What AMLO's Legacy Means For Mexico's Upcoming Election

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1:34Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, I think we, as a podcast, I think we have to do more on Latin America, Latin, economics, the business situation. It's just like a sort of part of the world that I don't think we've covered enough. No, I have to admit this is a total or almost total geographic and economic blind spot for me, with the exception of Guatemala. I just haven't spent that much time in Latin America. I haven't read that much about it. I think the story there is becoming increasingly interesting. And I think if you look at something like Mexico, for instance, there's all this enthusiasm about the theme of nearshoring, the idea that American companies are going to build all these big factories over there.

2:24It's going to be a big beneficiary of trade tensions with China. But at the same time, there's this ongoing political backdrop, which is, as far as I understand it, about to heat up in the shape of the Mexican presidential elections on June 2nd. Yes, that's right. There is a Mexican presidential election coming up on June 2nd, which is like a perfect news hook for us to sort of set the stakes, understand what this is all about and sort of use that as an entryway to expand our coverage. It is sort of crazy just in general in the media. And so I'm not trying to excuse us by implicating the entire media.

3:01It does feel like here in the US, there's much attention paid to Europe and the Middle East, obviously, and various things going on in East Asia. And yet the sort of dearth of coverage, I would say, about countries which probably are much more economically and politically intertwined with us than the countries that get most of the sort of foreign coverage. Yeah, it is actually kind of weird, isn't it? Now that I think about it. What's that expression? Familiarity breeds contempt. Contempt, yeah. Maybe not contempt, I guess. Ignorance. Ignorance. You're right. We spend so much time talking about things happening in the Middle East, oil production in the rest of the world, but actually not a lot of that attention trained on Latin America.

3:46So, okay, here is our first offering to course correct and actually learn something about specifically Mexico, but we'll broaden our horizons later and expand. We are going to be the change that we want to see in the world. But to this point, a really interesting fact that probably people don't really realize, Brad Setzer had some great observations about this. Mexico is set to displace China as the biggest source of imports into the U.S. market. We know there is a lot of investment happening. Tesla is building a factory in Mexico. We know that some of the Chinese automakers that are already impaired by tariffs and trade barriers, they're investing in Mexico maybe as a way of getting a conduit to the U.S.

4:30market. So there's more and more investment happening. At the same time, as we know, there are very significant issues with national security, violence, the power of the cartels across the country, all of this setting up in terms of like, what are the stakes of this upcoming election? Yeah, I'm just going to reemphasize that I am not entirely up to speed on the situation. I meant to come in this morning and sort of speed read my way through what's happening in Mexican politics. But then I got really distracted because I read that one of the things that's happening is this huge expansion of the amount of money that the government is spending on the military.

5:09And the defense programs are basically growing very, very quickly. And one of those is something called the National Security Infrastructure Project. And in addition to building military bases and hospitals and things like that, part of the project is to build an equine reproduction center. So I saw that And I spent an hour going down a rabbit hole of why the Mexican army seems to love horses. And there's actually like a lot written about this. So anyway, instead of reading about politics, I was reading about the Mexican army's love of show jumping and things like that. So, okay, let's do it. Let's actually talk about important things.

5:49Listeners getting a glimpse into the Odd Lots episode preparation process right there. We do have the perfect guest. We are going to be speaking with Andrea Navarro, senior reporter covering business for us here at Bloomberg based in Mexico City. She has a big story out now on the AMLO administration, the legacy of it, the upcoming election and what it all means and the balancing of these different countervailing forces. So, Andrea, thank you so much for coming on Odd Lots. And we really appreciate you taking on the task of getting me and Tracy up to speed on what really is an important trading partner, neighbor and big economic story for us.

6:31Hi, Joe and Tracy. Thank you for having me. Let's just start. There is this Mexican presidential election upcoming on June 2nd. Who are the candidates? What is this election about? So yeah, in Mexico, we have elections, presidential elections coming up on June 2nd. And the candidates are Claudia Sheinbaum. She was the former major of Mexico City. And she was anointed by López Obrador to be the candidate of his party called Morena. It's very clear right now that she's a likely winner. She has a 50 % preference in the polls, in the most recent polls. The distant second is held by a woman named Xochitl Galvez.

7:09Xochitl is from a coalition of opposition parties who were severely weakened over the past five or six years during the Lopez Obrador presidency. They came together to choose an opposition candidate that would have the best chances at really competing against Sheinbaum. But right now, the preference that she's showing is around 33%, which is not great. So barring something unexpected and very big, it's very likely that Claudia will win. There is a third candidate. His name is Jorge Álvarez Maynes. And the party he's coming from is Movimiento Ciudadano. The last thing I read is that he's holding about a 9 % preference.

7:53It's not likely that he's going to have a big showing. So it's most likely going to be between Xochitl and Claudia. But as I said, it's basically given that Claudia will win. Joe, I'm just going to say everyone should pray for our Spanish pronunciation in this episode, because Andrea just did a phenomenal amount of like switching there and getting like the accent exactly right. Okay, so Lopez Obrador is, aka AMLO, has been in power for multiple years and is sort of expected to hand off to his successor. Again, I don't know much about Mexico, but one thing I know is that when emerging market analysts start talking about weakening institutions and constitutional reforms, that's probably not a good thing.

8:41And some of those notes have been hitting my inbox relatively recently. What are they talking about here? Yeah, AMLO, as he is known, did have a string of controversial decrees or reforms that sort of scared the market throughout his presidency. I would say that the very first was right as he came into power in late 2018. He canceled an airport project that was going to be built near Mexico City to replace our old crumbling airport that's called Benito Juarez. And that project was planned by his predecessor, Enrique Peña Nieto, and it was going to be a very big airport. It was going to be beautiful.

9:21It was going to be state of the art and handle, I think it was like 68 million passengers a year, which is much more than we can handle now. But he, AMLO, when he was campaigning, he sort of painted the airport as a thing of the elites and that the average Mexican would never use it. And so why was so much money going into a project that was not going to benefit the average Mexican? So he scrapped it. And that really scared investors because a lot of businessmen in Mexico were involved in some way or the other in the airport project. We had Mexico's richest person, Carlos Slim. His company was going to build the terminal and I think one or two of the runways.

10:02And so coming in with such a strong move freaked everybody out and he just scrapped it. It ended up being more costly than actually finishing the project because he had to pay off bondholders. He had to pay off so much debt and so much investment that had already gone into the project. But he just went and did it and he didn't really care. And after that, there were a couple of things that sort of did scare investors. One of them was changing the rules into how airport operators can charge different fees. We have three big companies here that operate most of the airports in Mexico. And it was just one of those moves where nobody saw it coming.

10:41And when he did it, I think it was the largest sell-off of those shares that the companies had ever seen. shares tanked around like 47 % before paring back some losses. He's well known for making these brash announcements and movements that he sort of then pairs back and then people end up feeling that everything is going to be all right. I think that the best way to say it is that he has kept everybody on his toes. But in the end, if you look at the macroeconomics in Mexico, it's not all that bad. The peso is at its strongest that it's been in like 20 years, I think. Inflation is relatively under control.

11:17We have tons of money flowing in. So it's really been surprising, to say the least, to see how he has handled both the businessmen and the macroeconomy.

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13:25Prior to the 2020 election, there was a lot of fear at the time that Trump was going to build the wall and it's going to be terrible for the Mexican peso. Thinking back to that time, the peso is actually through 2020 almost seen as like the purest market proxy for market expectations of the outcome. Didn't you have a trade like that involved the peso? I seem to remember. I'm not going to brag about my pretend trade. Well, I just gave you a peg to brag about it. I did tweet that you sort of took Trump seriously, that the ultimate effective is going to be this sort of reinvigoration of sort of the North American trade at the expense of East Asian trading partners.

14:05You might want to go long Mexican peso against the Korean won. That has been a really big winner in my imaginary FX hedge fund. Yes, thank you, Tracy. I did correctly predict that the Mexican peso would be a winner of the sort of new trading environment, and that has been borne out. But we have seen this idea of like, and it really accelerated after COVID, this idea of like near shoring or friend shoring, this real turn away against particularly China. And we do see this sort of flood of investment in parts in Mexico. We know that Tesla is opening up a new factory. As I mentioned in the beginning, Mexico is set to displace China as the biggest sort of imports into the U.S.

14:47market. So for whatever reason, and you mentioned Amlo's, the anxiety that he gave to the business community, there are a lot of positive Mexican investment stories happening right now. I think that Tesla was a big example when it was announced. The problem with that is that they haven't really started construction on the plant, and there's some doubts on whether that's going to happen at all or if it's going to happen in five to 10 years. But we do know that several suppliers to Tesla already came up and set up shop in the northern parts of the country. And we do have a very big auto industry.

15:25Most of the big car companies have big plants here. And some of them have expanded them over the past few years. So there is a lot of movement. It's important to also mention some of the roadblocks that nearshoring has and why some people are doubting whether Mexico is going to be able to take full advantage of the larger geo-economical situation that it could potentially benefit from. But there are security concerns. There is water scarcity in the northern part of the country, in Nuevo León, in Sonora. There are a lot of states that have been dealing with severe droughts over the past few years.

16:04There's a problem with electricity. There's a big problem with supplying and distributing electricity. So there are a lot of industrial parks that have to set up their own generators, their own grids. They have to go in and connect their plants to the larger grid so that they can get some electricity. It's not cheap. It's not easy to do. All of those hurdles do represent something expensive, and it's very complicated for some companies to take on all of these problems by themselves. So they have been asking the government for more help with security, with electricity, with water, because if they don't resolve all of those things, it's going to be very difficult for companies to just take full advantage of being so close to the United States.

16:48I was going to ask, what's AMLO's approach or feeling towards the nearshoring trend? Because when I think of his policies, you know, sort of leftist, nationalist, he used to, from what I remember, talk about the moral economy and distributing gains and things like that. So I wonder if there's a tension there between that agenda and sort of inviting external capital into the country. But then, of course, you know, that capital leads to jobs, it leads to GDP growth. And there's also a theme here where he has been bulking up the military, he's been beefing up security and trying to crack down on crime, at least publicly.

17:33Yeah, I think that the last part that you said about what he says publicly versus what he actually does is a very big difference. I think that he hasn't really devoted that much time to talking about nearshoring. He knows that it's a thing. He knows that it could be beneficial for the country. But what he's really pushing for is for development in the southern part of the country. So if you look at a map of Mexico, you look at the northern states, and those are the ones that typically have gotten a lot of industrial investment just because of the closeness to the United States. And traditionally, it's just the way it has been.

18:13And if you look at the south and especially the southeast, so where you have the Yucatan Peninsula, Campeche, Oaxaca, some of these poorer states, they have traditionally not received so much investment as their northern counterparts. So what he has really pushed for has been for business to just set up shop down south. And it hasn't really been an easy decision for businesses because of the same things, right? Like you're farther away from the US and when there's not a big environment already set up for you to come in, it's expensive to just set up everything. And there aren't many hotels, there aren't many roads.

18:53It's just a lack of infrastructure that has held some of the businesses back. there's a train that he built. Well, there's two trains that he built. First is a Maya train that's in the Yucatan Peninsula that's supposed to be for passengers and for cargo. And a part of it has already been inaugurated. The other part is still under construction. But his big bet to answer to the new assuring question, I think, is the other train. And it's called the Trans-Hismico. So it's sort of his answer to the Panama Canal. He wants us to replace the Panama Canal with this train. And it's very interesting because if you look at all of the problems with the Panama Canal and with the Suez Canal, you could see some people or some companies potentially using the Transismico to ship some of their goods across the ocean.

19:42So one ending point of the Salina Cruz, Oaxaca in the Pacific, and then the other point is in the Gulf in Veracruz. So if that works out, logistically, it's not as easy because it is a train. So ships would have to come into one of the ports, offload all of the goods, upload them to a train, have the train pass over and then reach Veracruz where it would have to be uploaded into a ship again. But if that works, that could potentially be very good for the country and for the economy. It's just not clear that that's what's going to happen. Tracy, as we continue to do more LATAM episodes, we're definitely doing a specific episode on Mexico's ambition to replace the Panama Canal.

20:26That sounds like a great— That's a great headline right there. That's a great episode in its own right. Let's talk about the national security situation. You have a table in your story that shows just how much homicides in the country have increased over the years. The homicide rate during both the AMLO administration, but also the previous EPN administration, more than double than what it was during the Vicente Fox administration in the early 2000s. What is the sort of big story here? And what has AMLO tried to do and perhaps tried to do unsuccessfully to improve the national security situation?

21:05Yeah. So if you look at that chart and the numbers from starting in 2000, what happened very clearly was around 2008, when Felipe Caleron declared a war on drugs and on cartels, and he just deployed the military into the country and send them out to fight the big cartels. And back then, we did see this splash of violence just across the country, across newspapers. It was horrible. It wasn't what the country was used to. But then it sort of became the way of life. You know, it's very sad to say it, but I think that Mexicans lost some sensitivity to seeing so many murders and so many homicides just splashed across the country.

21:47and it did get a little bit worse during the Enrique Peña Nieto years just because the dynamics of cartels and how they work you know you kill off the leader and 10 new leaders come up and so right now what we're seeing is that the three or four cartels that used to run the criminal organizations they have been spread out and they have sort of multiplied into these cells and these smaller groups that are harder to fight, harder to control, and that have taken on several pockets of the country. So instead of having the big Sinaloa, Tijuana, or Golfo cartels, now you have so many different groups.

22:28I think that they were spread out more across the northern states back then. But now you see headlines where they're taking on several towns that are not that far from Mexico City, which is not something that we were used to seeing. And homicides as a result have just shot up. Now, if you ask AMLO, he's going to tell you that a closer look at the numbers will show a tiny slowdown in the rate. That could be true. But there are also many people who say that that's because statistics in Mexico aren't really that trustworthy. There's a big rate of impunity. There's many crimes that go unreported. If you look at homicides, they have shut up, but AMLO will tell you that they slowed down a little bit.

23:16There's doubts on how trustworthy the numbers are. And the numbers that have come down, it's such a tiny slowdown that it could just be a statistical error, not really a change in the trend. So in the intro, I mentioned the national security infrastructure projects. Could you maybe talk a little bit more about, which include the Equine Reproduction Center, I feel I must repeat this. Could you talk a little bit more about the Defense Department and its role in the economy and what we've seen there recently under AMLO? Of course. So the Defense Ministry has always been the central ministry under which most of the army or the military runs.

24:00But I would say that under this administration, its profile and its power and its budget have grown in a way that's been unprecedented and very surprising. And what we did in the story was take a closer look at the budget and not only at the money that was given to them, but how the money is actually being used. And so we found a program in Mexico, we called it A Partida. And it's literally the line in the budget that's called K-019. It's K-019. And that partida is specifically for the use of the military for its own infrastructure. Because the military in Mexico has been given so many infrastructure projects over the AMLO years, it's easy to think that that's the money that they're using to build the airports or the trains that the president has handed them over.

24:53But it's not. The money in this Partida specifically is for their own use. So it was very hard to find what contracts they were making with this money. But we did find, as you say, a lot of spending on horses, a lot of spending on gyms, on upgrades to their headquarters here in Mexico City. And so it does paint a picture of an army that's taking some of the money that they're being given for its own use. And another thing that's important to mention about this partida specifically is that Congress did not really approve this money for this use. So how it works in Mexico is that the president or the executive chose the Congress a proposal for the budget.

25:38Congress then analyzes it and the lower chamber has to approve it, the spending portion. And what we realized is that over the past few years, the military has used this tool that's called modifications to just change money from different partidas, to move it around and to use it at their discretion. So for this specific partida, the money that was spent eventually there had not been approved by Congress. They just approved a tiny portion, but then they spent whatever they wanted on whatever they wanted. And it's very hard for Congress to keep track of this. And it's very hard for anybody to just find the contracts and see where the average taxpayer's money is going to, which is very, it's very sad.

26:28It's interesting. We recently recorded an episode on some of the structural flaws of the Egyptian economy. And part of the story there was just like, how many aspects of the economy are implicitly or directly under the control of the Egyptian military and some of the problems there? It feels very redolent of that. But just go into this a little bit further because it's still sort of counterintuitive. I think you say in your story that defense spending during the AMLO years is up 128%, which is extraordinary. But talk more about this disconnect between the surge in defense spending and the lack of progress and somewhat arguably perhaps backsliding in terms of security and violence?

27:13Defense spending has grown 128 % over the first five years in AMDO's administration. Over the past year, just a single year, it grew 63%, which is not nothing. And the problem here is that a closer look at the budget will show you how the money is being spent on these big ticket infrastructure projects, on airports, on a state-run airline that nobody thought we needed, on the trains. And the amount of money that's being actually directed to training soldiers, to deploying them, to buying them weapons and equipment has stayed the same. Ever since the Calderon years, that program hasn't really grown.