Mexico Scares Investors

January 16, 2017

It seems a long time ago now but when Enrique Peña Nieto managed to pass a series of structural reforms in late 2013 investor optimism in Mexico peaked. To be fair to Peña Nieto he has managed to deliver much his reform agenda.  For example successive energy auctions have been held, which have succeeded in attracting international investment to the sector despite a challenging environment of low oil prices. However, the combination of corruption scandals, the never-ending drug-related violence and a sluggish economy has caused Peña Nieto’s approval ratings to slump to 25%.

A perfect storm

In January the frustration with Peña Nieto exploded into protest when his government announced it was cutting fuel subsidies. The move, known locally as the Gasolinazo, would be described as rational and sensible by most economists. However, it sparked widespread protests and looting by Mexicans whose living standards have already suffered from rising inflation.

he has managed to deliver much his reform agenda…

The Gasolinazo is particularly hard to explain to Mexican voters because it runs to the core of a key Peña Nieto promise. He managed to pass controversial reforms, such as opening up Mexico’s nationalised energy sector, on the basis that they would lead to higher economic growth and lower energy prices. It’s not Peña Nieto’s fault that they haven’t materialised – it was always going to take time. However, his administration has lacked the political nous to explain this to voters.

Enter the Trump

And it is in this fractious state that Mexico will receive the Trump presidency. We review the impact of Trump on Mexico in depth in our Briefing in the latest issue (download it FREE here) but suffice to say that increased barriers to trade are expected. Whether they materialise or not is another matter, after all Trump is famously unpredictable. However, just the spectre of Trump-induced changes creates a climate of uncertainty for Mexico. That uncertainty has already been borne out in the Mexican peso, which fell heavily since Trump’s surprise election victory. The falling peso is good for Mexican exports but it fuels even more inflation, which eventually will lead to higher interest rates. And that means more pain for Mexico’s disgruntled voters.