Mexico judicial reform to cause great volatility – analysts

A judicial reform proposed by Mexico's President Andrés Manuel López Obrador could amplify instability, especially in the foreign exchange market, due to the unpredictability it may cause.

“It is very likely that as soon as the new configuration of congress is confirmed, at any time, and once the reform to the judicial branch is approved, volatility and uncertainty could intensify and we could see additional pressure on the Mexican peso,” James Salazar, deputy director of economic analysis at CI Banco, told BNamericas.

The coalition of ruling Morena party and its allies is expected to achieve a qualified majority in congress.

While Salazar said a lot of volatility has been priced in since the elections in June, the reform will still be a negative source. “Part of the pressure we saw [recently] on the Mexican currency is explained by that,” he added.

In a report to its clients, Bank of America said that the next few days could mark the next decade for Mexico and warned about the risks related to the judicial reform, which it called "the most worrying and significant" of those presented by López Obrador. "We expect volatility to remain high until the end of the year."

Electoral authority INE was expected to begin discussing the allocation of plurinominal representatives on Friday, which Gabriela Siller, director of economic studies at Grupo Financiero Base, considered “relevant due to the possibility of overrepresentation by Morena and its allies,” she wrote on X.

Such a development would practically eliminate any possibility of the initiatives not being approved.

The reform would not just pressure the exchange rate, but the economy as a whole.

Siller wrote that “the approval of the judicial reform could quickly deteriorate the business environment and push the Mexican economy into recession, as happened in 2019, following the cancellation of the construction of the Mexico City airport.”

She estimated that the judicial reform could have an impact of at least 1.9% of GDP, due to a slowdown in new investments and falling reinvestment of profits by foreign companies, which would trigger a domino effect on other companies, both local and international, as demand for their products would fall.

“Because the reform of the judiciary would weaken the Mexican legal framework, the administration of justice and the application of the USMCA rules in the country, the trade relationship with the US would be put at risk and new investments from that country would be inhibited,” she said.

US and Canada speak up

US ambassador to Mexico Ken Salazar, who has been practicing law in different settings for 25 years, published a statement on the reform.

“Based on my lifelong experience supporting the rule of law, I believe that the direct election of judges represents a major risk to the functioning of democracy in Mexico. Any judicial reform must have safeguards that guarantee that the judiciary is strengthened and not subject to the corruption of politics,” he wrote.

“I also believe that 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, which depends on the confidence of investors in Mexico's legal framework,” he added.

Canada's ambassador to Mexico Graeme C. Clark told news agency EFE that investors have expressed their concerns about the reform.

Alfredo Coutiño, director of Moody's Analytics, wrote on X on Thursday that "after the US positioning regarding the inherent risks of judicial reform in Mexico, greater volatility and pressures on the exchange market cannot be ruled out."

Highlighting that at that point the exchange rate was 19.50 pesos to the dollar, he added that “the dance could just be beginning.”

CI Banco's Salazar said it is likely that statements such as those from Canada and the US could build some pressure and generate adjustments to the proposal at a certain moment.

However, "the reality is that it seems that [the judicial reform] will move forward without any obstacles... We do not even rule out that in September the exchange rate will be above 20 pesos to the dollar because there is also the issue of the elections in the US, the first [presidential] debate is coming, the campaigns will intensify and the reform to the judicial branch will be combined with the external issue."

"This could put further pressure on the currency," Salazar said.