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PODCAST
Jun 20, 2024
29:08 MINS
Ep. 222 - Mexico's election impact: Insights and analysis
![Rafael Amiel Contributor Image](https://cdn.ihsmarkit.com/www/images/0420/Rafael-Amiel-400x400.jpg)
Rafael Amiel
Director, Latin America & Caribbean Economics, S&P Global Market Intelligence
![Jose Sevilla-Macip Contributor Image](https://cdn.ihsmarkit.com/www/images/0721/josemacip-400x400.jpg)
Jose Sevilla-Macip
Senior Research Analyst, Latin America Country Risk, S&P Global Market Intelligence
We analyze the recent election results in Mexico and their potential impact on the country's business environment and geopolitical landscape. Our experts discuss what the ruling MORENA party's victory in the presidential election and its success in state governorships and Congress mean for the legislative agenda, the economic outlook, and foreign policy.
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Transcript
- Transcript for this Ep. 222 - Mexicos election impact: Insights and analysis
-
Call Participants
ATTENDEES
Jose Enrique Sevilla-Macip
Kristen Hallam
Rafael Amiel
Presentation
Kristen Hallam
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Hello. I'm Kristen Hallam, lead content strategist for Global Intelligence and Analytics at S&P Global Market Intelligence and host of the podcast. In this episode, we're focusing on the recent election results in Mexico and the potential impact on the country's business environment and on the geopolitical landscape.
Joining me for this discussion is Jose Enrique Sevilla-Macip, Senior Analyst for Latin America; and Rafael Amiel, Director, Latin American and Caribbean Economics. Welcome back to the podcast, Jose Enrique and Rafael. Let's start by quickly recapping the results of the election for our listeners. Jose Enrique, what can you tell us?
Jose Enrique Sevilla-Macip
Thanks for having me, Kristen. First of all, we need to say that the ruling MORENA party won the -- MORENA won the presidential election, which its candidate Claudia Sheinbaum, with 59% of the vote. That is 32 percentage points ahead of the runner-up. This is not only a big margin, but it's also a wider margin compared to that which AMLO obtained in the 2018 election.
Besides the presidency MORENA also won 7 out of 9 state governorships, including Mexico City, and they also won big in Congress. They, MORENA, together with its allies, the Labor Party and the Green Party obtained above 360 deputies in the lower chamber of Congress, that is enough to pass constitutional majority. That's a 2/3 majority in the Chamber of Deputies.
In the Senate, they fell 2 seats short of a 2/3 majority. They obtained 83 out of 128 senate seats. Now certainly, this is below the threshold required to approve constitutional amendments, but based on precedence of the past couple of legislative elections in which we've seen elected deputy campaigners from other parties to either align with MORENA on certain issues or switch parties altogether.
We believe that it is likely that the government is going to be able to get this 2/3 majority either for specific issues of its legislative agenda or perhaps by having a couple of senators to switch sides and align with MORENA entirely. So just as a recap, MORENA won the presidency, MORENA won the majority of State Governorship and MORENA increased its majority in the Federal Congress, including a 2/3 majority in the lower chamber.
Question and Answer
Kristen Hallam
Wow, that is a big margin for Sheinbaum and significant result for MORENA overall. So what does this mean for the opposition?
Jose Enrique Sevilla-Macip
Well, the opposition is in a very difficult place as of now. Mexico's party system at the dawn of the 21st century was composed basically by 3 parties, which were a center party former ruling PRI party; a conservative party, the National Action Party or PAN and on the left wing, we had the PRD, the party of the Democratic Revolution.
AMLO hailed from this left wing party. After the 2012 election AMLO deflected from this party and conformed MORENA. And basically, after the election won by AMLO in 2018, it disrupted this traditional 3-party system. What we've seen in the 2024 election is further collapse of the 3-party system, and we've got now MORENA as -- clearly consolidated political force nationwide.
And on the opposition, PRD, AMLO's former party lost its registry due to very low vote. The PRI got its worst result ever and the conservative national action party also got less than 20% of the vote. So basically, the opposition won't have the coordination nor the numbers in Congress to stop basically any MORENA initiative.
Kristen Hallam
So now that MORENA has the presidency and the constitutional majority or very close to it in the Senate. What is MORENA likely to do? What proposals will the party try to push through?
Jose Enrique Sevilla-Macip
MORENA has a quite ambitious constitutional reform agenda. In February this year, just 8 months before leaving the office, AMLO announced a set of 18 constitutional amendments that would structurally change the nature of the Mexican state.
Among the most important of these proposed reforms include the transfer of the National Guard, which is militarized Police Corporation. It's administrative transferred to the Defense Ministry. Currently, it is at legally a civilian corporation. With this reform, it will now be fully, and legally a military corporation, which will grant the Defense Ministry a stronger position in the conduction of Mexico security policy.
The second relevant amendment is the so-called judicial reform, which we're going to discuss a bit more afterwards because of its importance and because both AMLO and Sheinbaum have singled its reform out as its first order of business for the new Congress.
Another very relevant amendment proposal is that an administrative reorganization of the Mexican state, which contemplates the elimination of several regulatory organs. For example, the energy regulatory organization, the regulation agency for the telecom sector and the antitrust organization.
Another institution that would be dismantled under this proposal would also be the transparency institute. And the final of these major structural reforms is a change in electoral rules. What MORENA is trying to do is to reduce the number of deputies and senators, basically by eliminating proportional representation. This would allow majority party to have even more power in future congresses.
So far, AMLO and Sheinbaum after discussing which of these proposals, they were going to prioritize, they decided to, as of now and within 2024, focus only on the reform of the judiciary. Not because they have discarded the other ones. Probably Sheinbaum is going to go for them, but probably in 2025 or beyond. So far, within 2024, what we are expecting is passage of the reform to the judiciary.
Kristen Hallam
Wow, well, it sounds like some pretty impactful proposals there. What can you tell us about how these proposals might impact businesses, specifically?
Jose Enrique Sevilla-Macip
Given that MORENA gave priority to the overhaul of the judiciary, perhaps it makes sense to elaborate on that one. Basically, the main change proposed by AMLO in this amendment is to elect Supreme Court Magistrates and all Federal Judges by popular votes. Instead of the current system, which the President must nominate judges and at least in the Supreme Court, they should be approved by the Senate.
Under the new rules, this won't be an open process for everyone that want to be a judge can contest for doing so. The process involves the nomination of 10 candidates by the executives by the President, basically, 10 candidates by the legislative branch, which is 5 by the Chamber of Deputies, 5 by the Senate. And another 10 candidates like the judiciary itself.
Mexico Supreme Court currently has 11 seats. The amendment proposed to reduce the number of seats to 9. And then we're going to have these 30 candidates, 10 nominated by the President, 10 by the Congress and 10 by the judiciary. From that pool of 30 candidates are going to vote for 9.
Now what does this means for the business environment? Well, that -- we believe that it's going to increase legal risk and particularly, legal redress options for companies operating in Mexico. Because if Mexico submits judges and Supreme Court Magistrates to popular vote, one can only expect that the results and the composition of the Supreme Court and judicial mechanisms all across Mexico is slightly going to reflect the composition of both Congress and the executive branch, which as of now is as we've seen, an overwhelming support for MORENA.
This will open court to a more overt process of politicization and plus, reduced judicial independence. That has been an issue of [ ruling ] Mexico, historically and under AMLO. But if this reform passes as it is, this process is just only going to accentuate.
Kristen Hallam
Rafael, might be good to bring you in now to offer some economic perspective on this as well. What might we see in terms of impact to the overall economy?
Rafael Amiel
Thank you, Kristen. Well, what we have seen already the immediate impact of the election of Mr. Sheinbaum is that the foreign exchange markets have reacted negatively. And Mexican currency, the Peso has depreciated in the 8% to 10% range, depending what you look at, when that day, you look at the day of the election or a few days before.
So the markets are not very happy with exactly what Jose mentioned, the threat of constitutional changes, [ especially ] markets because if you see the bonds market also Mexican Sovereign in price declined, the yield maturity has increased, not effectively as we have seen on the foreign exchange market.>
But certainly, the reaction to the threat of these changes is something that we have to take into account because that will translate into business sentiment and then poor business sentiment translates into lower investment, which in the past 6 years has not been really good.
So if we have to say the immediate impact of this election, they were until we hear something different, we have to revise our forecast, we have to revise our investment forecast in the private sector and look ahead and say, well, if we don't see any changes in terms of the proposed policy orientation then the potential for investment and growth in Mexico will diminish significantly.
Kristen Hallam
While, I come back to you on that forecast. But first, I just want to talk a little bit about where we might see some policy continuity between Sheinbaum and the outgoing President AMLO.
Rafael Amiel
In terms of policy continuity in our business scenario, we already assume that the excess spending on the increased public investment during the past 4 to 6 quarters that were happening in order to complete flagship projects by the government will decline in 2025.
The expected 5% fiscal deficit of 2024 should decline and the government will align to this. That's not going to change in terms of the rate of additional spending or in terms of the risk of sharper or equal type increases in minimum wages, then it's not in our business scenario. We're assuming that going forward, public finances will move in the path of fiscal consolidation, reducing the deficit and stabilizing the debt.
And then we assume that minimum wages would not increase as much as they did in previous years. So that policy continuity is in our baseline. And we need to wait and see if something different is announced by the new administration. Regarding the stance of the government with respect to the private sector and private investment, I'm going to pass this to Jose Enrique.
Jose Enrique Sevilla-Macip
Okay. Well, Sheinbaum hailed from MORENA, Sheinbaum has been a very close ally to AMLO and they are ideologically coincident. So we expect broad policy continuity in most domain. Sheinbaum has endorsed AMLOs approach to the energy sector in the sense of strengthening MX in the oil and gas sector and the federal electricity commission in the power sector, strengthen them not only through constant financial support, but also through regulatory changes.
Social policy, this has been one of the landmark issues under AMLO and Sheinbaum has pledged to not only continue AMLO's social spending, but also include some new transfer programs that she enacted during her term at Mexico City, major and that she plans for them to become national.
Another important aspect that Sheinbaum is likely going to continue is the development focus on Mexico, Southern regions in comparison to northern central states, which are already more developed and which already have a significant industrial presence.
And finally, another point I want to highlight is foreign policy. Mexico under AMLO has tried to recover this position of non-alignment. Mexico in strategic issues remains aligned to the United States. But at least historically AMLO has tried to shift away and tried to brand this nonalignment posture. We expect that to broadly remain under Sheinbaum.
Kristen Hallam
And just thinking about Sheinbaum and AMLO as political leaders, in what way might we see differences between them? >
Jose Enrique Sevilla-Macip
The important aspect because policy-wise, we expect a lot of continuity, but the difference between them is going to be more notable on the style of governing. AMLO throughout his term, every day, he has devoted 2 or 3 hours to give a daily press conference, in which he basically laid out his agenda.
He criticized journalists, he comments on Mexican history. He basically shares his thoughts on whatever is going on in Mexico and in the world every day. Sheinbaum, because of her personality, she is more of a technical profile, we don't expect her to continue this style of governing. Also, for example, I just mentioned several issues in which we expect policy continuity: energy, foreign policy.
But even within that growth continuity, some style differences are going to be important. On the energy side, for example, Sheinbaum has trajectory as an [ scholar ] in environmental engineering. She has pledged to put more emphasis on renewable power generation. We expect that to be a focus of her energy policy, but within this broader framework of having the state-owned firms playing the main role in this energy policy.
So perhaps yes, more support for renewables, but under a framework privileging state-owned companies. On foreign policy, we expect these will, relationship with the U.S. are going to remain the most important, but we also expect these non-alignment rhetoric, but without the diplomatic confrontations that we've seen under AMLO.
Sheinbaum being, as I was saying, a more reserved profile, she's unlikely to be willing to openly comment on international relations during press conference. So perhaps the broader approach to foreign policy will remain, but this is style of confronting ideologically opposing leaders from other countries, we don't expect that from a Sheinbaum presidency.
Kristen Hallam
That's a good segue I think into my next question. You talked about AMLO's policy of nonalignment and how the U.S. relationship is among the most important, if not the most important relationship that Mexico has. But could you maybe shed some light on any potential impact that these elections could have on Mexico's relationship with the U.S. either on specific issues or with other key actors in the region or specific personalities, if you will?
Jose Enrique Sevilla-Macip
Relation between the U.S. and Mexico currently is centered around 3 topics: immigration, security and particularly fentanyl trafficking and trade regional supply chain. Under AMLO, we've seen broad alignment with the U.S. on all these 3 accounts. Again, rhetorically, AMLO has been critical of the U.S. foreign policy in other parts of the world.
But AMLO has maintained a 28,000 strong military deployment all over Mexico, focused only on containing illegal immigration flows towards the U.S. Mexico law enforcement is detaining above 100,000 illegal migrants per month during 2024, preventing them to reach the U.S. border.
So despite all the rhetoric about the need of investing in human development in Central America, AMLO has complied with U.S. demand of Mexico help to prevent migration flows to reach the border. On fentanyl trafficking, there have been differences regarding how they proceed operationally against drug trafficking organizations. But certainly, AMLO has been willing to maintain this cooperation with U.S. strategic objectives.
Perhaps the only difference compared to previous Mexican administration is that AMLO isn't in favor of U.S. operative working in Mexican territory alongside Mexico law enforcement. We expect Sheinbaum to endorse a similar approach. And finally, on trade, well, Mexico is fully dependent on U.S. for its trade policy. 80% of Mexican exports go to the U.S.
The U.S. is the prime foreign investor in Mexico. So on that regard, well, we expect Mexico to maintain broad policy continuity. What's going to be more interesting is what is the U.S. policy towards Mexico after the U.S. election in November. But that will depend on the results, and I would leave that to our U.S. colleagues to analyze.
Kristen Hallam
Rafael bringing you back into the discussion, how do you see the outcomes of the elections impacting the economic landscape and investment opportunities for Mexico?
Rafael Amiel
I want to go back a little bit to the translate issue because in our assessment, way before throughout the past 4 quarters, we've been saying that the Mexican Peso was overvalued. And this correction, which is still a [ partial ] correction brings values more in line with what should be an given exchange rate.
But certainly, it may help exports in purchasing power of remittances within the domestic market in Mexico. But it's a correction that is showing that the premium that the Peso had is managing for the direction of trouble that may happen in the policy in Mexico. And in our forecast, we assume what we call mild near-shoring.
So we assume increased foreign direct investment in Mexico in the next 5 years, but not massive because there are some constraints that we have discussed in previous podcasts. And with these results, what we may have to do is to revise that assumption of mild near-shoring. We have examples of committed investments, sizable committed investment in Mexico that have not materialized yet and may not materialize at all.
So that may lead us to revive. We need to still be a little bit patient on what may happen with the administration in terms of this constitutional reports, what may happen in terms of policy continuity. But in our baseline scenario, we may need to incorporate immediately some of these changes.
Kristen Hallam
Rafael, can you just for the sake of our listeners, tell them what our current forecast is for Mexico. And I think you've already mentioned some changes that you're considering, but anything that you can share on that would be great.
Rafael Amiel
Sure. As we speak, we are on the process of updating our forecast for the month of June. Our latest forcast cover Mexico's real GDP to grow 2.4% and we may revise the downwards by [ 3/10 ] of a percentage point. So that would be 2.1% in the model that we're running for 2025, the reduction on the expansion of real GDP is about 1 to 2 points, so it may count from 2.5% to 2.3%.
Kristen Hallam
Thanks for that. So question for both of you, what indicators will you be watching as AMLOs term winds down and Sheinbaum prepares to step into the presidency. Jose Enrique, let's start with you and then we'll go to Rafael.
Jose Enrique Sevilla-Macip
I can think of basically 2 broad indicators that are worth monitoring ahead of the Sheinbaum's inauguration on October 1. The first one is the cabinet appointments. So far, the only confirmed position that Sheinbaum has said is the Finance Ministry, and she confirmed Incumbent Finance Minister, Rogelio Ramirez, which had served for already 3 years.
If Sheinbaum announces further cabinet positions that are already in the post, well, that would indicate that AMLO's influence in government decision-making is slightly going to remain beyond his stepping down. The other major indicator that we believe we should be watching for is investment announcement.
Now that we've got a clear picture of the new Congress of the new President, new investment announcement would significantly increase confidence in Mexico for the next term or on the other hand, the cancellation of already made investment announcement would point on the other side. So I would say those 2 indicators are worth watching now. The cabinet appointment and anything that happens in relation to investment announcement.
Kristen Hallam
Okay. And how about you Rafael? What indicators will you be watching?
Rafael Amiel
I would follow closely government spending to check and confirm our assumption of a correction or a reduction on the fiscal deficit is on its way. And then the other one relates to investment, but from the standpoint that Jose Enrique mentioned before, what is Sheinbaum expecting from the private sector.
So we want to see what the new administration has towards big economic decisions. Do they want to concentrate and centralize economic decisions, will they let more action to the private sector compared to what we already have, right? So those are the 2 key indicators that I will check.
Kristen Hallam
All right. And any final thoughts for our listeners, Rafael, let's start with you since you're already on the hot seat.
Rafael Amiel
Yes. I want to call the attention of our audience to Mexico's economic performance in the past 3 years. If our forecast is fully correct. I mean there's not much room for deviation, whatever in 6 years go. Mexico's growth in the past 6 years has been 8%. The subpar growth, well, there was a pandemic, yes.
But for instance, the United States, would have completed 17% growth. Brazil 13% growth. The region almost 11%. So Mexico has been growing at a lower pace than the regional peers and certainly much, much lower than the United States.
And should this investment opportunities that we're talking the near-shoring or reshoring, those are key elements for Mexico to expand. So we will look carefully at that, we continue to discuss this because we don't see much room for growth if investment doesn't happen and the role of the private sector is very important and relevant in this project.
Kristen Hallam
All right. And Jose Enrique, any final thoughts for our listeners?
Jose Enrique Sevilla-Macip
Sure. Perhaps just adding another indicator to watch out for. I mean, I just mentioned about the importance of Sheinbaum cabinet nominations. But as a broader indicator how the relationship between AMLO and Sheinbaum plays out. That's going to be an interesting thing to watch for.
AMLO has pledged to fully retire from public life once he steps down. And how will Sheinbaum manage all the different factions within MORENA and that so far have been disciplined because of AMLO's leadership. If AMLO's leadership is missing, as he has said, he will retire. How will Sheinbaum be able to maintain this unity and discipline within MORENA. That's going to be one of the key questions that we're looking forward to answer by the end of this year, hopefully.
Kristen Hallam
All right. Well, thank you, Jose Enrique and Rafael for sharing your insights with us on Mexico's election results and that impact. That wraps up our episode. Please subscribe to the podcast, so you don't miss our episodes on other key elections, including India, South Africa and the European Union. Until then, stay curious and stay informed.
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