What would I fear if I were an investor in Mexico? (Oh, wait, I am!)
It is plausible to say, “Not much.” For all the ups-and-downs of AMLO’s first six months, country risk remains low. In fact, it remains as a low as Brazil. Now, that may be a low bar, but wealthy investors love President Bolsonaro. I heard one hedge fund manager describe him as “my guy.” They would not describe AMLO as “their guy.” But they are not running away.
And it makes sense that they would not run away! The country is in great fiscal shape; it can afford the refinery stupidity (which won’t happen) and the Tren Maya nonsense (which might). It has been picking up manufacturing fleeing China for years (as we pointed out back in 2013); now it is poised to benefit even more from the great trade war. And if you are afraid of taxes, relax. AMLO’s party has called for tax hikes, but AMLO himself has been repeatedly clear that they will are not on the table: “Income taxes will not go up. We are going to keep the same tax rates in real terms, the same payments. New taxes will not be created.”
AMLO knows that he benefits from the credit that international markets give his country; if foreign investors treated Mexico the way that they treat Argentina, his plans would be ruined before they started.
So what is not to like?
Well, I would worry about one thing: becoming a sacrificial lamb should AMLO need one.
If (when) things go bad, even temporarily, he will need a monster to destroy. What better than a rich company? As long as his proxies can credibly claim in elite circle that it was a assault on an organization that specifically done did wrong and not an attack on the investor class, then he can have the best of both worlds.
This is now happening.
Two days ago, the AMLO administration has moved against Altos Hornos de México (Ahmsa), freezing its accounts. The Mexican government has evidence that Ahmsa paid a $3.7 million bribe to a shell company owned by the infamous Odebrecht. Yesterday, Spanish authorities detailed Ahmsa’s CEO. Today, the Mexican government opened a corruption prosecution against Emilio Lozoya, the former Pemex CEO.
To be clear, the prosecution is long overdue. It is astonishing that the Odebrecht scandal, which has toppled governments elsewhere, has been basically invisible in Mexico, despite Odebrecht testimony about bribes. There is fire behind the smoke.
And while Ahmsa and Pemex are clearly in the wrong, the timing of the announcement and the decision to prosecute are clearly political.
Meaning an investor’s primary fear should not be macroeconomic. Nor should it be contract enforcement. Rather, it should be that the government might choose to single them out in order to satisfy short-term political needs.
Fortunately, AMLO has more than enough strong domestic monsters to slay that he is unlikely to need to kill weak foreign ones. But for large investors, the danger is there ... especially if they did business with the previous PRI government with its spectacular levels of corruption.
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