Government Rift Deepens Mexico’s Economic Crisis

The abrupt, door-slamming resignation Tuesday of Mexico’s finance minister highlights the difficulty that leftist firebrand President Andrés Manuel López Obrador has found turning his inchoate ideas into economic gains—with potentially dire consequences for a country facing a dearth of investment and a real risk of recession.

Carlos Urzúa, a widely respected academic economist tasked with the seemingly impossible job of both keeping Mexico’s budget on an even keel and advancing López Obrador’s unorthodox agenda, finally called it quits in a sharply worded letter of resignation that gave credence to months of rumors of policy clashes at high levels in the new Mexican government.

“There were many differences of opinion on economic matters,” he wrote, before continuing in brutal fashion: “I’m convinced that every economic policy should be evidence-based, considering the consequences that such a policy can have and free from extremism, whether of the right or the left.” Urzúa concluded by saying that he was “driven to resign.”

Tensions between López Obrador, commonly referred to as AMLO, and Urzúa had been building for months, since the new president, who took office in December 2018, canceled a partially built, $13 billion airport in Mexico City and embarked on a series of ill-advised ventures, such as a high-speed train through the Yucatan Peninsula and an $8 billion oil refinery that no foreign oil company could or would build.

Coupled with that were repeated attacks by the president on Mexican institutions, such as the energy regulator, and—more chilling to foreign investors—apparent attacks on the country’s high-profile energy reforms, which were meant to open Mexico up to foreign oil and gas investment after eight decades of isolation. Most recently, López Obrador lambasted a standard contract for natural gas deliveries made by the previous administration as “unfair,” spooking foreign investors who fear the left-wing president will seek to tear up oil exploration contracts made under the recent energy policy changes.

“It’s extremely troubling in terms of Mexican respect for contracts and the rule of law, and Mexico’s ability to attract investment,” said Antonio Ortiz-Mena, a former Mexican trade negotiator and economic expert.

Urzúa’s deputy, Arturo Herrera, will take over the unpalatable job of mediating between López Obrador and economic reality. Late Tuesday, the Mexican president expressed his complete confidence in the World Bank alumnus and longtime civil servant as Herrera stood by, looking so uncomfortable that he might have been in a hostage video posted on López Obrador’s Twitter feed. The incoming economy chief averted his eyes as López Obrador talked of the need to carry through his economic reforms after decades of what he calls failed attempts at liberal economics.

“Herrera looks like he’s about to be put in front of the firing squad—he knows what he’s let himself in for,” said Duncan Wood, the director of the Mexico Institute at the Wilson Center in Washington.

The market reacted immediately to Urzúa’s resignation by sending the peso sharply down, where it stayed on Wednesday. Since López Obrador measures his success in large part by the value of Mexico’s currency, that gives Mexico watchers some reason to hope that the president realizes that investors are watching the country carefully and are worried by instability in the economic team. The first question is whether Herrera, who has repeatedly been undercut by López Obrador in public in recent months, will have the wherewithal to push back against impractical economic ideas.

“I hope that Herrera has the, let’s say, fortitude to stand up to the president,” Wood said.

The bigger question is whether López Obrador, who is still basking in generally high approval ratings, understands the need to change course on his economic policy, or if he doubles down. Beyond the weakened currency and spooked foreign investors, Mexico’s economy is facing the prospect of essentially zero growth or even recession—at a time when its No. 1 trading partner, the United States, is booming economically.

“Given past experience, and knowing AMLO, he is incredibly stubborn—Herrera is in for a rough ride, and so is the Mexican economy,” Wood said.

The high-profile departure of a top economic official fretting about the president’s economic ignorance, extreme ideas, and imposition of patently unqualified people for top jobs—another complaint by Urzúa—invites obvious comparisons with Mexico’s northern neighbor.

But there are a couple of key differences between President Donald Trump’s United States and López Obrador’s Mexico. First, despite Trump’s trade wars, massive budget deficits, and statist economic policies, GDP growth is robust—unlike in Mexico. Second, Trump doesn’t have a blank check to implement policies—again, unlike in Mexico.

“Trump is constrained by Congress, and by the Supreme Court, and we are not seeing those same checks and balances in Mexico,” Wood said. López Obrador’s political party controls both chambers of the Mexican legislature, and Mexican lawmakers are just as pliable, or more so, than Republicans in the United States.

“The president says something, and the rank and file in Congress says, ‘He must be right,’” Wood said.

The big fear is that López Obrador will scare off the very foreign investment needed to spur the economic growth that he has pledged, which will require billions from both domestic and international sources. In the past, Mexico sought financial stability, like balanced budgets and tamed inflation, to assuage foreign investors. But now there is a bigger bogeyman, and he’s in the presidential palace.

“AMLO rightly criticizes previous governments for not achieving economic growth,” said Ortiz-Mena, who is now at Albright Stonebridge Group, a consultancy. “But investors are looking well beyond fiscal and monetary policy. There is a very dangerous misunderstanding that investment will flow as long as there is stability. The way he is going about it will be hugely counterproductive.”

That’s what makes López Obrador’s rhetorical attacks on the prior administration’s energy reform, like the threat to take gas pipeline contracts to arbitration, so worrisome. It’s not just that Mexico needs massive foreign investment to rejuvenate its tired oil fields and to build new refineries. It’s that rules-based investment in energy the key to unlocking foreign and domestic investment across all sectors of the Mexican economy.

“What the president doesn’t understand is the contagion effect—energy reform is central in establishing Mexico as a place for investment, and by undermining that, he undermines the investment profile of the entire country,” Wood said.