(EDC Economics)
Economic
forecasters have always had to understand politics. But lately it has often seemed like politics might trump economics in determining a country's future -- take Mexico, for example.
The Mexican
economy holds out considerable promise, and has done so for some time. With a young and skilled labour force, a rich endowment of natural resources and the competitive advantage offered by its proximity to
the U.S. and its NAFTA privileges, Mexico should be able to do what Ireland did in the 1990s. But the reforms needed to pave the way for such dramatic progress have been slow to emerge, mainly because of
political rigidities and logjams.
This situation puts politics top of mind for economic forecasters. And even though Mexico's next election is not until mid-2006, companies are already worrying about
its outcome when planning. Driving this uncertainty is the emergence of Andr¥?Manuel L¥? Obrador (known as AMLO) as a front-runner for the presidency. AMLO is the mayor of Mexico City, and is widely expected
to be the presidential candidate for the Partido de la Revoluci¥?emocr¥?ca (PRD), and to give the historically dominant Partido Revolucionario Institucional (PRI), a run for its money. This could leave the
Partido Accion Nacional (the party of incumbent President Fox) in the dust.
AMLO is a political scientist and has spent his entire career in Mexican politics. He is a policy activist with a strong
leaning to the left -- in other words, the sort of populist leader that international investors prefer to avoid. He is embroiled in a legal matter that, although minor, is being exploited by the government
in order to scupper his election plans. But even if he is prevented from running, his popularity means that he will still have a big impact on the election.
It is easy to see the parallels between
AMLO and Brazil's Lula. Recall that in mid-2002, several months prior to Brazil's election, the emergence of the populist Luiz In¥?o Lula da Silva (Lula) as the front-runner sent investors running for cover.
Brazil's interest rate spread ballooned to over 24 per cent and the economy faltered. But economics trumped politics in the end, as Lula made pragmatic and market-savvy decisions and reassured international
investors. Nevertheless, it took about a year for Brazil's economy to get back on track -- a disruption best avoided.
Could the same thing happen in Mexico later this year? Possibly, as AMLO (or
someone else if he cannot run) will speak out against privatization and NAFTA, and will talk about restructuring public debt. But Mexico is rated investment grade, its foreign debt relative to GDP is around
half the level of Brazil's and the central bank has established a solid reputation for policy orthodoxy. And AMLO himself has shown his pragmatic side, working alongside private business and demonstrating a
willingness to squeeze the bureaucracy and sell public properties.
The bottom line? Mexico has been falling short of its aspirations and politics are responsible. Investors could face significant
market volatility in the months ahead of next year's election. But the smart ones will see it -- as in the case of Brazil in 2002 -- as an opportunity to buy, not to sell.
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