Mexico faces a difficult, risk-laden year in 2018 that will shape its longer-term economic outlook, according to a report by the world’s largest political risk consultancy.
Eurasia Group placed Mexico fourth in its Top Risks 2018 report, in which it ranked its top 10 geopolitical risks for the year ahead.
The report cited two main risks to Mexico: renegotiation of the North American Free Trade Agreement (NAFTA) and the July 1 presidential election.
In relation to the former, the firm said that a successful renegotiation is still possible but warned of the consequences of not reaching a new deal or a decision by U.S. President Donald Trump to terminate the 24-year-old agreement.
Eurasia said that those two possibilities would not automatically spell the end of NAFTA but added that “Canada and Mexico would, at least initially, walk away, creating uncertainty over billions of dollars of economic activity in the world’s most prosperous region.”
“Though the pain would be shared, the Mexican economy and those who invest in it would suffer disproportionately, given the country’s deep reliance on trade with the US,” the report said.
The firm also warned that the first risk will likely overlap with the second, amplifying the perils of both.
Although negotiators from all three countries have undertaken to complete the negotiations as quickly as they can, the process remains likely to extend beyond March 30, the official starting date of the presidential election campaign period.
Eurasia warned that after that date “it will become very hard for government negotiators to agree to meaningful compromises without seeming to bow to the U.S. hegemonic neighbor.”
If Andrés Manuel López Obrador were to win the July 1 election, Eurasia said, “an AMLO presidency, particularly if NAFTA’s future remains uncertain, would bring significant market risk to Mexico.”
The leftist leader of the National Regeneration Movement, or Morena party, has consistently led opinion polls and had an 11-point lead over his nearest rival, Ricardo Anaya, in the latest survey by the polling form Parametria.
Eurasia said that “López Obrador is not as radical as some rivals portray him, but he represents a fundamental break with the investor-friendly economic model implemented in Mexico since the 1980s.”
The candidacy of López Obrador’s other main rival for the top job — that of José Antonio Meade for the ruling Institutional Revolutionary Party (PRI) — will be burdened by his association with the unpopular current president Enrique Peña Nieto, the report said. Meade was 16 points behind López Obrador in the Parametria poll.
Eurasia cited high-profile corruption cases, a deterioration of the security system and sluggish economic growth as the main reasons behind voter anger at government.
The Eurasia Group director for Latin America said recently that the combination of political factors made Mexico particularly susceptible to economic volatility.
“The level of uncertainty in Mexico, from investors’ point of view, is one of the highest we have seen in recent decades in the sense of what the development of politics, the economy and the business environment could be, and that level is determined by two events and both of them are political,” Daniel Kener said.
Kener also said that if López Obrador wins, the embattled peso could slide even further against the US dollar, at least temporarily.
“A victory for him could lead to a depreciation in the exchange rate and later an appreciation, depending on the signals,” he said.