20180712-法国巴黎银行-Mexico__Four_key_events_before_AMLO_s_inauguration_9页_401kb

Summary of "Mexico: Four key events before AMLO's inauguration"

Core Content

This document outlines four key events that are expected to shape the early phase of Andrés Manuel López Obrador (AMLO)'s administration in Mexico, before his official inauguration. These events are seen as critical indicators of the policies and priorities that AMLO's government will pursue, as well as the potential impact on the Mexican peso (MXN) and the broader Latin American financial landscape.

Main Points

1. 2019 Budget: A Balancing Act

• The 2019 budget will be a key event to watch, as it will include several of AMLO's fiscal initiatives.
• Key fiscal initiatives to be considered:
  • Pension rules: Double pensions for the elderly (Projected annual cost: above 0.5% of GDP)
  • Recovery of refineries: Initiate the recovery process of PEMEX's oil refineries (Projected annual cost: 0.4-0.5% of GDP)
  • Freeze on fuel prices: Freeze fuel prices in real terms (Projected annual cost: 0.2-0.3% of GDP)
  • Expand rail network: Start construction on the 830km Yucatan peninsula rail track (Projected annual cost: 0.1% of GDP)
  • Scholarships: Grants programme gradually reaching all high school students (Projected annual cost: above 0.5% of GDP)
  • Lower taxes: Slash VAT from 16% to 8% in the northern border (Projected annual cost: 0.1% of GDP)
  • Decentralise government: Spread the federal administration to outside the capital (Projected annual cost: 0.1% of GDP)
• The main challenge will be to maintain a fiscal primary surplus amid high expenditure pressures.
• The likelihood of these items being included in the budget is varied, with some having a moderate to high chance of implementation.

2. NAFTA Negotiations: AMLO's Pro-NAFTA Stance

• AMLO has expressed a clear pro-NAFTA stance, and his new chief negotiator, Jesús Seade, aims to reach a deal before the U.S. midterm elections in November.
• Despite the U.S. likely taking a more cautious approach, a positive outcome is expected.
• However, a full agreement is not anticipated before 2019 due to ongoing roadblocks.

3. Appointment of Key Officials

• The final composition of AMLO's cabinet and the appointment of heads of state-owned companies (SOEs) remain uncertain.
• These appointments are crucial for understanding the direction and priorities of the new administration.
• The appointment of PEMEX's chief will be particularly significant, as it will need to balance AMLO's campaign promises with the company's financial realities.

4. Congressional Performance

• AMLO is expected to have a wide majority in Congress, which will provide him with strong legislative support.
• His first major test will be the approval of the 2019 fiscal policy by 31 December.
• The performance of the opposition, which is either divided or weakened, will also be important in assessing the new administration's ability to face checks and balances.

Key Information

• The market has already largely priced in the election outcome, suggesting that the Mexican peso (MXN) may not experience significant short-term volatility.
• The document presents updated FX rate models:
  • FEER model: Indicates that the MXN has a long-term fair value of 17.45, suggesting potential for appreciation.
  • BEER model: Suggests a short-term fair value of 18.90 for the MXN.
• The document also includes a table of theoretical FX rates based on the sustainable current account balance, showing that the MXN has a 12.5% potential for appreciation against the market price.
• The legal disclaimer emphasizes that the document is a marketing communication and not investment research, and that it does not constitute financial, legal, or tax advice.

Conclusion

The four key events—2019 budget, NAFTA negotiations, key official appointments, and congressional performance—will be instrumental in shaping the initial phase of AMLO's administration. The document also highlights the potential for the MXN to appreciate in the long term, based on updated FX models, and underscores the importance of these events in assessing the economic and political trajectory of the new government.