AMLO, Mexico’s presidential front-runner could shake up Trump and NAFTA

People in Mexico are heading on Sunday in an election that’s set to bring a paradigm political shift to the country.

The leading presidential candidate, Andres Manuel Lopez Obrador, commonly referred to as AMLO, is expected to win in a landslide victory on the back of widespread frustration over endemic corruption and crime.

A victory for his left-wing Morena party would represent the first time that the presidency has not been held by Mexico’s traditionally dominant parties — the National Action Party (PAN) and the Institutional Revolutionary Party (PRI) — since the country’s democratic transition in 2000. The PAN and PRI candidates, Ricardo Anaya and Jose Antonio Meade, are trailing behind in polls, damaged by their parties’ associations with corruption and graft.

Businesses are concerned, as are NAFTA (North American Free Trade Agreement) proponents; meanwhile, for the 53 million Mexicans living below the poverty line — roughly 44 percent of the population — AMLO symbolizes change and an overhaul of a broken system.

A Mexican Trump?

A champion of the poor, the 64-year old former Mexico City mayor has been described by critics as a Mexican Hugo Chavez or even a Mexican Donald Trump, thanks to his nationalist and populist agenda — although he’s toned down some of his more inflammatory campaign promises like ending energy privatizations.

He’s called the ruling political class “filthy pigs,” “hogs” and “swine” during campaign rallies, and promised a non-violent revolution. Still, his aides say that on most of his more radical pledges, he won’t actually follow through.

If elected, he is expected to shake up markets with a far less business-friendly approach than his competitors, and a much more aggressive response to Trump than that of his predecessor Enrique Pena Nieto of the PRI, who will leave office deeply unpopular.

And the enthusiasm for AMLO’s attitude is reflected in his 25-point lead in current polls, a dramatic indication of changed political sentiment after his failed presidential bids of 2006 and 2012.

Market volatility ahead

For market watchers at emerging markets investment bank Exotix Capital, the left-winger spells trouble.

“We suspect market participants underrate the negative implications of an AMLO presidency,” said Rafael Elias, an analyst at Exotix.

Elias pointed to the increasing likelihood that the Morena party could win an absolute majority in Congress, affording AMLO powers that no Mexican president has enjoyed since the 1990s. “I am of the view that finances would be much less orthodox, public spending would balloon, current account would deteriorate, and perhaps we could even see a ratings downgrade as public finances worsen,” he said.

This scenario would lead to immediate negative consequences: the Mexican peso weakening, foreign and domestic investment falling, capital flight and possibly even a recession, Elias warned.

Investor uncertainty

Still, other investors believe AMLO will end up softening his stance — he’s already promised that property rights will be respected, and that no energy contracts will be voided unless tied to corruption. And as mayor of Mexico City from 2000 to 2005, AMLO was described as more of a fiscal hawk, while managing to significantly cut poverty and win approval ratings of above 80 percent.

“He maintains he has no plan to nationalize companies and that he would lead a market-friendly government — without tax increases, new taxes or an increase in public debt,” said Michael Conelius, portfolio manager of the T. Rowe Price Emerging Markets Bond Fund. “Still, we are concerned he may slow or halt oil sector reforms, open corruption probes and challenge central bank independence.”

If AMLO fails to win a congressional majority, his fiscal power will be limited. And not all observers doubt the candidate’s respect for institutions like the central bank.

“(AMLO) has shown respect for Mexico’s institutions; he subscribes to central bank independence and supports NAFTA,” according to Christopher Teschmacher, multi-asset fund manager at LGIM. “In general, we believe AMLO has made a transition from a redistributive to a staunchly middle-class candidate.”

In any case, major economic reforms would have to be preceded by congressional votes or referendums, meaning that investors likely will have time to evaluate their options before the grounds shifts underneath them.

‘Belligerent’ on NAFT

For NAFTA, Exotix Capital’s Elias expects “a belligerent AMLO that would not hesitate to take a hard stance and could possibly derail the advances” of the current administration’s delegation.

We could potentially see the negotiation process starting from scratch, he said, as AMLO’s natural tendency “will be to try to use NAFTA as a way to gain credibility with his base by ‘not letting the gringos get the best of us,’” and by taking a hard position on areas like agriculture and manufacturing. He has also shown willingness to walk away from the talks if he feels Trump goes too far.

AMLO has previously been critical of NAFTA, and his popularity among farmers and the working class was further boosted thanks to his confrontational attitude toward President Trump.

Out-of-control crime

But more pressing than Trump’s threats is Mexico’s staggering crime rate. May was the deadliest month in Mexico since the government first published homicide data 20 years ago.

According to the national registry, 2,890 people were killed in one month — roughly 93 victims per day, or four per hour. Since January, the figure is 13,298: a 21 percent increase on the same period last year.

Deadly crime in Mexico has steadily worsened over the last several years of Mexico’s war on its drug cartels, which began with the administration of former president Felipe Calderon in 2006.

More than 120 politicians running for local office have been murdered since campaigning began in September, most commonly due to their unwillingness to comply with the powerful cartels.

Mexicans see their government as having consistently failed to protect them. AMLO, while pledging to combat corruption and crime, has yet to offer a detailed agenda to address the violence besides a program of amnesty, which critics say will be completely ineffective.

The country of 128 million is looking at seismic changes ahead. At best, Mexico could see big improvements on corruption and poverty; at worst, it could see intensified crime, economic turbulence, and even rockier relations with its neighbor to the north.

Source: CNBC