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Mexico’s peso was on track for its worst week since the beginning of the pandemic as investors digested an unexpectedly large victory for the ruling left-wing party set on radically overhauling the country’s political system.
The market turmoil deepened on Friday after the country’s current president, Andrés Manuel López Obrador, appeared to brush off market concerns and vowed to press ahead with his proposed reforms.
“Justice is more important than the markets,” he said in his morning news conference. “The elites . . . don’t think of the country.”
Voters chose former Mexico City mayor Claudia Sheinbaum as the first woman president by a margin of more than 30 points on Sunday, handing her Morena coalition a near two-thirds majority that would allow it to enact changes to the constitution.
The surprisingly large margin sent the peso almost 8 per cent weaker against the dollar this week, with the benchmark stock index down 3.4 per cent over the past five sessions.
López Obrador, Morena’s founder and figurehead, proposed a package of reforms in February that included eliminating independent regulators and directly electing supreme court justices and electoral authority board members.
Markets had mostly shrugged off any risk because he lacked the congressional backing to pass those reforms. But Sunday’s results mean his coalition will probably be able to construct a supermajority coalition with opposition lawmakers.
The president will overlap with the new Congress for a month before Sheinbaum takes over in October. On Friday, when asked about investors’ reaction to the election, he said: “It’s like when you have to choose between the law and justice.”
As he was speaking the peso sank as much as 2.3 per cent to about 18.4 per dollar, its weakest level in about seven months.
Leftist nationalist López Obrador has become the dominant figure of Mexican politics, and has maintained approval ratings in the mid-60s after more than doubling the minimum wage and increasing social programmes.
His disparate set of reforms is designed to cement his legacy and includes a ban on genetically modified corn, above-inflation rises in the minimum wage and pension promises that put pressure on public finances.
Sheinbaum faces the daunting task of shrinking a deficit of almost 6 per cent of GDP in her first year in office after López Obrador abandoned a previous commitment to austerity. Further, legal experts say some of the proposed changes could violate Mexico’s trade agreement with the US and Canada, which underpins much of the country’s foreign investment.
López Obrador’s comments came after contrasting statements from Morena leaders on Thursday about the status of the reforms.
Morena’s lower house leader Ignacio Mier said a vote on the reforms would go ahead when Congress reconvened in September, though he left the door open for potential changes. But Sheinbaum later struck a more cautious tone, saying no decision had been taken, and that she thought a “dialogue” had to be opened.
“No one is going to be affected, a process has to be opened so that its well understood,” she said.
The reaction in the highly liquid peso comes after several years as one of the top-performing emerging market currencies, a fact regularly touted by Morena politicians on the campaign trail.
The peso had benefited from high interest rates set by the central bank as well as strong remittances and export income. There is also hope that the country will benefit from the broader geopolitical trend for nearshoring, said Gaby Siller, analyst at Banco Base — although the market has now focused its attention on domestic politics.
“The reforms are worrying because they deteriorate the rule of law in the Mexico,” Siller said. “This could contaminate the real economy. Fear translates into caution, and business owners could now opt to pause investment projects.”
Additional reporting by Kate Duguid and Peter Wells in New York
