More Uncertainty but Message Clear: “Fix It”

Antonio O. Garza (Ambassador to Mexico, 2002-2009)

Cross-posted from Ambassador Garza’s July 2016 newsletter.

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This past January, I wrote that the coming year would be one characterized by our “Living with Uncertainty”. Looking back, while it was clear that this year would be tumultuous, I certainly misunderestimated what was to come.

It’s hard not to start with Brexit, when 52 percent of the United Kingdom’s voters chose to break with the European Union.  The vote marks the first departure from the grand European project, tacking an uncharted course for the United Kingdom and for the continent. But the contentious vote was really the easy part. The next two years will be filled with the tougher steps—sitting through painful negotiations, designing a brand new state framework, and calming jittery markets that are concerned with the future of both the United Kingdom and a strong and peaceful Europe.

The anger is not just a United Kingdom and United States phenomenon; voters around the world are frustrated. And Mexico is no exception.

In 2013, it was easy to be optimistic about Mexico, as it pushed through a far-reaching reform agenda. It was the first time in decades that the country was shaking up its economy, and all expectations centered on greater efficiency, roaring GDP growth, social gains, and eventual political benefits for the PRI. Few analysts, if anyone, seriously predicted that only a few years later, the Enrique Peña Nieto administration would be struggling to control mounting setbacks on the streets, and at the ballot box, and investors would starting to think and write about political risk.

In hindsight, it’s a bit easier to see.

First, it’s now clear that the initial reforms missed or ignored the Mexico’s critical issues of rule of law and corruption. And when civil society organizations and academics forced corruption onto the national agenda through the biting Ley 3de3, PRI and Green Party legislators defanged it. To be fair, the final anti-corruption legislation does introduce some welcome steps forward, but the PRI’s refusal to adopt all of the hard-hitting measures didn’t go unnoticed.

Second, specific groups within Mexico have fiercely resisted the reforms, with the starkest opposition coming from the teachers union in response to the 2013 education reform. It’s a truism that all structural reforms have enemies, but the government and teacher union’s fractious relationship took a bloody turn in Oaxaca over the past weeks—leaving at least eight dead, including one journalist, and over one hundred wounded. Peña Nieto and Internal Minister Miguel Osorio Chong promised to investigate those accused of inciting the violence and to seek dialogue with the protestors. But given how both sides are deeply entrenched, real compromises seems unlikely.

Third, external factors have complicated the reforms’ rollout, best exemplified through the energy reform. In a bold move plagued by bad timing, the Mexican government opened its energy sector and promised widespread benefits just before the price of oil tanked. The drop stripped the government of a much-needed source of tax revenue, forcing it to tighten its belt at the very time that it expected to be raking in the pesos.

The frustration took a tangible form during this month’s state elections, where the PRI won only five out of twelve possible governorships and lost party strongholds that it had held for over eighty years. In its place, the PAN, at times aligned with the PRD, swept the seven remaining positions. Andrés Manuel López Obrador’s MORENA party also did relatively well, falling short of winning any governor positions but filling a plurality of the seats in Mexico’s new constituent assembly and emerging as a serious political actor.

One shouldn’t take these results as a sudden open-arms embrace of the PAN, PRD, or Morena, or a rush toward a Brexit or leftist style populism. It seems that the votes were often more to punish the PRI than in support of any other party or movement—in a “least bad” style outcome. In general, many Mexicans remain deeply unhappy with their political options, exemplified best by the extraordinarily low voter turnout rate in Mexico City, at just 28 percent. Worse, of that number, some 172,000 citizens (just over 8 percent of all voters) walked to the polls only to annul their vote in protest.

Political analysts aren’t the only ones taking note of these electoral results and tensions. I’ve found myself increasingly fielding questions from international investors concerned about the possibility for greater political risk in Mexico. Rest assured that in the short term, any risk to investments seems limited. Yet, Mexicans’ frustration with the political establishment is real. I’ll be keeping a close eye on the country and most assuredly will be sharing my thoughts with you in the months ahead.

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