Mexico – The Budget

It will be simply impossible to know if the forthcoming Mexican budget is credible. President Andres Manuel Lopez Obrador (AMLO) has enough political strength to carry over a fiscal consolidation plan. This means AMLO can eliminate social programs and trusts and replace them with the ones he deems important. The market’s reaction to the budget will likely skew toward neutral or slightly negative. The reason for this is that the fiscal situation is stuck between a rock and a hard place. As a budget that signals a lack of fiscal discipline will be market-negative, yet, a fiscally prudent budget might also be deemed implausible. The best way to think about the budget is not as a single event, but rather as a continual process with which AMLO will reform the public sector from its root. This is the avenue in which AMLO intends to fight corruption. The “AMLO risk premium”, the premium resulting from the economic policy signals of president Lopez Obrador, has been expanding after the cancelation of the Texcoco airport. This has been pushing the USDMXN and MBonos-US Treasury spreads higher. In our view, there are two key elements that will shape the AMLO-risk premium going forward: 1) how the government deals with the MexCat bondholders, which we believe will be resolved in the coming weeks , and 2 ) the 2019 budget, which we analyze in this note.