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FT: Will AMLO turn out to be a fiscal hawk?

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Andres Manuel Lopez Obrador speaks during a press conference at Hyatt Regency Polanco hotel on July 9 in Mexico City. Photo: Carlos Tischler/Getty Images

Andrés Manuel López Obrador campaigned on a pledge to root out corruption, boost infrastructure spending and provide greater support to the “poor and forgotten.”

But a pragmatic side has also surfaced since the late stages of the campaign, says the Financial Times.

“He is more aware of the importance of investors,” says Rene Lichtschlag, senior portfolio manager at Union Investment. “He had a stable lead for weeks. There was no need to be more aggressive against investors.”

The market reacted well to AMLO’s July 1 victory. Mexico-focused funds reported net inflows that improve on 2017 numbers.

And the country’s benchmark IPC stock index is up almost 4 percent since the beginning of the month, and AMLO doesn’t even assume power until Dec. 1.

“The Mexican economy from a fundamental perspective is in good shape,” says Fernando Murillo, of Oxford Economics, citing low unemployment, resilient consumer spending and inflation coming under control as reasons for optimism.

Pablo Riveroll, head of Latin America equities at Schroders, adds that the relief rally in Mexican stocks created positive momentum, but he cautions: “The reality will be seen when they take over. The private sector is still figuring out what the new policy is.”

So how will López Obrador eradicate corruption, and how will NAFTA renegotiations turn out? How will he pay for increased old age and disability pensions, improved youth programs, better payouts to struggling farmers and improved infrastructure?

This he hopes to achieve by clamping down on corruption and adjusting existing public spending programs, most notably reducing the salaries of bureaucrats, including politicians.

While fine detail have not been announced, economists say the new president may prove more prudent than outsiders predict.

“This guy has reinvented himself from being a redistributive leftist to a firmly middle-class candidate,” says Erik Lueth, an emerging market economist at Legal & General Investment Management. “He’s a fiscal hawk.”

The future of oil contracts awarded under an energy liberalization program starting five years ago is less clear. Scores of oil companies have invested in the Gulf of Mexico but López Obrador has repeatedly said he wanted to revise the agreements to eliminate corruption and further assess their benefit to Mexico.

On fighting corruption, AMLO has a big job. About half of Mexicans who needed to access basic public services said they had to pay a bribe to do so, according to a recent study.

The issue is important for international investors because corruption hurts the economy.

The biggest issue that is largely outside López Obrador’s control is the discussion on NAFTA. For Mexico, which sends four-fifths of its exports to the U.S., a deal is critical. Graciela Márquez, Mexico’s incoming economy minister, has said a NAFTA deal by October is possible but the likelihood of this is diminishing, considering the state of U.S. politics.

Some investors are skeptical, but the visit by a U.S. delegation led by Mike Pompeo, secretary of state, shortly after the election is seen as a positive signal.

Union Investment has about €750 million invested in Mexican assets but Lichtschlag says no big adjustments have been made to the portfolio.

Source: Financial Times

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