Mexico: What More Morena May Mean for Markets

Given the wide margin in the polls, pricing in the markets points to a base case for policy continuation under Sheinbaum, who has consistently expressed her loyalty and support for AMLO’s political agenda; this has positive and negative market implications as it proposes stable debt-to-GDP ratios and healthy fiscal balances, as well as state control over strategic sectors like energy or mining—power centralization that has led to institutional erosion.

The market also seems to expect the Morena party to secure a simple majority in the congressional elections but fall short of the two-thirds majority needed in both legislative chambers to secure a supermajority that would allow for constitutional amendments. This expectation seems well placed: Sheinbaum is less popular than AMLO, and in 2018 AMLO won votes in areas where his coalition is traditionally weak. This is unlikely to be replicated, a sign that the Morena coalition’s share of Congress would face challenges to expand beyond its current levels.

Lack of supermajorities has prevented AMLO from pushing through controversial constitutional reforms, which has in turn supported market sentiment. This and the independence of the judiciary are probably the most important constraints that the Lopez Obrador and a likely Sheinbaum administration would face if they tried to make more structural and disruptive changes. Such changes could increase downside risk for Mexican risk assets.

Mexico’s fiscal situation is at the forefront currently. The 2024 budget has raised some eyebrows, with the deficit now expected to reach about 5.9% of GDP, the largest deficit for Mexico in several decades (see chart). Expenditures have risen due to increased spending to finalize AMLO’s key infrastructure projects, increased social programs, pensions, and higher interest costs. Large explicit support for state oil company PEMEX has also made waves. This brings the expected primary deficit for 2024 to 1.4% of GDP, another large number for Mexico historically, and has led to projections that the country’s debt-to-GDP ratio will breach 50%.

For the market, this would likely mean more bond supply to absorb and possible rating agency implications if post-election fiscal consolidation fails to happen. Both candidates have continued to express support for social spending. Sheinbaum has argued that the government still has space to strengthen social programs, while Galvez has proposed reducing government assistance to PEMEX and reallocating the funds to social programs. Both candidates have also said that they would defer fiscal reform in their first years in office but pledged to prevent an increase in public debt. 

Regardless of who wins, there will need to be some reconciliation: The current budget guidelines call for a steep cut in expenditures totaling 2.9% of GDP in 2025. While the candidates still have time to cement their platforms, this will be an important subject for investors.

In our view, the peso has been supported by robust remittance flows from the United States, where the economy has been strong, and the hawkish central bank Banxico, which has held the policy rate at restrictive levels for an extended period. However, with the potential for Banxico to engage in an easing cycle (the central bank has now cut once) and the elections getting closer, the balance of risks could skew to the downside for the currency.

The US election in November also could pose a key challenge, especially if Republican candidate and former president Donald Trump wins, which could create headwinds in terms of trade policy. On the other hand, if the US “exceptionalism” narrative continues—with US growth higher than its peers’—the Mexican peso could also continue to outperform its emerging markets peers in the near term.