Latin America Advisor

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What Does Morena’s Dominance Mean for Mexico’s Economy?

Mexico’s peso has tumbled against the U.S. dollar since Claudia Sheinbaum was elected president and the ruling Morena party dominated congressional elections on June 2.

A day after the landslide victory of Claudia Sheinbaum, the candidate of Mexico’s ruling Morena party, and the party’s dominant showing in congressional and state races, the country’s peso and stock market plummeted. The following day, Finance Minister Rogelio Ramírez de la O–who Sheinbaum said will remain in his position in her administration–sought to reassure investors that the incoming government will remain committed to fiscal discipline. He said the government will cut the budget deficit and maintain central bank autonomy. To what extent is Sheinbaum’s team calming the markets, and how are investors likely to react in the coming months? What will Sheinbaum’s policies mean for Mexico’s economy and investment? What are the biggest economic changes that Mexico could see under her administration?

Andrés Rozental, member of the Advisor board, president of Rozental & Asociados and former deputy foreign minister of Mexico: “The most important lesson for Mexico’s president-elect to learn since her landslide victory is that financial markets and investors act as a check on questionable economic and political proposals. Although current President López Obrador (AMLO) insists that ‘justice’ trumps the markets, or even the law, Claudia Sheinbaum had a good baptism of fire as to why that isn’t the case. Even after Mexico’s finance minister tried to calm markets, the peso fell more than 8 percent in the week after a leading congressman from her Morena movement announced that the constitutional reforms AMLO unsuccessfully tried to get passed during his six-year term would now be rammed through by a supermajority-dominated Congress, even before the end of AMLO’s presidency. The adverse reaction to Sheinbaum’s 30-plus percentage point winning margin has more to do with these proposed constitutional amendments—judges to be elected by popular vote; a reform to eliminate autonomous oversight institutions and regulatory bodies; changes to the composition of Congress by getting rid of plurinominal candidates, among others—than with fiscal discipline or an austerity budget. If the incoming administration can control the legislative and judicial branches with supermajorities and politically subservient judges, Mexico would lose the fundamental division of powers that characterize a democracy, which scares many Mexicans and foreign investors as well. Until now, Dr. Sheinbaum has followed AMLO’s line with respect to economic policy. However, she has also said that she is her own person and plans to govern according a city about 372 miles south of Santiago was hit hard as the Curanilahue and Las Ranas rivers overflowed after the area received more than 13 inches of rain in just hours, Agence France-Presse reported. That was more rain than the area received in all of last year. In the coastal resort city of Viña del Mar, approximately 150 people were evacuated because of flooding, the AP reported. On Thursday, Chile’s weather service issued an alarm covering 14 million of Chile’s approximately 20 million people, but the alert was lifted after 80 percent of the storm passed and entered Argentina, AFP reported. “The worst of this frontal system is behind us, but we cannot let our guard down,” Chilean Interior Minister Carolina Toha said Thursday. She added that the government had declared a catastrophe in five regions in order to speed the deployment of emergency resources. The rains hit the country while President Gabriel Boric is on an official visit this week to Europe. “When someone loses part of their house, part of their assets, when they to the realities of Mexico’s economy and international commitments. We’ll have to wait and see.”

Pamela Starr, senior advisor at Monarch Global Strategies and professor at the University of Southern California: “In the wake of Claudia Sheinbaum’s landslide victory, her three-party alliance is the new hegemonic political force in Mexico. Markets temporarily recoiled at this surprising result, but calming words from the president, the president-elect and Finance Minister Ramírez de la O quickly stabilized them. Ensuing events, however, have been more troubling. President López Obrador supported the promise of an outgoing congressional leader to move forward with a series of radical reforms that would tie the hands of the incoming president. The so-called ‘Plan C’ calls for the new legislature, which takes office Sept. 1, to approve and for AMLO to sign constitutional reforms that would eliminate judicial independence, gut the National Electoral Commission and eliminate a series of autonomous agencies essential to transparency and a competitive economy. If approved, these reforms would sharply restrict President Sheinbaum’s policy autonomy and thus her ability to meet the economic and security challenges she will inherit. Sheinbaum has signaled that she intends to take a more technocratic course to achieving the ideological goals of AMLO’s Fourth Transformation. This includes a more friendly investment climate for clean energy generation and modernizing electricity transmission as part of a broader strategy to attract nearshoring. This is not because she is secretly a capitalist at heart—quite the contrary. But she does understand that higher tax revenues are essential to achieving her core policy aims and, since she has promised not to raise taxes, this can only come from expanding the tax base through investment and growth.”

Ruben Olmos, chief executive officer of Global Nexus LLC: “Dr. Sheinbaum’s team is doing its very best to present her as a responsible, forward-looking leader who is talking to heads of state and multilaterals and sitting down with representatives of U.S. companies. The problem is the sitting president who wants to use his remaining time in office to advance his controversial reform agenda amid concerns from investors and markets. In an effort to calm things down, President-elect Sheinbaum will announce her cabinet sometime next week and indicated that the changes to the judiciary will have an open debate among academics and practitioners and will be presented to Congress in September and most likely approved by the ruling Morena’s supermajority in the Chamber of Deputies and with the help of smaller parties in the Senate. The incoming administration will need to sort things out to avoid a turbulent end of the year given a fiscal gap nearing 6 percent of GDP, budget constraints to finance the continuity of social programs, public security concerns, infrastructure development and volatility around the U.S. election outcome.”

Rodrigo Abud, managing director at Panorama: “Morena’s landslide victory has raised concerns in the markets over the prospects of a government with nearly unrestricted legroom to approve controversial constitutional reforms. With a supermajority in the lower house of Congress and nearly a two-thirds majority in the Senate, Mexico’s power dynamics quickly shifted toward the private sector and civil society. On top of recent attempts to stabilize market volatility, the new administration will need to balance President López Obrador’s post-electoral influence while charting a new agenda. The expansion of Morena generates political strength but also reveals internal factions that will compete for policy direction. Optimism persists as a new cabinet announcement next week is expected to reduce uncertainty and clarify institutional roles. The critical question is whether appoint- ments will prioritize technical expertise or ideological loyalty. Sheinbaum has commit- ted to political inclusiveness, announcing public consultations before new legislation is approved in September. Overhauls to regulatory bodies like the CRE and INAI would reportedly be discussed at a later stage. Finally, the U.S. presidential election could have a significant impact in Mexico around nearshoring, migration and security. The government’s proposed strategies to curb the fiscal deficit, uphold the central bank’s autonomy and bolster social expenditures are promising. However, sustaining these plans could be challenged by an uncertain investment landscape, aggravated by the absence of institutional checks. Without a stable political environment for investment, even the most robust economic plans may falter. To succeed, the administration must avoid the temptation of ruling unilaterally and cultivate an environment conducive to long-term investments.” 

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