Eurasia Group | Is the left headed for a comeback in Mexico?

Is the Mexican Left Headed for a Comeback?

Eurasia Live
02 August 2016 | 09:10 AM ET
why the third time may just be the charm for Mexico's leftist leader In Mexico, both the promise and the problems continue to grow. Here's Daniel Kerner, Eurasia Group's Latin America Practice Head, on political dynamics, economic potential, and the possible return of a leftist champion in Mexico.
Willis Sparks: President Pena Nieto's reforms, particularly in the energy and telecom sectors, are historic. When will their economic benefits for Mexico become apparent?
Daniel Kerner: Who knows! This is the perennial question in Mexico. In the 1990s, investors were excited with the country's reforms, but the growth never really came. Mexico has since experienced a remarkable period of macroeconomic stability, but the growth rates have been disappointing.  The Pena Nieto administration pushed forward with more reform. Of these, the truly transformational reform is the opening of the energy sector. This opens the entire sector, from upstream to downstream, and is designed to attract private investment. The transformation will take years to fully materialize, but the impact will be felt when it does.
Yet, Mexico's economic fate remains too dependent on the US economy, and there are still enormous challenges that will constrain growth. Poverty is still too high, and too many workers remain stuck in the informal workforce, denying them pensions and other basic benefits. There are also enormous regional variations in the economic environment.
Pena Nieto's reforms will probably continue to boost some of the positive trends that have helped Mexico in the past few decades, especially manufacturing investment tied to the North American supply chain. But poorer areas, especially in the south, won't see major benefits.
Sparks: The next presidential election is still two years away, but how likely is it that Andres Manuel Lopez Obrador can lead a comeback for the left?
Kerner: This is a very real risk. Lopez Obrador has been the runner-up in the past two presidential elections and remains a popular figure and credible contender. His newly created Morena party performed very well in recent legislative and gubernatorial elections, and it has already become the most important party on the left. In the next two years, economic growth will remain subdued, security will probably continue to deteriorate, and it's hard to see the broader corruption outlook improving much. Thus, anger over corruption and low growth—and a growing anti-establishment trend among Mexican voters—will fit well with Lopez Obrador's message. And unless oil prices recover substantially, there's not much the unpopular Pena Nieto can do to reverse this.
Lopez Obrador is an astute politician, but he will have to moderate his tone during the campaign a bit in order to win. He also needs to unify a splintered left as the ruling PRI party works hard to divide the anti-PRI vote. If the center-right PAN party chooses its candidate wisely, it can be a competitive option again. Thus, Lopez Obrador will be competitive, but his victory is far from assured.
If elected, he will probably be more pragmatic than many fear, at least in the beginning, to try to limit the potential economic damage of a pessimism-driven downturn in the business and investment climate following his win. Mexico is highly integrated into the global financial markets, and a Lopez Obrador victory will bring volatility to the peso and bond markets. Over time, the risk of policy deviation will increase—and the opening of the energy sector could be at risk. Fully reversing it would be close to impossible, but the opening could become much more complicated and a much slower process.  
Sparks: Are you optimistic about Mexico's future? Why or why not?
Kerner: The outlook is truly mixed. On the one hand, in spite of all the talk about disappointing growth, Mexico's performance over the past couple of decades has not been bad. The country has grown without putting macroeconomic stability at risk and has moved to become a manufacturing powerhouse closely integrated to the US. The middle class has grown remarkably, and without any surge of populism. The recently implemented reforms should help consolidate these positive trends. If either the PAN or PRI wins the 2018 elections, and if the US economy grows fairly well, the positive trend will probably continue.
That said, the risk of a Lopez Obrador victory remains high. Even if he loses, public frustration over low growth, corruption, crime and other problems will remain a source of tension. Mexico still has very high levels of poverty, and better management of fiscal and debt dynamics will be needed. Mexico still looks better than most emerging markets, but the challenges are real.