Exchange Rates

If last year was a celebration of economic optimism in Mexico, this week felt like a hangover. The tensions that began with the overwhelming victory of the ruling party and its allies in the June 2 elections reached feverish proportions when the markets, investment banks, employers and even the US ambassador warned strongly about the dangers of the reform of the judiciary proposed by President Andrés Manuel López Obrador. They claim that democracy is at stake, but the economy will also suffer.

The crux of the matter is the popular election of judges, ministers and magistrates at the federal level, which is expected to take place for the first time next year to replace up to 900 positions in a single election, according to the latest version of the ruling. Later, judicial elections are expected to be synchronized with the calendar of elections for federal deputies. The executive, legislative and judicial branches must nominate the candidates, who must be law graduates who meet certain requirements.

The opposition, as well as non-governmental organizations, pointed out that this system puts the Judiciary in the hands of the Government, eliminating the separation of powers. Therefore, among the hundreds of modifications to the original project, a filter was included in the list of candidates by an Evaluation Committee made up of five people recognized in the judicial activity. The final selection will be by public draw, ensuring gender parity, the opinion states.

“They are going to dictate the lists and everything else, that is, they continue to control and the vote will be irrelevant,” says Luis Maizel, a Mexican investor in the United States and director of LM Capital Group. Maizel says that he has sold some of his Mexican debt bonds this year, first when the election results were known and again in recent days, when the National Electoral Institute (INE) outlined granting Morena and its allied parties a qualified majority in the Chamber of Deputies. This practically guarantees that Morena will approve the Judicial Reform next month, which will be up for the new legislature “plus whatever López Obrador comes up with,” says Maizel, “I am terrified of September.”

Dread was the sentiment that dominated the private sector, both inside and outside Mexico, this week. The Mexican peso, which had already lost 9.5% of its value against the dollar since the elections, fell another 2.6%, closing at 19.10 per dollar. This wiped out all the gains made during the sustained appreciation of the exchange rate during 2023 and part of 2022, driven by remittances, tourism and investment from foreign companies seeking to expand their operations in Mexico by taking advantage of the trade war with China.

Also this week, three global investment banks published separate reports warning that the risk of investing in Mexico had just increased due to the high possibility of the judicial reform being passed. The country’s largest employers’ associations asked the INE to limit the representation of Morena and its allies in Congress, something that would have made it difficult to approve the reform, which, one of them said, “puts democracy at risk.” The United Nations, for its part, had already spoken out against it, arguing that it could “undermine the independence of the judiciary.”

But the strongest, and most surprising, message came from the U.S. ambassador to Mexico, Ken Salazar, who changed his mind in just one week. On Friday, August 16, he told reporters that he supported the popular election of judges only to change his position on Thursday. “The direct election of judges represents a greater risk to the functioning of democracy in Mexico,” he said in his second press conference. “The debate over the direct election of judges in these times, as well as the fierce politics if the elections of judges in 2025 and 2027 were to be approved, threaten the historic commercial relationship that we have built,” he added.

“Because in general terms this is, without a doubt, something negative and to avoid something like this happening, or to change it, you have to up the ante,” says Damian Fraser, former managing director of the investment bank UBS in Mexico and director of the business consultancy Miranda Partners. “Writing a balanced letter saying ‘this is something bad’ will not get you much attention. Therefore, you have to say that Mexican democracy is at risk if you want people to listen and to develop a campaign against it,” adds the specialist.

Benito Berber, chief economist for the Americas at investment bank Natixis, expects a combination of market pressure, internal political pressure and external pressure to water down the final proposal. “President López Obrador is determined to capture the judges and the impact on the investment climate, domestic and international, will be negative,” says the specialist, “so it is very possible that the price of Mexican assets, including the exchange rate, will suffer as a consequence of the approval of the reform.”

Most states in the neighboring country have judicial elections, but not at the federal level. In addition, in the US it is usually juries that determine guilt and judges that pass sentence. “The United States has a civic culture and a culture of the rule of law that is infinitely stronger than in Mexico,” says Fraser, “I think that, if you put it all together, it is not really that comparable.”

Both Maizel and Fraser agree that the politicization that could occur in the Judiciary as a result of the reform adds to other factors that already made Mexico a risky or less attractive investment destination than other peers. “There is much more to consider in any investment decision than just a reform like this,” explains Fraser, “the fiscal deficit is high, the economy is slowing down, the quality of public policy and the decision to waste resources on projects such as a refinery or the Mayan Train has been very poor… so I definitely think that the reaction of the private sector and the concern is appropriate.”

“Power makes you sick. If you don’t control it, if there’s no one to stop you, if there’s no one to limit you, the exercise of power becomes an abuse of power,” says Maizel, referring to the control of Congress, the presidency and, potentially, the judiciary by López Obrador’s party. “What investors like is when power has to negotiate transcendental changes for the country, where there is discussion, where there is acceptance, where there are differences. A situation in which you can change an entire country by decree is dangerous, and that’s where I think Mexico is heading now, unfortunately,” concludes the investor.

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