On last Sunday, July 1, Mexico held its largest ever election as over 56 million voters turned out to elect a new president, congress, and over 3,400 positions across all levels of government. Former mayor of Mexico City, Andrés Manuel López Obrador, commonly known as AMLO, won by a landslide, securing 53% of the vote and a 31-point margin versus the second place candidate. While polls had given AMLO a sizeable advantage, the scale of his victory translated to a larger than expected showing in the popular vote and a majority for his coalition in both houses of congress.
In many ways, this year’s election marked a significant shift in Mexico’s political, social and economic history. This year’s election was AMLOs third run for president. In his first run in 2006, AMLO lost by a miniscule margin of <0.6% in the late hours of counting, and then disputed the results by hosting his own “alternative inauguration” in the Zócalo, Mexico City’s historic city center. This image of a scorned and raving man, coupled with some of his more populist ideologies, left many market participants nervous about his return to power.
Yet it was precisely some of these characteristics that led AMLO to victory this year when many Mexican voters wanted change above all else. Following his loss in the 2012 election, AMLO established a new left-leaning party smartly named Movimiento Regeneración Nacional, or “MORENA”, which is Spanish for “brown woman”. The new party became incredibly well-positioned to earn votes from a Mexican public frustrated by a century of rule under establishment parties that seemed only to result in rising inequality, insecurity, and corruption.
Despite the historic nature of these elections and the outcome – the market reaction has actually played out in a somewhat repetitive fashion. Looking specifically at the currency, the Mexican peso (MXN) started depreciating around two months before the election, but then started recovering a couple weeks right before the election and has now completely recovered back to its 200-day moving average.
Part of the recovery could be attributed to the market-friendly message AMLO has projected since winning – he has emphasized more policy continuity, especially in the areas of fiscal discipline, central bank independence, and NAFTA negotiations. However, he has also so far remained committed to some of his more concerning policy proposals – a review of the massive and well-underway Mexico City Airport project, a review and pause in oil-field auctions which were a key component of Mexico’s landmark energy reform, a plan to build additional and likely unprofitable refineries, and additional social benefits for the youth and elderly to be financed from yet undetermined sources. Market participants will need to follow how these policy proposals develop, but for now, markets and AMLO are both enjoying a honeymoon period before his inauguration on December 1.
After December 1, the medium-term story remains more uncertain as AMLO reconciles campaign promises with reality. However, as a country with the most liquid emerging market currency and a large majority of domestic government debt held by foreigners, market discipline will remain a big hurdle for significantly unfriendly policy shifts. While markets may not yet love AMLO, they have certainly learned to live with AMLO for now.