Mexico - AMLO reform scenarios - August 2024
Investors are worried about AMLO's judicial reform. Also, investors are worried that investors are worried.
Mexico's new Congress takes power next week. Claudia Sheinbaum becomes president on the first of October. this leaves the entire month of September for President Andres Manuel Lopez Obrador to overlap with a supermajority in the lower House and a near supermajority in the Senate. As I wrote for World Politics Review in early July:
for that one month, AMLO will perhaps be the most powerful lame duck president in history. And while most presidents—at least those who aren’t desperately trying to hold onto power—spend their final month in office engaging in symbolic acts and managing the boring bureaucratic process of transferring power to their successor, AMLO will engage in one last attempt to rewrite the rules of Mexican democracy.
This reform push has led Mexico's peso to drop. Investors are having doubts about President-elect Sheinbaum's upcoming term in office. Why?
The judicial reform is being pushed through in a seemingly undemocratic way. Morena divided up their coalition in a way to avoid constitutional limits on a single party obtaining too many congressional seats and then convinced friendly regulators to approve it.
Many current judges are protesting the reforms as are most of the president's political opponents. That creates some level of political tension and instability.
If passed, the judicial system will be politicized in ways that:
Undermine dispute resolution, making investments less secure
Benefit AMLO's Morena party and harm his political opponents
Allow criminals greater influence in the judicial system
Reduce the quality of the judicial system, undermining security efforts
Further, there are international implications. The US and Canada are opposed to Mexico's judicial reforms. This could create various trade disputes and hit the upcoming renegotiation of USMCA.
Investors are worried about all of the above. Further, investors are worried because other investors are worried. Sometimes these narratives become self-perpetuating and it can be difficult to disentangle how much concern is about the reforms and how much is about the perception of the reforms and how others might react to them.
But the idea that the reforms pass and harm Mexico's investment environment is just one scenario. Here are four scenarios for the reform and how it impacts the investment environment during Sheinbaum's term:
A) AMLO's judicial reform passes and it is bad for Mexico's investment environment. That happens for all the reasons listed above.
B) AMLO's judicial reform passes and Mexico's investment environment improves. This would not occur because the judicial reform is good (it is not), but because the concerns end up being overblown or overshadowed by other positives including a growing US economy and a nearshoring trend that is just beginning.
C) AMLO's judicial reform fails to pass and it is good for Mexico's investment environment. A failure to pass the judicial reform would almost certainly lead to a short-term surge of business enthusiasm. For that to be maintained and for Sheinbaum to benefit, she would need to then learn the lessons of the reforms' failure and turn to a more moderate agenda that helps the economy.
D) AMLO's judicial reform fails to pass and that failure is bad for Mexico's investment environment. This likely occurs because the failure to pass judicial reform hangs over the early part of Sheinbaum's presidency and harms her ability to pass an agenda moving forward. Separately, AMLO could be vindictive about the failure to pass and make it a mission to sabotage future efforts that seem to undo his legacy.
The discussion today is all about scenario A. Many in Mexico's business community would like to see some variation of scenario C.
I think scenario B is currently the most likely. The narrative on AMLO's reforms has overshot their actual impact in the short and medium term. There are plenty of other positive things about Mexico's business environment that should help the country. I also think Sheinbaum will take a more productive direction once she is president, though it may take 6-12 months to see any real breaks from AMLO. That is a dangerous prediction to make on a day when the peso has dropped to near its lowest levels in years, AMLO has paused relations with the United States due to criticisms of his reforms, and some other leading analysts are lowering their forecasts on Mexico due to the reforms.
Still, having said B is the most likely, I also think all four scenarios have realistic potential. Separate from which scenario I think is most likely, it's important to map out all the scenarios and realize that perhaps the conventional wisdom is just one of several possible futures. Too many analysts have jumped in on a single narrative and what it will mean for the markets and that groupthink may turn out poorly.
I also don't want to suggest that the reforms are good. They aren't. They are bad for Mexico and will degrade the country's democracy. As with any attempt to degrade checks and balances, it is concerning about how it will be used by the party in power but it is also concerning that it is hard to judge the long term impact once the ruling party loses momentum. AMLO is treating these reforms as if he is turning Morena into the new PRI and planning for decades of control. While that is one potential future, another is that Morena loses popularity and power in the coming six years and it is not clear how this election of judges will play out in that very different political environment.
