Morgan Stanley, Fitch wary of Mexican risk of judicial reform

US bank Morgan Stanley and Fitch Ratings warn that Mexico faces financial risks from the judicial reform proposed by the government given the likely qualified majority that the ruling Morena party and its allies are expected to have in congress.

The preliminary congressional election results indicate that Morena and partner parties may secure enough plurinominal seats to give them the legislative power to pass constitutional amendments. 

The final composition of congress is due to be announced by electoral authority INE on Friday, August 23. 

If Morena can gain a qualified majority, it will be significantly more likely that the package of constitutional reforms presented by President Andrés Manuel López Obrador (AMLO) in February, including a reform of the judiciary, will be passed in September when the new ordinary period of sessions begins in congress and before president-elect Claudia Sheinbaum takes office on October 1.

“We downgrade Mexico to UW [underweight) following the Judicial reform proposal the Executive sent to Congress. We believe replacing the judicial system should increase risk, Mexico's risk premia and limit capex. That's a problem as nearshoring is reaching key bottlenecks,” Morgan Stanley said in a report to investors. 

The draft reform, which has generated significant resistance from the private sector, proposes electing all judges, magisters, and ministers by popular vote and establishing new rules for judicial proceedings.

“We lower the weight of key holdings in the country such as Walmex, Femsa and Coca-Cola Femsa, and delete Kimberly Clark Mexico, Laureate and Qualitas,” Morgan Stanley added. 

Meanwhile, Fitch Ratings also noted that the government's congressional majority could allow it to secure approval for constitutional reforms. 

“The congressional election results have brought back AMLO’s push for 20 constitutional reform initiatives to the forefront, which were initially submitted in February 2024. The package includes modifications to the judiciary and electoral institute, a pension reform, modifications to the minimum salary and disappearance of autonomous regulatory entities,” the rating agency said. 

Fitch expects the president to benefit from Morena’s dominant position in congress, given the month-long delay between the newly elected legislators taking office on September 1 and Sheinbaum’s inauguration a month later. 

According to Fitch, if approved without modification and swiftly implemented, these reforms may negatively affect Mexico’s institutional quality and checks and balances. “We believe these reforms would, overall, negatively affect Mexico’s institutional profile, but it is too early to gauge the potential severity prior to approval and implementation.” 

“A downside risk from these reforms would be their potential to undermine investment and business confidence by severely affecting the rule of law. However, we do not foresee such effects occurring to a significant extent in the near term,” Fitch added.