Citigroup Warns Mexico of Deficit, Price Surges if Obrador Wins

  • Economist’ s note breaks with banks’ passive role in election
  • AMLO would hurt peso and impact credit rating: Sergio Luna

Mexico’ s peso would swoon as its deficit balloons under Andres Manuel Lopez Obrador, the presidential candidate who’ s leading in polls by double digits, Citigroup Inc. warned in a note to clients.

The economic platform of the front-runner in the July 1 elections would cut 0. 7 percentage points from projected economic growth and raise inflation estimates by 23 percent, wrote Sergio Luna, chief economist for Citibanamex, the bank’ s Mexico unit. The widening fiscal deficit would impact Mexico’ s credit rating and lead to higher interest rates across maturities, Luna wrote.

The statement marks a stark shift in tone from financial institutions as elections near and Lopez Obrador’ s lead has widened to 20. 5 percentage point from his nearest opponent in Bloomberg’ s Poll tracker. The candidate has pledged to halt gasoline-price increases in real terms, cancel a $13 billion new airport project and suspend oil auctions in a landmark reform that opened crude drilling to private companies.

While he’ s pledged to maintain Mexico’ s primary surplus and cut government spending to pay for his programs, some bank economists began to show skepticism — though none as powerfully as Luna.

" The changes proposed by AMLO regarding reforms would eventually generate macroeconomic inconsistencies in terms of monetary, fiscal and commercial policy, as well as distortions at the micro-economic level, " Luna wrote.

The peso took sharp a dip last week after rallying on news that a deal to rework the North American Free Trade Agreement may be reached within weeks. That, along with a high carry trade, led the currency to rally most among majors and ignore electoral risk, Luna said, who warned that the rally won’ t last and will reverse as July 1 draws closer.

The peso will weaken by 19 percent by 2022 as the deficit widens to 4 percent by that same year, Citigroup predicts.