With a new, populist president, Mexico tests ‘business as usual’

Many will be watching Andrés Manuel López Obrador’s economic approach, including Jonathan Heath, the Mexican of Canadian descent slated for the central bank. David Agren spoke to him in Mexico City.

By: /
November 23, 2018
Mexican President-elect Andres Manuel Lopez Obrador (back to camera) speaks to journalists in Mexico City, July 6, 2018. REUTERS/Alexandre Meneghini

As Mexico’s president-elect Andrés Manuel López Obrador prepares to take office on December 1, his economic policies have increasingly come under the microscope, from the cancellation of a new airport to dealings with state-owned oil company, Pemex.

“Everything points to a very difficult start to the new sexenio,” wrote economist Jonathan Heath of the new six-year-term administration in a recent column.“The private sector is watching and investing little by little in the face of changes that are aggressive and not very encouraging.

“The new government is not helping itself. It’s trying to complicate a scenario that is already complicated enough.”

Despite the criticism, López Obrador is expected to nominate Heath to fill one of the five seats on the Bank of Mexico’s board. Heath, however, isn’t likely to curtail his candour, even with a pending appointment to the central bank.

“I can be quite direct,” Heath said over a happy hour glass of wine in late October. “But all my criticism has been constructive.”

López Obrador — commonly called “AMLO” — has spooked international investors and Mexico’s business and political classes for more than a decade with his homespun populism, crusades against structural reforms such as the opening of the state-run oil industry, and propensity for peddling nostalgia for a time when Mexico’s economy was closed, government intervention was rampant, but growth was robust.

AMLO promises to restore government’s role in economic development. But he also pledges sound economic policies such as no big tax increases and “more or less” balanced budgets. And in the euphoria of his crushing July 1 election win — in which he claimed 53 percent of the popular vote and his MORENA party took both houses of Congress — he pledged to honour the contracts signed by foreign oil companies and respect central bank autonomy.

The appointment of Heath — someone known to be critical — will test that commitment. It’s especially important as investor fears over an AMLO administration are resurfacing.

For his part, Heath isn’t entirely sure what to expect from an AMLO administration, though he’s hardly panicking.

“There’s nothing that I can hear from them that says they’re going to be that extreme. … I remember when AMLO was head of the Mexico City government. He was very fiscally responsible; I would say conservative. He has always been that way,” Heath said.

“What he wants to do is spend differently” — on social benefits, regional development and infrastructure projects like a railway line through the Yucatán Peninsula and a refinery in his home state of Tabasco — “not spend what you don’t have,” Heath added. “He’s always talked about respecting macroeconomic stability, respecting the Bank of Mexico, so it shouldn’t come as much of a surprise.”

A critic with Canadian roots

Heath, 64, was born in Mexico to Canadian parents, who had moved south. His father ran a Rayovac battery factory and his parents retired to British Columbia after 30 years in Mexico. Heath’s children have since studied at the University of British Columbia, though his own ties to Canada have become distant. He filed a letter with the Interior Ministry at age 18 to retain Mexican citizenship, in the process renouncing Canadian citizenship. Mexico only changed its immigration laws to allow dual citizenship in the last 25 years. Some positions, including those on the Bank of Mexico’s board, still require candidates to be “Mexican by birth,” a legacy of the nationalism of Mexico’s post-revolutionary period.

He has penned a popular column on finances for the Reforma newspaper since its founding in 1993 and for a time served as chief Latin America economist for British bank HSBC. But Heath is as famous for his fondness for fine wines and Negronis as he is his expertise on finances. His Twitter photo features Heath smoking a cigar, cocktail in hand, while the enormity of his home bar and collection of craft gins is legendary. His candour wins fans, too, though it has cost him jobs and isn’t always appreciated in a country where talking out of turn is avoided.

“Unlike economists who fear exposing themselves to reprisals from the institutions where they work, [Heath] can sharply critique the contemporary Mexican reality,” wrote Viridiana Ríos, scholar at the Wilson Centre, a Washington think tank, in the newspaper Excélcior.

One issue on which he has strayed from orthodoxy is AMLO as a problem for the private sector, preferring to instead keep an open mind.

“He’s hard to read,” Heath said of AMLO. “He has the potential to be one of the best presidents, [and] at the same time, one of the worst presidents.”

As inauguration day draws near, AMLO is stoking uneasiness, though many forget that “even the private sector was fed up with the [Enrique] Peña Nieto government,” Heath said. A vote in October in favour of pulling the plug on an already one-third completed, USD$13-billion airport for Mexico City sent the peso plunging. AMLO was considered to be influential on the results, as he pushed for the referendum and was in favour of the cancellation himself. 

Markets fell further after AMLO’s allies in Congress later proposed a plan for slashing hefty bank commissions — a common complaint as foreign-owned banks (including Scotiabank) charge more in Mexico than back home, according to banking watchdog CONDUSEF.

That quickly ended the honeymoon between AMLO and the private sector, Heath said in an interview with OpenCanada the day after the airport announcement. Heath later tweeted an Economist story with the headline, “Adiós to certainty: Mexico’s economy.” 

Separating business from politics

Some pundits see politics at play in AMLO’s posturing, as the business sector has gained influence since the implementation of the original NAFTA deal in the 1990s and can’t be cowed as easily as it was in past years, when state control of the economy was common and expropriations always a possibility.

AMLO has also called out some in the private sector for allegedly making their money unethically, a charge business people reject. It’s a hard accusation to rebut in a country where crony capitalism is common and politicians are often alleged to be doing private business with public works. There was also symbolism in stopping the airport’s construction, even though AMLO’s proposed alternative — keeping open Mexico City’s existing airport, increasing service at Toluca to the west of the capital and building a terminal and extra runway at an air base called Santa Lucía — hasn’t been shown yet to be viable.

“What’s clear is political and economic power are no longer the same,” Diego Petersen Farah wrote in the Guadalajara newspaper El Informador.

 Said in other words, businessmen will no longer make decisions nor with they be privileged interlocutors in this country. The government is no longer theirs, neither is it for them,” Petersen wrote. Cancelling the airport via a consultation — however flawed — “was [AMLO’s] first act of authority.”

'Businessmen will no longer make decisions nor with they be privileged interlocutors in this country.'

In past years and at times during the 2018 campaign, AMLO complained bitterly of Mexico’s paltry economic growth over the past 25 years, beginning with NAFTA’s implementation. GDP per capita has slumped, though the economy has been stable.

AMLO has kept NAFTA (now USMCA) and tapped respected figures in finance and economics to fill senior positions. But analysts say the appointees are not of the same club of economists from schools like the Autonomous Technological Institute of Mexico (ITAM), the University of Chicago and MIT, who have filled the Finance Ministry and central bank and pursued a stability-at-all-costs approach.

“Those guys weren’t about stoking growth. They were about containing the instability of the markets, put[ting] Mexico on an even keel, keep it afloat. But over time, that was no longer enough,” said Federico Estévez, political science professor at ITAM.

Estévez points to Heath as bringing a fresh perspective to the Bank of Mexico.

“What happened is it became a brotherhood, a fraternity of the high-brow economists. It became mostly an exclusive club,” he said. “Heath isn’t such a bad sort of compromise candidate: someone the technocrats can still deal with and will have a position that is not tied to faction.”

By maintaining some orthodoxy in macroeconomics and appointing respected figures to financial positions, AMLO is “trying to disavow governments [like Argentina and Venezuela] which fought with international organizations” like the International Monetary Fund, said Aldo Muñoz Armenta, political science professor at the Autonomous University of Mexico State. In recent years, “the idea [in Mexico] has been that finances should be stable at the cost of fighting poverty.” 

A new approach on the horizon?

Heath, a specialist in macroeconomics and University of Pennsylvania graduate, remembers the bad old days of triple-digit inflation and an inability to freely publish economic analysis. He made his name during the mid 1990s “tequila crisis,” when the peso was devaluated. At the time, he headed a think tank affiliated with a brokerage firm and a bank and returned from Christmas holidays to read through a government response to the crisis. He issued a note to clients, saying the response wouldn’t work. The note was faxed around New York, and when the finance minister arrived there to reassure investors, the first question from investors was derived from Heath’s assessment.

Shortly thereafter, Heath was told to write a new report “correcting” his old report. He declined and was fired or quit, he said, not remembering which was accurate (his response to the request, he said, was an expletive).

In those days, “if the finance minister didn’t like what you said, he told your boss and you’d get fired,” he said. In the aftermath, and as an independent economist, “I had every single financial institution with an interest in Mexico” as a client, he added.

The tequila crisis exposed an information breach between international investors who return to Mexico as an emerging markets darling every so often, such as the early 1990s and the start of Peña Nieto’s presidency, and ordinary Mexicans, who seem more circumspect about promises of change.

Many Mexicans never got excited over Peña Nieto’s reform agenda — and past privatizations and reforms still rankle people, though Heath credits a 1993 reform giving the central bank autonomy with curbing inflation. And Heath points out that many Mexicans in 1994 started buying dollars, sensing something was amiss, as international investors poured money into the country. The peso subsequently crashed.

“People here buy dollars and ask question later,” Heath said, repeating one his favourite maxims.

Voters opted for AMLO in part over frustration with stagnant wages and rising prices. The minimum wage is in real terms below where it was in 1995, according to government statistics — something AMLO promises to increase.

Heath has defended an increase in the minimum wage, which was kept low as an inflation-fighting mechanism. He publicly chided the central bank over a 2016 study positing raising the minimum wage would trigger a disproportionate rise in inflation. “In so many word, Banxico is telling us no possibility exists of increasing the minimum wage,” he wrote in Reforma. “The study is full of supposed fantasies, difficult to believe. ... It gives the impression they first wrote the conclusions and later looked for ad hoc empirical evidence.”

He also senses the public’s frustration with their personal finances in recent years as the peso sank (through no fault of Peña Nieto’s, Heath says). The government-set gasoline price increased and government spending became “inefficient,” failing to contribute to growth and poverty reduction).

Average growth during the 2012-2018 Peña Nieto administration will average just 0.1 percent due to “inefficient spending” — which encompasses everything from fruitless Pemex exploration expeditions to corruption — according to Heath’s figures.

So, while AMLO promises to fight corruption and excesses of government, by cutting civil servant salaries for instance, Heath will be one of many watching closely.

“The sensation is felt by the public: here’s the government taking their money and they’re not seeing anything. … They feel it in their pocketbooks,” Heath said. “People want a government that spends more efficiently.”