Mexico notes - April 2024
It will be Sheinbaum's presidency, but AMLO's party. That means the fear of an AMLO-tantrum will hang over the coming six years, even if Morena wins in June.
Last week, Sergio Luna's article about Mexico's election contained an important consideration well below the fold.
The headline was "Should Investors Take a Sheinbaum Victory for Granted in Mexico?" Luna offers some reasons why Xóchitl Gálvez could still win. I've also heard from several sources in Mexico that they see a surge of Gálvez support that isn't being captured in the polls. I'm not convinced. The election will likely be closer than the current 14 point lead that Sheinbaum has in the average of polls, but 14 points is a lot and there is not any evidence of that large of a Gálvez surge that I am seeing. Her performance in the debates is fine, but Sheinbaum is playing a smart and cautious campaign that is limiting mistakes that give her opponent any opening. My answer to the headline question remains "yes, probably 80% odds Sheinbaum wins," which is the same prediction that I made at the beginning of the year.
On the question of what investors think about that result, this election is a rare win-win choice for investors. Sheinbaum is likely to be more market-friendly than AMLO. She will perhaps be a bit less stingy on fiscal policy across her whole six year term (though AMLO has ramped up the spending this year in ways that are concerning), but she'll also be more honest and realistic about the budget. She'll be more open to foreign investment, particularly in the energy sector. In the unlikely event Gálvez wins, investors would probably be pretty happy with her administration's policy. It's not every election that investors get this sort of market-friendly matchup in Latin America. If the US election avoids a protectionist wave, it sets up a good opportunity for a nearshoring boom in the coming years that makes the current mini-boom look small by comparison.
What Luna gets correct is the question of the “AMLO-tantrum” scenario should his party lose the election. A few weeks ago in World Politics Review, I wrote about "sore losers" being a problem for presidential elections in this hemisphere. Lopez Obrador has proven in the past that he is the type of politician who refuses to accept democratic defeat. Were Gálvez to win the election, the transition would be absolutely tumultuous, potentially on par with Bolsonaro or Trump. It's an unlikely wildcard but high-impact scenario and a reminder of the concerns we should all have when dealing with a leader with autocratic tendencies.
I'll take that scenario a step further. Sheinbaum could win this election, a smooth transition could occur, and the fear of an AMLO-tantrum will still remain a concern under the coming administration. The top two questions I've received from investors about Mexico in recent months are how Sheinbaum may be different than AMLO and how AMLO may constrain Sheinbaum's policies. At some point during her six year term, probably after the honeymoon but well before year five, the new president will disagree politically with her predecessor and attempt to implement a policy that in some ways undermines his legacy. That could be on infrastructure or security or energy.
It's Sheinbaum's presidency, but AMLO's party. His influence over the Congress, the governorships, and the state legislatures controlled by Morena cannot be understated. I will make a long term prediction that six years from now, it will probably be AMLO and not Sheinbaum dedazo-ing the next party candidate for the presidency from behind the scenes. While AMLO will happily back the Sheinbaum agenda early on, that first major disagreement is going to lead to a serious breach of trust. As an added complication, the military is enjoying the economic role it has under the current president and is going to politically fight to avoid having it taken away under the next administration, making Sheinbaum's potential reforms that much more difficult.
The retiring president's influence means the potential for the AMLO-tantrum hangs over a Sheinbaum term and her ability to define her own agenda away from the more damaging policies of the AMLO administration. Sheinbaum is a smart politician. She knows how to massage AMLO's ego, as seen by her ability to outmaneuver Ebrard in the party primary last year. I can imagine a scenario where she announces that the Dos Bocas Tabasco refinery is being renamed the "Lopez Obrador Refinery" on the same day she undoes other aspects of his energy policies as a way of giving the former president his due and avoiding that clash. I don't know if that works.
The clash is not inevitable, but the tensions and concerns about the potential clash almost certainly are. Even if open warfare within Morena never breaks out, the fact Sheinbaum will need to consider her predecessor's reaction and potential opposition to every move she makes will complicate her agenda and her presidency.