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COMMENTARY

The following was delivered during a seminar about midstream oil and gas on July 16, 2018. The seminar was organized in Mexico by the Canadian Embassy and the Government of Alberta.

by Francisco Suárez Dávila
CGAI Fellow
July 2018

Table of Contents

• Introduction
• The Election Outcome – What it Means?
• Future Challenges, Risks and Opportunities Facing the New Government and Mexican Society
• Let me briefly refer to some debated “front burner issues” Obrador promised
• Conclusion

Introduction

Thank you for inviting me to participate in this seminar. Always glad to welcome my Canadian friends. As former ambassador to Canada I visited Calgary four times and worked hard to establish cooperation in the energy field, for example, with your prestigious Alberta Energy Regulator and the University of Calgary.

My friend Klaus Büttner, Managing Director, Mexico’s Alberta Office has given me a most difficult task to make “a crystal ball” analysis of the Mexican election outcome.

I will address two issues:

1. First, the election itself, what it means?
2. Second, an attempt to interpret some of its consequences and what are the future challenges, risks, and opportunities in terms of what the new government might want to do.

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The Election Outcome - What it Means?

1. At the outset it should say that it means a significant turning point in our history, a deep transformation, a change of paradigm, although the direction of the change and its consequences are not yet completely clear. Thus, Mexico joins the ranks of other countries, including our Northern neighbor, that are undergoing major changes for similar reasons - a massive anti-establishment vote of angry people which is sometimes called “populism”. Fortunately, this change occurred through a peaceful democratic process.
2. It was the largest election in Mexican history in breadth and depth. It covered more than 3,000 election posts. The President, nine governorships, two houses of Congress, local Congresses and more than 1,500 mayors.
3. It was an exemplary electoral journey an outstanding organizational performance; 50 million votes, the electoral institutions operated 150,000 ballot sites, with 1.3 million officials. Early results were announced by 11:00 p.m., based on a sample which proved quite accurate. In the light of those early results the defeated candidates conceded defeat that evening, and the President congratulated the virtual winner. That had not happened before!
4. The results were predictable, except for wishful thinking from losing candidates, because Andrés Manuel López Obrador had a 20 point advantage in all the most prestigious pollsters. These also proved surprisingly accurate, although it was an election made even more complex by the fact that we had three mayor party coalitions.
5. Financial markets had discounted who would win and remained quite stable; the issue was whether he would have a Congressional majority.
6. Nobody, however, predicted the scale of the victory. It was a “stunning landslide” also called a political “tsunami”. Obrador won 53% of votes; first place in all States but one (Guanajuato), including the conservative north. He has a simple majority control on both Houses and close to the qualified majority that he would need for a constitutional reform. Majority in 17 local Congresses also needed for that purpose. Won five of the nine governorships, including the recovery of Mexico City.
7. The backlash against the government’s party was enormous. President Peña had a low public approval of 16% and that was all his candidate Meade received. The government party, PRI suffered its worst defeat in its history, and came third or even lower in most ridings.The traditional party of the right, the PAN, achieved 23% of the vote. Its worst election in 30 years. Some analysts speak of the virtual disappearance of our three-party system.
8. I don't want to get too much into the reasons for Obrador’s victory. But he made a brilliant campaign; harping insistently on the mayor issue, and widespread corruption. The other two candidates made a bad campaign. They basically destroyed each other supposedly fighting for a strategic second place that would unite opposition against Obrador. It never happened!
9. Obrador has been on the campaign trail for 18 years, having lost two earlier elections. The anti-systemic vote has been accumulating by grievances throughout that period. I mentioned corruption, in the first place. But also worsening violence figures linked to organized crime that are close to controlling some parts of the country, evolving from drugs, to kidnappings, to extortion, to lucrative theft of oil and gasoline. The political system and parties became highly discredited and dysfunctional. In economics, progress was initially made through the introduction of structural reforms, notably energy. Macro fundamentals are satisfactory. The prevailing neoliberal dogma gave priority to price stability, fiscal equilibrium, and trade openness, useful as they are, but growth was mediocre 2 per cent per year. Inequality continued to be among the highest in the world, and poverty remains at high levels, particularly in the south. I recently wrote a book Mexico 2018: à la recherché du temps perdue. We have lost 18 years; Obrador took advantage of that.

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Future Challenges, Risks and Opportunities Facing the New Government and Mexican Society

 A Initial challenges…

1. The new administration faces a daunting challenge. Having received the broadest possible popular mandate to carry out change, this raises high expectations. It has to deliver and for that, he has to define the means of change. Obrador has a clear sense of history, an ambitious vision; he wants to carry out the fourth broad historical transformation of Mexico.
2. Before the election he was facing a polarized public opinion: the elites, high business, worried about his populist streak, considered him unpredictable, like Trump, a leader with a great political instinct, but not a solid intellectual base. They made a campaign on the fear that he could become a Mexican Chavez.
3. After two weeks, I am cautiously optimistic. We have to eliminate myths, prejudices, and fantasies and make our analysis based on facts.
4. In the two post-election weeks, he has put in place an operation for national reconciliation and cooperation. He has met with all major business groups, who in a spirit of “bygones be bygones” and “many abrazos” offered enthusiastic support, even a bit too much. He had meetings with all 32 of Mexico’s governors, the majority in opposition (25), and finally, a visit of Trump’s main secretaries: State, Treasury, and National Security. Could not be a better start to build trust!
5. To organize a smooth transition process, he met with President Peña. An advantage is he designated a shadow cabinet since December. They have been working on the government program. This means they can usefully work in the long transition of 6 months. Actual ministers know with whom to work. He has appointed a competent chief of staff, a successful former businessman, Mr. Alfonso Romo, who has worked hard at building business confidence. The cabinet looks quite reasonable with some exceptions. Some have been former cabinet ministers (Education), and experience in his own Mexico City administration (Treasury). There are also more postgraduates from Cambridge, Oxford and Harvard than in Peña’s team.
6. The president’s inauguration takes place the 1^st December; new Congress, 1^st Budget proposal sent by outgoing administration on the 8^th September, must be approved by 15^th December. Clear overlap, both teams will work together.
7. He has been announcing programs in different areas. His first one is a basic block of reasonable, responsible economic policy. Obrador and his finance team have been fiscally conservative. He and Urzúa, future Minister of Finance, have committed themselves to fiscal equilibrium, no increase in debt, and respect to the autonomy of the Central Bank. Mr. Urzúa was responsible for a vast outreach program with foreign investment funds, he spoke with more than 70. The market has given its verdict: The peso has been extraordinarily stable and has in fact appreciated! He has announced his forecast for next year: growth 2.5 per cent; inflation 4 per cent; and primary fiscal surplus. Obrador has expressed he wishes to double growth to 4 per cent. There will be emphasis on more public investment, particularly infrastructure, which has been dismal. Our public investment rate is at its lowest historical level, it has shown negative growth for 5 years.
8. Infrastructure will be a source of growth, and he has announced big ticket investments: The trans-isthmus route from the Gulf to the Pacific almost a “land Channel”, and a Maya tourist train. This will help our southern region, including positive spillovers to Central America, a key concern.
9. He has announced two basic social programs:
   1. Increasing an absurdly low or nonexistent pension on low income elderly.
   2. An ambitious program to tackle the severe problem of young people who neither study nor work. He intends to cover about two million through student scholarship and grants to businessmen who will employ them and train them. This has been well received by the private sector.
   3. He will increase minimum wages in an effective way.
10. A major issue is how he will finance these and other projects. Partly by one of the “cornerstones” of his policies - to introduce a culture of austerity into his administration. Reduction of President’s wage by half, which acts as a ceiling for all, high officials at about $5,000 per month. This I believe is doubtful. Significate reduction of non-trade union bureaucrats, and a new civil service code of conduct. There is ample scope to reduce the enormous increases of current expenditure, including thousands of poverty reduction programs which are ineffective, and the highly discretionary transfers to states by the Ministry of Finance.Secondly, he believes he will achieve savings because of his attack on corruption (it is not fully spelled out what he will do). He will preach by example. He will centralize all public purchases in one entity. Also doubtful and impractical! He will appoint a single federal delegate in all states to overview federal expenditures, “a real viceroy” and great source of political power and control. Our fiscal coordination mechanism entails transfers to states equal to half the budget, a big source of corruption.
11. On the other hand, he claims there will be no new or higher taxes, but a reduction of corporate income tax to be able to compete with Trump’s policies.
12. Good news regarding NAFTA. He supports ongoing negotiations, and has expressed he will maintain the highly respected Mexican negotiating team. His designated trade representative is highly qualified, Mr. Seade former number two in OMC. There is expected to be a ministerial meeting at the end of July, with both Mexican teams participation with the United States and Canadian government. The hope is to try to end negotiations by August. Still very doubtful. We hope the trilateral approach is maintained. To go for separate bilateral deals would be a big mistake.

B) Risks and uncertainty

1. Obrador leads not a party but a “broad social movement” with quite heterogeneous components, from intellectuals, experienced bureaucrats to social activist, some quite radical. Will he be able to balance all?
2. There is the question of checks and balances. It is true that he controls a majority in Congress. But, Mexico has strong institutions to counter balance presidential power. There is the Supreme Court, the very institutionalized armed forces, organized business groups, active and well organized groups of civil society; the autonomous Central Bank. Very important, the importance of financial markets in an open economy bordering on the United States. No government can accept a serious financial crisis with exchange rate depreciation, inflation, capital flight. Obrador and his team will work hard to avoid it. (Following Lula’s example).
3. In some ways he has evolved towards the system of the hegemonic PRI, who effectively controlled the political system for almost 50 years, the difference now is he has a new democratic mandate expressed though the polls.

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Let me briefly refer to some debated "front burner issues" Obrador promised.

1. Education reform as proposed by Peña is targeted for annulment or revocation. This education Minister is Moctezuma, who implemented President Zedillo’s education reform. He does not question its need but will change its approach. Here there is the fear that the reform will be surrendered to strong teacher’s trade unions!
2. New Mexico City Mega Airport. It will be reviewed to see if there was no gaffe. After the review, they will decide to either proceed or make a concession to the private sector.
3. Decentralization of ministries in Mexico City to other states. Some consider it absurd, costly, and potentially paralyzing to the administration!
4. Some political reforms will be introduced. The populist rules to realize a midterm review and possible mandate revocation and greater use of public consultations, establishing a legal framework for coalition governments.
5. He will introduce “austerity symbols”, change the presidential residence to his own, sell the presidential plane, eliminate Presidential Security Group made up of elite military general staff. This is all very doubtful and has received great opposition.
6. He has not spelled out what he will do to put an end to widespread violence and organized crime. One good step is to separate the Ministry of Public Security, which had been absurdly integrated into the Ministry of Government, so that it becomes a separate ministry. I believe the process of energy reform will continue perhaps with a brief “stand still” period to review it, maybe to make adjustments. The elicitation process is regarded as having been conducted with efficacy and honesty. Contracts should be correct. PEMEX is in very bad shape. The new government will want to make it a strong public corporation, not a monopoly. It cannot continue to be government “cash cow” and needs more resources for investment. Refineries are an issue, rehabilitation of four existing ones operating at low capacity, or build two new ones (doubtful). Another issue is what to do with our petrochemical industry?

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Conclusion

Finally, there are “opportunities” derived from the “centrality” assigned to accelerating growth, based on public and private investment, towards reducing regional inequalities of the southern half of Mexico, and to carry out effective programs to reduce poverty while maintaining fiscal responsibility. Supporting NAFTA and acting with dignity against Mr. Trump’s likely aggressions, maintaining a government open to private investment. If Obrador is viewed to make progress against corruption and organized crime, uses his great power with moderation, is open to criticism, and he holds radical allies in check, Mexico will stand out very favorably among the largest economies. Social stability and political legitimacy in a world beset by problems and uncertainties will provide Mexico with considerable advantages. A tall order, but I am cautiously optimistic. The actions of the first two weeks sustain this belief. Let’s give him the benefit of the doubt!

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