The budget is coming up in the first two weeks of December, and the market is nervous.

Rob Simpson, emerging market fixed income portfolio manager at Insight Investment, part of BNY Mellon IM says:

“When Obrador (AMLO) was elected the next president of Mexico last summer, investors were initially willing to give him the benefit of the doubt. AMLO’s victory speech was seen as conciliatory and he further sought to allay investor concerns through meetings with key domestic business leaders.  Initial comfort gave way to complacency, bonds and the peso both performed well, with investors assuming that once in office AMLO was likely to take a more pragmatic approach to policy than his campaign promises suggested.

“Recent policy decisions have, however, put paid to that complacency. Investor sentiment was badly shaken after a nationwide referendum was held on whether a new airport for Mexico City (already partially built) should be completed. Despite the vote being non-binding and a miniscule turnout of just 1%, AMLO pledged to cancel the project after voters rejected it. This has had the effect of sending a negative signal to both local and foreign investors, prompting a sharp sell-off in bonds and the peso and has raised concerns that other government projects could be at risk.

“Further populist referenda have since been announced, and the market is now concerned over the populist direction of policy. Additionally, we have seen a brain drain of key individuals leaving various areas of government and the central bank.

“The budget is coming up in the first two weeks of December, and the market is nervous. While 2019 might not be so bad, albeit we expect some slippage versus previous estimates, the extrapolation to future years may be concerning and warrants close monitoring.”

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