The recent landslide victory of Mexico’s ruling party, MORENA, has raised significant concerns among investors, who fear potential shifts in the country’s legal and economic landscape. President Andres Manuel Lopez Obrador, in his final months in office, may leverage the party’s super-majority in the legislature to implement sweeping constitutional changes, potentially disrupting the business environment.
Key Concerns
Lopez Obrador has proposed several constitutional changes aimed at restructuring Mexico’s judiciary, weakening regulatory agencies, and expanding social welfare programs. These measures have sparked anxiety among investors due to fears of instability and unpredictability. Esteban Polidura, director of investment strategy for the Americas at Julius Baer, emphasized the need for a stable and independent judiciary. He noted, “What an investor wants least, especially one investing billions in Mexico, is for the rules of the game to suddenly change.”
One of the most contentious proposals involves reducing the number of Supreme Court judges from 11 to 9 and subjecting all judges to a reconfirmation election. Critics argue this would undermine judicial independence, a cornerstone for investor confidence.
Economic Implications
Lopez Obrador’s plans also include increased spending on pensions and other social benefits, raising concerns about Mexico’s fiscal health. The government projects a fiscal deficit of 5.9% of GDP for 2024, the highest since the 1980s. Aaron Gifford, senior emerging markets sovereign analyst at T. Rowe Price, highlighted fears of fiscal slippage despite President-elect Claudia Sheinbaum’s pledge of fiscal responsibility.
Sheinbaum’s Approach
Claudia Sheinbaum, set to take office on October 1, has largely aligned herself with Lopez Obrador’s policies but may adopt a more gradual approach to reforms. While she has signaled a commitment to fiscal orthodoxy, the extent of her deviation from her predecessor’s interventionist policies remains uncertain.
Damian Buchet, chief investment officer at Finisterre Capital, noted that the current budget appears politically motivated to allow Lopez Obrador to complete key projects. However, Sheinbaum may steer the economy back toward fiscal prudence.
Investor Sentiment
The overarching concern for investors is the potential erosion of established legal and regulatory frameworks. Ramse Gutierrez, co-director of investments at Franklin Templeton in Mexico City, emphasized the critical role of independent institutions in maintaining market confidence. “The main issue is the rules of the game, the State of Law, that the established rules are followed,” he stated.
As Mexico transitions politically, the business community will closely monitor the actions of both outgoing President Lopez Obrador and incoming President-elect Sheinbaum. Their decisions will have significant implications for the country’s economic stability and investor confidence. Ensuring a balance between political ambitions and economic stability is crucial for maintaining investor trust and fostering sustainable growth in Mexico’s economy.
