Mexico’s Triple Threat Triangulation

Mexican shares were flat through May as President Pena Nieto’s popular approval rating dipped to 30 percent halfway through his term, with both growth and inflation stuck in the 2-3 percent range. The “three for three” reform on public official wealth disclosure and conflict of interest has yet to be adopted in Congress with lukewarm support despite civic group activism, after the President’s family was involved in questionable real estate deals. The ruling PRI is set for a thrashing in state elections reflecting political and economic unease and continued law and order breakdown, with student killings still unresolved and a top soccer player reportedly kidnapped by dug gangs. Retail sales decline follows the lowest consumer sentiment reading in two years, and the central bank is again poised to raise interest rates with the US Federal Reserve with the peso drifting at 18/dollar. The current account deficit persist around 3 percent of GDP, and foreign portfolio continues to outrun direct investment to cover the gap. The IMF estimated FDI inflows at just 1.5 percent of output, one-third Brazil’s fraction, with a negligible impetus from Pemex’s private opening on slack oil prices. A new leftist party founded by previous presidential contender Lopez Obrador is expected to make headway in provincial pools and demands resumed state control in industry and finance. The exchange rate intervention formula could again come under review amid a strong showing as the recent hands-off stance hikes the cost of imported consumer goods and manufacturing inputs. Global investors starting to focus on the US presidential race also express worry on about the vituperative rhetoric and border wall building promise of Republican standard-bearer Donald Trump, and question the Democratic candidates’ immigration and foreign policy positions as well particularly the absence of free-trade agreement backing. The TPP would update the two-decade old NAFTA and subsequent amendments, but is unlikely to see a congressional vote before the Obama term ends, according to experts.

Argentina was up over 10 percent on the MSCI frontier index, as the sponsor began to study the possibility of core universe return as part of the Macri government’s medium-term reintegration path. However after a giant external debt market the central bank reacted to peso appreciation by suspending overseas purchase of local instruments as it also cut the local benchmark rate toward 35 percent. Following a high court ruling around $5 billion in public pension fund arrears must be met, with the immediate catalyst of a tax amnesty due to mobilize a multiple of that amount, according to projections under more flexible rules than previous attempts. President Macri absorbed a setback in Congress after his early momentum when he resorted to vetoing a no-layoff civil servant bill promoted by the opposition Peronist party. His predecessor Christina Fernandez is under investigation for suspicious hotel deals and central bank currency transactions under the former control regime. Recession will linger this year with the fiscal deficit at 7 percent of GDP, the trade surplus eroding, and both inflation and poverty rates expected to stabilize at 30 percent. Another round of elections is scheduled in 2017, and President Macri and his technocrat team must shed their elite image if his political grouping has any hope of winning legislative majority and sealing the “change” slogan.