September will bring FX volatility amid regulatory uncertainty
On August 22, the Chamber of Deputies will begin discussions of MORENA’s judiciary reform, whose main goals are to elect judges via popular vote and restructure the organization of the judicial branch. The reform needs a qualified majority of 66% in both chambers of Congress and approval from more than half of the state-level legislatures. In September 2024, MORENA and its allies will be just 2% short of reaching the qualified majority needed in the Senate. In our base-case scenario, MORENA waters down the reform and approves it until 2025.
Scenarios and their business implications:
- Base case (43% likelihood): The reform is watered down—allowing for the election of only district judges via popular vote—and approved in late 2025 or beyond. In H2 2024, the MXN slightly depreciates, while the stock exchange experiences a minor decline. Regulatory uncertainty hinders private investment, including nearshoring, and slows 2025 GDP growth. In the medium term, MNCs face higher operational costs, as they learn to navigate an increasingly complex legal environment. In the long term, Mexico’s rule of law deteriorates, but the Supreme Court remains a counterweight to the executive and legislative branches.
- Downside (37% likelihood): The reform is fully approved in H2 2024, significantly depreciating the MXN. This accelerates inflation and compels Banxico to maintain high interest rates for longer. Mexico’s stock exchange falls due to the uncertainty generated by the reform. Mexico’s investment and GDP slow considerably in 2025. In the medium term, operational costs for MNCs increase, as they reinforce their legal and public relations teams. Judicial resolutions could be delayed, and some contracts and plans might need reassessments. The politicization of the judiciary increases risks of corruption, intellectual property, and contract enforcement. The reform also triggers USMCA disputes and complicates the treaty’s revision in 2026.
- Upside (20% likelihood): Moderates within MORENA block the reform in 2025, paving the way for improvements in the judiciary. In the short term, the MXN stabilizes, and investment grows more than expected, strengthening GDP growth. In the medium term, the legal landscape improves through technical judiciary reforms, reducing MNCs’ operational costs and boosting legal predictability. In the long run, the rule of law gradually improves, contributing to a thriving business environment.
Background on MORENA’s judiciary reform
The reform’s main objective is to enable the election of over 1,600 federal judges and ministers via popular vote, including district judges, circuit magistrates, and Supreme Court ministers. The reform aims to reduce the number of Supreme Court ministers from 11 to 9, reduce their tenures from 15 to 12 years, and restructure the judiciary’s internal administration. These changes would have profound implications. For example, they could lead to the politicization of the judiciary, increased exposure of candidates to violent organized crime groups, a weakened civil service, eroded checks and balances, higher election costs, and potential violations of the USMCA, particularly on labor laws.
*A higher score means that regulations are effectively implemented and enforced.
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