AMLO’s Mexico

Mexican president AMLO will cast shadow over successor [View in browser]( [Bloomberg]( Welcome to the [Year of the Elections](, Bloomberg’s newsletter on the votes that matter to markets, business and policy amid the most fragmented geo-economic landscape in decades.  When Andres Manuel Lopez Obrador narrowly lost his first presidential race in 2006, he cried fraud, demanded a vote recount and called for large street protests that paralyzed Mexico City for seven weeks. And when his complaints fell flat at the electoral court, the leftist leader proclaimed himself the country’s “legitimate president” and launched a parallel government. Critics dismissed it as a waste of time. But during several years as the face of Mexico’s “legitimate government,” AMLO, as he is known, toured every municipality in the nation, slowly but steadily shifting the foundation of Mexican politics. After another lost election in 2012, and the creation of his own National Regeneration Party, he won the 2018 vote in a landslide. But just like Lopez Obrador didn’t need an elected office to become the most influential politician in the nation of about 128 million, he’s set to remain a powerful figure once his six-year term ends in October. With his popularity north of 60% thanks in no small measure to programs that provide cash payments to many Mexicans, real wage gains and an anti-corruption rhetoric, the larger-than-life AMLO will cast a shadow over whoever succeeds him. That’s most likely his protege Claudia Sheinbaum, who holds a 25-percentage point lead over opposition candidate Xochitl Galvez ahead of the June 2 vote, [according to opinion polls](. Sheinbaum has been careful to craft government proposals that remain closely aligned with current policies. Galvez, on the other hand, has struggled to offer an appealing alternative to voters unhappy about AMLO’s poor security track record — polls show it’s his biggest vulnerability. Sheinbaum has so far managed to keep Galvez at bay in the campaign. An energy engineer and former mayor of Mexico City, she has the experience to build her own presidency out from under AMLO’s influence, but that will require tackling some challenges head on. A Sheinbaum government would face the need to foster a more business-friendly environment if Mexico is to fully take advantage of the [global supply-chain realignment known as nearshoring](. So far, companies that have chosen Mexico to relocate closer to the vast US consumer market have done so with little to no help from AMLO’s administration. Even so, that initial capital influx has sustained such a rally in the foreign-exchange market that the national currency was dubbed the “super peso.” Whether the next president seizes the opportunity or squanders it will determine how much investment the country will be able to attract, how fast its economy will grow, and potentially how wealthy its population will become. A [fiscal adjustment will be all but unavoidable](, either by cutting expenses or raising taxes or trying to broaden the tax base, each option with its own set of political challenges. Then there’s the drag from Pemex, the world’s most indebted oil major that has remained afloat thanks to growing support from the Mexican Treasury — a strategy that if unchecked may eventually cost the country its investment grade. Morena, the Spanish-language acronym for the party Lopez Obrador founded in 2011, will play a key role in the future of AMLO’s policies. It has won states long controlled by the opposition, but it’s unclear whether it will gain two-thirds of the positions in both houses of congress, a super majority that would allow the president to pass major constitutional reforms that have eluded Lopez Obrador. [AMLO’s legacy](leaves some tough decisions for his successor. — [Walter Brandimarte]( and [Maya Averbuch]( Sheinbaum speaks during a campaign event in Mexico City. Photographer: Victoria Razo/Bloomberg Mexican Economy Q&A We spoke with [Felipe Hernandez](, Latin American economist for Bloomberg Economics, for his perspective. Companies trying to relocate to Mexico to stay closer to the US consumer market are probably finding more obstacles than government assistance. What can the new president do to change that and what would that mean for Mexico’s economy? Increasing exports and rising investment in the past couple of years have proven that with a long-standing free trade agreement, its unique location and a large manufacturing hub, Mexico continues benefiting from US growth and is in a privileged position to benefit from US-China trade tensions. Lifting restrictions for private participation in energy and other sectors and ending unfair advantages given to government-owned companies would attract more capital and help ease infrastructure constraints. That, along with more stable rules and better security, could accelerate investment, increase productivity and boost potential growth and the long-term outlook of the economy. After spending relatively little during the pandemic, AMLO is now producing the largest budget deficit since the 1980s in a bid to consolidate his legacy and ensure his chosen successor’s election. What will the consequences be for the economy and the new government? A wide deficit this year [driven by increasing spending]( requires a large adjustment in 2025 to return to sustainable levels. With most of the additional outlays going into transfers and social programs to bolster popular support ahead of the elections, the adjustment next year implies large cuts that will not be welcome and be a drag on the approval image of the new administration. Increasing revenues is an alternative, but closing the wide gap would likely require higher taxes, with economic and political implications. There is room for more efficient tax collection but, after significant efforts in the past five years, such measures have less upside and, alone, would not be enough. Lopez Obrador’s government has also drawn down savings and reserves in public-sector funds, leaving very little for the next administration to use. Falling short of the necessary fiscal adjustment in 2025, Mexico would risk losing its investment grade, increasing financing costs for the government and the economy. The Markets Take [Julia Leite](, Bloomberg’s managing editor for Latin American emerging markets, writes about the “super peso” and investor optimism about Mexico. Markets have all but ignored the presidential race — a departure both from Latin America elections, which often send jitters through local assets, and from Mexico’s previous votes, when the currency weakened in the runup to the ballot. Sheinbaum’s strong lead is part of that, but so is the peso’s apparent unyielding rally. The latest available data show hedge funds continue to boost bets the exchange rate will appreciate — even as analysts warn the currency is overvalued and too many people have bought into the trade. While the latest bout of risk aversion in markets hasn’t fully spared the peso, it’s still the best performing major currency against the dollar in the world this year following massive gains in 2023. The peso has several factors going for it. It’s the most liquid currency in Latin America, and the only one that trades around the clock — so any time investors jump back into risky assets, it’s often the number one choice. Still-high interest rates and low volatility continue to make it an attractive bet for traders who borrow in lower-yielding currencies to buy those that offer higher yields. Mexico’s currency has so far been spared from fiscal concerns that often hit the likes of the Brazilian real. And unlike many of its emerging-market peers, the peso often benefits from strong US data due to its close ties to the world’s largest economy. Nearshoring, a phenomenon that has gained steam since the pandemic as companies rethink their global-supply chains, has further boosted that appeal. That close connection with the US, on issues ranging from the economy to migration, may mean that traders will keep a closer watch on the US November vote than on Mexico’s own election. Corporate Stakes [Scott Squires](, Bloomberg’s Mexico energy reporter, looks at Pemex’s dire situation. The fate of Petroleos Mexicanos is a key theme during Mexico’s election, as the world’s most indebted oil firm struggles to find financing, boost production that has dwindled to about half its output from two decades ago, and reduce its debt burden of roughly $106 billion. AMLO has lavished support on Pemex, granting as much as 1.37 trillion pesos (around $80 billion) throughout his administration in the form of tax cuts and capital injections that have failed to reverse the company’s financial decline. While big changes in government support for Pemex aren’t expected under Sheinbaum, she is [promising to shake up Mexico’s energy sector]( with a focus on building new capacity for renewable energy. Sheinbaum plans to keep Pemex’s oil and gas output at around 1.8 million barrels per day, and invest in renewables to meet the country’s excess energy demand. She also plans to increase efficiency at the company’s refineries, reducing fuel imports and expanding its mandate to include lithium extraction and energy production. It’s still unclear how she’ll pull that off, especially given Pemex’s financial woes and the unwillingness of Mexico’s ruling Morena party to open the doors to private investment. More from Bloomberg - Check out our [Bloomberg Investigates]( film series about untold stories and unraveled mysteries - [Bloomberg Opinion]( for a roundup of our most vital opinions on business, politics, economics, tech and more - [Next Africa](, a twice-weekly newsletter on where the continent stands now — and where it’s headed - [Washington Edition]( for exclusive coverage on how the worlds of money and politics intersect in the US capital - Explore all Bloomberg newsletters at [Bloomberg.com](. Follow Us Like getting this newsletter? 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