2018: AMLO to be more fiscally responsible than markets think

We said:

The 2019 budget bill appears likely to be fiscally prudent, aiding investor sentiment, even though fiscal erosion remains a growing medium-term risk in our view. The President-elect's economics team - acutely conscious that investors are anxious about the fiscal situation - has taken care to send the right signals on the 2019 draft budget. Equally encouraging, there are some signs that the economic team is quietly working to pare back some of AMLO's populist proposals in a bid to hew its 2019 budget target. 

Looking ahead, investor sentiment in Q4 will likely be dictated by two major issues. These are: 1) progress (or lack thereof) on NAFTA particularly in regards to Canada signing onto the preliminary US-Mexico agreement; and 2) the final 2019 budget proposal, which must be submitted by 15 December by the new government and passed before yearend. Our base case is that a fiscally responsible budget will be passed, especially given the encouraging signs sent thus far by AMLO's economic team. The fact that there are few penalties in store for the government should it spend more than its allotted budget, as the Pena Nieto administration has shown, is an additional incentive. 

Outcome:

In December 2018, the AMLO administration delivered a 2019 budget bill that was well-received by the market and helped to make the peso one of the best-performing EM currencies in the first four months of 2019. In H1/19, the government beat its primary surplus target by nearly 70%. 

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