Capital Ideas^TM

On Sunday 2 June, over 99 million voters participated in the largest general elections in Mexico’s history, with presidential, legislative, and several local elections taking place simultaneously.

With 95% of the vote counted, Claudia Sheinbaum, Morena’s left-leaning candidate and protégé of incumbent Andrés Manuel López Obrador (AMLO), won the presidential election, receiving the largest vote share of any candidate since the 1980s. The Congressional results delivered a more meaningful surprise: Morena and allies will have a qualified majority (69%, above the required two thirds) in the House of Representatives and will be just shy of a qualified majority (64%) in the Senate. The new Congress begins its term on 1 September, while inauguration of the president-elect takes place a month later.

Market impact

This wider-than-expected victory margin has raised concern among investors around constitutional amendments aimed at reducing government checks and balances, and there has been a selloff in the immediate aftermath.

AMLO presented a number of constitutional reforms in the first quarter of 2024, which president-elect Sheinbaum should be able to implement. Some of the constitutional changes codify existing programs and policies, while others would reform the electoral institute, judiciary, and autonomous agencies to the Executive’s benefit. From a fiscal perspective, the impact of these reforms are less clear, but they will likely introduce more rigidity to the budget.

That said, the new Congressional supermajorities do not change the government’s incentives to maintain macro stability. AMLO needed only simple (>50%) congressional majorities to spend on social transfers and infrastructure projects; his government maintained a budget balance out of concern for exchange rate volatility and insistence on honouring his “no new taxes” pledge.

President-elect Sheinbaum was measured in her victory speech and suggested a continuation of the status quo: fiscal discipline, respect for the central bank’s autonomy, continuation of AMLO’s transfer programs, facilitation of domestic and foreign direct private investment, and collaboration with the US. Sheinbaum’s finance minister pledged to reduce the fiscal deficit in 2025 and maintain fiscal discipline, but this will likely require higher taxes – note that Mexico has the lowest tax-to-GDP in the OECD and one of the lowest in Latin America.

What to watch:

Now until 1 October 2024: The market will be closely monitoring the backgrounds of key cabinet members and public statements from the president-elect over the next four months. Although the new administration might not substantially jeopardise macroeconomic stability, a Morena-led government and Congress could be hesitant to endorse essential reforms or implement measures necessary for attracting investment.

September-October 2024: During the one-month gap between the new term for congress and presidential inauguration, AMLO could prioritise approving as much of his reform agenda as possible before his term concludes. This period will also give us a sense of Sheinbaum’s priorities vis-à-vis reforms, and whether the new administration can quickly corral a two thirds majority in the Senate.

Now until November 2024: US election activity will also be key to watch, especially if the market starts to price in the implications of a Trump presidency. Trump has made the southern border crisis with Mexico a top issue in his campaign, and may raise tensions using the threat of border closures. That said, the US’s strategic and economic interests in Mexico have grown as trade and manufacturing have pivoted away from China towards US allies.

November/December 2024: Towards the end of the year, a seat will become available on the Supreme Court of Justice of Mexico. The Morena administration will then have appointed four of the eleven Supreme Court justices, the minority needed to block a law approved by Congress on constitutional grounds. The budget is also expected to be announced in November, which will signal whether Sheinbaum maintains AMLO’s “republican austerity” and fiscal conservatism, as she asserted in her acceptance speech.