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Mexico’s New Government: A Pivotal Moment for the Country’s Investment Story

The Mexican election results have fundamentally changed the investment thesis in Mexico. In the near term, we remain cautious on Mexico, as we are watching to see whether the new government can take a balanced approach that will encourage fiscal consolidation and sustain support of nearshoring.

Emerging Markets Macro Strategist and Portfolio Manager
Senior Emerging Markets Analyst

Potential Constitutional Reforms Leave Investors with Questions

Claudia Sheinbaum, who won a landslide victory in Mexico’s largest-ever presidential election on June 2, will take the reins alongside a lower House of Congress that is 2/3 controlled by her Morena party—a supermajority that allows Congress to change the Constitution.1

Sheinbaum’s strong mandate means that she will be able to consolidate and expand the policies that have made the Morena party popular with voters. However, it also means that current President Andres Manuel Lopez Obrador (AMLO) can push through some of his 20 constitutional reform proposals2  before he leaves office, which could hinder some of the most important economic tailwinds in the region.3

The election occurs at a big moment in Mexico, as the country continues to benefit from nearshoring opportunities given its geographical proximity to the US, its demographics, its logistical advantages and its relatively lower wages. Sheinbaum has the opportunity to further boost Mexico’s position on the ongoing redesign of global supply chain. However, if AMLO’s proposals are pushed through, they could have an adverse impact on nearshoring and on two other key trends for investors: the path toward fiscal consolidation and the strengthening of the government’s institutional framework, also known as “checks and balances.” These three pillars present both opportunities and risks to Mexico’s future, requiring the new government to find the right balance. The new government’s actions will determine the trajectory of investor views on Mexico over the medium to long term.

Nearshoring Remains the Country’s Major Growth Engine

Most political analysts expect Sheinbaum to prioritize nearshoring opportunities. Mexico has already reaped benefits from nearshoring including higher per capita income and rising GDP growth expectations, though gains in foreign direct investment (FDI) are disappointing (Figure 1). Keeping the benefits flowing and continuing to attract nearshoring investment requires improvements in areas such as rule of law, competitiveness, and infrastructure, as the increased manufacturing activity relies on sufficient power generation capacity and clean water. Sheinbaum’s background is encouraging, as she is a Nobel Prize-winning climate scientist and she holds a doctorate in energy engineering. However, Sheinbaum has publicly supported the constitutional reforms proposed by AMLO.

Fiscal Consolidation Commitment Needed to Maintain Macro Policy Framework

If Sheinbaum continues AMLO’s existing fiscal policy, this would imply supporting higher wages, extending social programs, and implementing infrastructure investment, all at a time when Mexico’s government deficit is expected to reach 5.9% in of GDP in 2024—a record high. Wage increases and higher government spending will also keep upward pressure on inflation, preventing meaningful reduction of a risk premium in Mexican financial assets. To date, Sheinbaum’s plans to reappoint Mexican Finance Minister Rogelio Ramirez, combined with both of their recent pledges to fiscal prudence, are reassuring. However, there have been no stated plans to cut fiscal spending and the proposed constitutional reforms will make fiscal consolidation challenging.

The Institutional Framework Could Become Less Favorable

The mandate of Sheinbaum’s new government gives it nearly unbounded sway over Mexico’s legal and financial policies, a situation that has caused alarm over the lack of “checks and balances” to executive power. The fear is rooted in potential passage of AMLO’s constitutional changes in their current form. These changes include overhauling the judicial and electoral systems; eliminating autonomous regulatory agencies; and expanding pension reform. After winning the presidential elections, Sheinbaum expressed support for AMLO’s proposed judicial reform.

Constitutional reform, or any other measure that threatens the independence of regulatory autonomous agencies or undercuts USMCA4 commitments, risks further dilution of checks and balances and of benefits from nearshoring. Accompanying this, we could see a loss of business and investor confidence and further challenges to fiscal consolidation.

The Bottom Line

We cannot overstate the significance of this election to the next chapter for the Mexican economy. The government checks and balances that guarantee a balanced approach on the fiscal policies, institutional policies, and especially the rule of law during AMLO’s administration, may no longer be in place.

We see the markets demanding a higher risk premium on Mexican assets in the near term as the blowout win for Sheinbaum and the Morena Party increases fear over constitutional reforms that will make fiscal consolidation harder and impede Mexico’s ability to attract capital. Over the next few months, we expect this news to keep upward pressure on interest rates and spreads for credit assets in the region, as well as downward pressure on the Mexican Peso and equities.

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