to Mexico City, “and I am leaving here even more optimistic.”

Bankers are celebrating too. Mexican equity issuance tripled last year, corporate bond sales were the highest in eight years and Mexico’s share of Latin America investment banking revenue shot up.

“If you had to pick a country, this might be the number one opportunity,” Jamie Dimon, chief executive of JPMorgan, told Bloomberg television last November.

Amid the revels, Mexico will hold presidential and congressional elections next month. President Andrés Manuel López Obrador, a quirky old-school leftwinger, cannot run again but polls point to a decisive victory for his chosen successor, Claudia Sheinbaum. This is good news, according to the consensus view, because the ruling party candidate offers an attractive mix of continuity with a dash of technocratic modernity.

Yet an outsider arriving late at the Mexico party might be struck by something else: the revellers are doing their level best not to notice: four large elephants wandering around the room.

The first is organised crime. Murder, extortion and cargo theft have all boomed during López Obrador’s presidency. The country’s cartels control more territory than ever before (more than one-third, according to a US military estimate) and have spread deep into new rackets, such as migrant trafficking and fuel theft.

The second area of concern is public finances. After proclaiming an undying commitment to thrift for his first five years in office, López Obrador suddenly lost his inhibitions in election year and started to spend. The result is Mexico’s highest fiscal deficit since 1988, predicted to reach 5.9 per cent this year. The official explanation is that this year’s gap is a one-off caused by a splurge in capital expenditure to finish López Obrador’s signature projects, such as an $19bn new oil refinery.

That does not hold water: one economist points out public investment is already down 23 per cent this year. At about 2.5 per cent of GDP, even if it were cut in half next year, it would not make much of a dent in the deficit. Much higher permanent welfare spending and increasing support for the heavily indebted state oil company Pemex are the main culprits for the hole in state finances. These problems will not go away.

The third worry is the state of the country’s institutions, which have been assailed by López Obrador as remnants of a failed “neoliberal” past. The supreme court, the independent election institute, state regulators and even the transparency institute have all come under attack.

The fourth potential issue for investors is Sheinbaum’s politics. The carefully cultivated image of the ruling party candidate as a technocratic, pragmatic leader is based on her record as mayor of Mexico City and her training as a climate scientist who did doctoral research at Berkeley and was part of Nobel Prize-winning Intergovernmental Panel on Climate Change in 2007.

But Sheinbaum defines herself as being just as much a product of leftwing radical student activism and life-long party affiliation as a scientist or technocrat. This Sheinbaum is quite different: committed to deep political and economic change to achieve social justice and end once and for all what she sees as failed “neoliberal” economic policies. Her verdict on Mexico’s 30 years prior to López Obrador as a free-market economy geared to trade with the US? It brought “atrocious poverty and inequality”.

She shares the president’s conviction that Mexico’s courts are biased in favour of conservative elites and agrees with his solution of using the ballot box to elect supreme justices. Sheinbaum is not concerned that the new federal police force created by López Obrador is under military control, nor that generals and admirals now run ports, airports and even an airline because Mexico’s army “comes from the Mexican. revolution . . . it doesn’t come from the elites”.

For now, many Mexico investors are loving the party but the increasingly uncomfortable reality outside is likely to prompt a rapid sobering-up.

michael.stott@ft.com