The New Political Landscape in Mexico
On Sunday, Mexico witnessed a new “celebration of Mexican democracy” with an impressive voter turnout of 12.9% and a high cost per vote. This event, once considered impossible by many, has now become our new reality. With the hegemonic party gaining absolute control over all three branches of government—executive, legislative, and judicial—what does this mean for the future, particularly in economic terms?
Economic Consequences and Risks
The unfortunate reality is that we are only beginning to see the consequences. The investment and overall economy had already shown signs of slowing down since last year, primarily due to uncertainty created by “Plan C” and external factors including Trump. This uncertainty has now materialized, with the worst-case scenario becoming a reality. The hegemonic party now holds complete control over all three branches of government, leaving no safeguards or checks and balances.
Previously, investors could assume that there was access to justice or mediation mechanisms in case of a dispute between parties or individuals and the state. This assurance, ultimately provided by the Supreme Court, has vanished. Starting September 1st, Mexico will have a new Supreme Court composed of nine justices who are either part of or aligned with the hegemonic party. While there may be varying degrees of alignment within the movement or among different currents, it is a fact that these justices will not rule against the executive in any case. Consequently, there are no protections for conflicts with the Mexican state.
Why is this serious? When deciding on any investment and presenting it to an investment committee or board of directors, both in Mexico and globally, potential benefits and risks are evaluated. Today, the risks in Mexico are significantly higher. Any dispute with the government—regarding taxes, concessions, permits, and many other issues—will be resolved in their favor, regardless of the case’s merits. This does not make investment impossible but does require higher return rates to compensate for the increased risk. As a result, numerous projects will no longer be viable, leading to reduced investment, slower growth, fewer job opportunities, and more fiscal challenges.
Additionally, all contracts with government entities or public companies will incur extra costs due to the inclusion of international arbitration clauses demanded by multinational corporations.
Short-term Economic Challenges
This “experiment” of direct democracy, initiated by the former president and concluded during this administration, will have a price in the short and medium term. It may take at least two to three years to demonstrate otherwise consistently.
Moreover, Mexico is halfway through the renegotiation and review of the T-MEC. How can we demand changes from our trading partners when, in practical terms, we are no longer a country with the rule of law?
Key Questions and Answers
- What are the immediate economic implications of the hegemonic party’s control over all branches of government? The risks for investors have increased significantly, as disputes with the government are likely to be resolved in their favor. This may lead to reduced investment, slower growth, and more fiscal challenges.
- How will this affect contracts with government entities or public companies? Multinational corporations will demand the inclusion of international arbitration clauses in contracts, leading to additional costs.
- What are the short-term challenges for Mexico’s economy? The country must navigate the renegotiation of the T-MEC while demonstrating its commitment to the rule of law, which has been called into question by recent political developments.
