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Mexican finance minister's resignation is an ominous sign

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      By Emerging Markets Debt Team, Eaton Vance Management

      Boston: The resignation of Mexican Finance Minister Carlos Urzua on July 9 is a troubling sign for investors about the young administration of President Andres Manuel Lopez Obrador (AMLO), who was inaugurated last December. AMLO is a charismatic populist leader who decisively defeated candidates from the two entrenched parties, the National Action Party (PAN) and the Institutional Revolutionary Party (PRI).

      Much of the uncertainty surrounding AMLO's intentions stems from mixed signals on the campaign trail. In some speeches, he presented himself as a fiscally conservative pragmatist, yet others were dominated by a hard-edged populism. His decision last October to cancel the massive Texcoco project to build a new airport for Mexico City did nothing to allay concerns because it raised questions about his willingness to honor contracts.

      Such concerns were heightened by AMLO's decision to force renegotiation with a Mexico-U.S.-Canada natural gas pipeline consortium, designed to supply one-third of Mexico's needs. Urzua objected on the grounds that it could jeopardize passage of the new U.S.-Mexico-Canada Agreement (USMCA) and harm national development.

      We view it as another example of AMLO potentially not honoring contracts signed by predecessors. Also, it highlights how significant the loss of Urzua is, as he was someone seen by many as being able to push back against AMLO's more unorthodox policies and plans. The finance minister mentioned poor policymaking, appointment of officials without adequate public finance knowledge and the existence of conflicts of interest in the administration.

      Most investors have been giving Mexican assets the benefit of the doubt despite the worsening policy outlook. Markets initially sold off on the news, but quickly rallied back (and more) once Arturo Herrera was named as the successor.

      We think the market is not appreciating the medium- and long-term impact of Urzua's move - it further cements our belief that the macroeconomic deterioration under AMLO will be quicker than expected. AMLO has promised fiscal discipline, but we are very skeptical, given what we have seen so far both in terms of actions and plans.

      Bottom line: Fiscal slippage, lack of forward thinking on PEMEX (Mexico's troubled energy giant), a poor investment climate, lack of clarity on USMCA approval, potential recession and sticky high inflation don't add up to a case for optimism for Mexican assets going forward.