López Obrador sets up first battles in inaugural speech

Sunday, December 2, 2018

Taking his oath of office over the weekend, Mexican President Andrés Manuel López Obrador (AMLO) launched a sharp attack on the energy reform under his predecessor Enrique Peña Nieto, and doubling-down on his promise to pull off a fiscal hat trick - balancing public spending with anti-corruption actions and austerity measures.

He will have to hit the ground running.

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Just one day into office, on Sunday, a document surfaced suggesting that work on the new Mexico City airport project (NAICM) would continue until further notice, in an apparent reversal of AMLO's announcement October 29 that the project would be cancelled - a move that sent markets reeling.

AMLO deflected when asked about the document or whether work would continue on the project.

The new leader also faces a critical test over the next two weeks as he works with congress to pass the 2019 federal budget. He has committed to not deepening Mexico's debt burden or raise taxes to fund his initiatives, spending no more than the tax revenue while he is in office.

AMLO also cited his plan to cut the sales tax along Mexico's 3,180km border with the US to 8% from 16% starting on January 1. "This 25km wide strip will become the biggest free trade zone in the world," he said.

The 2013 fiscal reform package had raised the border VAT from 11% to 16% in sync with the rest of the country.

Earlier in the week, Alfonso Ramírez Cuéllar, a member of AMLO's majority Morena party and head of the budget committee in the lower house, said that the issue was being analyzed, but he viewed immediate action on the border sales tax issue as difficult to pass in both houses.

In a note, Edward Glossop, Latin America economist for research firm Capital Economics, stressed that AMLO may well be able to achieve his balanced budget on paper, but "the devil will be in the detail."

"The goal of a primary surplus looks inconsistent with AMLO's campaign pledge to boost government spending (and not raise taxes). This circle could be squared with unrealistic revenue projections, based on clamping down on corruption and waste. But as we've noted in the past, successive governments have tried and failed to boost revenues in this way."

Revenue projections in the annual budget are based heavily on the estimates for the peso-US dollar exchange rate and the price for oil in 2019.

More referendums ahead

In the speech, AMLO signaled more of his non-binding referendums, or "citizen consultations," are to come. The first of these led to the initial announcement that the new Mexico City international airport (NAICM) would be cancelled.

Whether the airport continues as originally planned or not, these consultations are facing mounting scrutiny.

Raising the stakes, he added that at the halfway point, three years into his mandate, he would hold a public consultation to ask if the people wish him to stay or step down.

Questions surrounding of the escalation of these consultations have generated both investor concern and legal controversy. Mexico has a legal mechanism to hold referendums, which was not observed by the vote over NAICM, which was also criticized for lacking transparency and oversight.

The president also dedicated a key portion of his speech to rebuking the energy reforms, saying, "They told us energy reform was coming to save us, the energy reform has only meant a drop in oil [production] and an inordinate increase in the prices of gasolines, diesel, [natural] gas and electricity."

On other points, he restated his intention to merge existing federal police forces into a new national guard and his desire to launch a program boosting economic development in Central America and Mexico as a means to end the immigration problem in the US.

Among the list of promises set for his first three years in office, AMLO said Mexico's minimum wage would double nationwide in the period and continue to increase above inflation moving forward. He also promised to roll out his plan for a universal pension system, including the expansion of a Mexico City pension program for elderly citizens.

Slim voices confidence

Markets have signaled their close attention to AMLO's policy, with international media coverage voicing concerns over López Obrador's 'true colors' and asking whether he will be the pragmatist seen as mayor of Mexico City or the idealist who could reverse energy reform and sacrifice Mexico's hard-fought macroeconomic stability.

Others however have seen the possibility for a rebound in markets once investors' worst fears are removed with a sound budget proposal this month.

Mexican business magnate Carlos Slim, who has been both adversary and ally to AMLO over the years and was said to have lost 9bn pesos (US$450mn) with the announcement of the cancelled airport project, put a positive spin on the address Saturday, when reporters asked him whether AMLO's speech inspired any certainty.

"Certainty and an invitation to work and to invest," said Slim, as quoted in Mexican daily La Jornada. "What is needed, as he said, is the generation of employment to fight poverty."

"The best investment is to fight poverty, to incorporate marginalized people into modernity with education and employment."

Pictured: Mexican lawmakers held up placards reading "Lower tax at the border" during the inauguration.