Latam Insights: 2024 Mexican Election Primer: What’s at Stake?

Mexico’s presidential election will finally be held this Sunday, after an almost year-long electoral process; the formal campaign period kicked off in March 2024, but the pre-campaigns and the intra party processes began almost a year prior. The election will not only institute a new President (at this stage it looks like Mexico will have its first female president), but also a full refresh of both houses of Congress, 9 state governors (including the important Mexico City), 31 state legislatures, and close to 1,900 municipal governments.

Despite lengthy campaigning, it’s been hard to sort through the content of the parties’ different platforms to garner what these are about, as the campaign has partly been pitched as somewhat of a referendum on the current administration. To varying degrees, the campaign platforms are scant on detailed proposals, but between the platforms and the various campaign events it’s possible to break down some of their key elements proposed. The incumbent party’s platform (Sheinbaum’s) has mostly pledged continuity with respect to AMLO’s government. The two main opposition platforms have pledged continuity for AMLO’s social transfers, but have diverged in some important areas—although here again specifics are wanting (table 1).

One key element which has been generally left out of discussion has been addressing the fiscal deficit that the next administration will inherit, after the current government budgeted a surge in the broad definition of the deficit to 5.9% of GDP.

At this stage in the game, voter polls and poll-of-polls suggest that Sheinbaum has a strong lead in the election (20–30 percentage point lead in the Oraculus.mx and Bloomberg poll-of-polls), yet several political analysts highlight that looking at recent state level election results suggest that the contest is materially closer than polls suggest. The margin of victory of the election will likely be closely monitored, particularly for two reasons: 1) on the immediate aftermath because a tight margin is seen as more likely to lead to post electoral conflict, and 2) the importance of legislative majority thresholds for policy implementation. Some key thresholds include:

• The Expenditure Decree is approved by 50% + 1 vote in the Lower House.

• The Revenues Law (which includes the tax bill and debt program) and Economic Policy Guidelines (macro assumptions of the budget) is approved by 50% + 1 vote in both the Lower House and the Senate.

• Passing legal changes requires 50% + 1 vote in both the Lower House and the Senate.

• Constitutional Amendments require a vote of >2/3 in both houses, plus a majority of State Legislatures.

However, there are arguments that in the case of a Morena victory, the importance of reaching the Constitutional Reform threshold is heavily reduced by the so-called 4^th Supreme Court Justice argument (explained in local journal Nexos here). At the end of 2024, a seat will become vacant on the Supreme Court of Justice of Mexico. If Morena’s candidate, Claudia Sheinbaum, wins, it would be her turn to designate who occupies that chair. Depending on who is elected, if it is someone who gives unconditional support to the Federal government (as the three ministers: Loretta Ortiz, Yasmín Esquivel and Lenia Batres are considered to do), the government would have an unconditional block of four justices in the Supreme Court. With this, this block would have the ability to block any unconstitutionality ruling. This implies that, de facto, the government could carry out reforms such as the proposed reform of the electoral, electrical and justice systems, and ensure that they come into force, even if they do not obtain a qualified majority.

Potential key elements for investors:

• Energy: The opportunity that the reindustrialization of the US economy and the consolidation of regional production chains represents for Mexico also entails some challenges among which is rising power shortages (Mexico’s idle capacity in electricity generation is at its lowest level since 1980). Part of the electricity generation problem is due to the uncertainty that the sector currently faces in its regulatory framework, which has put the brakes on investment in both transmission and generation. Before the reform of the sector in 2013, private players increased their participation in generation to around 30% of capacity, mainly under the figure of PIDIREGAS PPPs. Subsequently, with the 2013 reform, private generation and ownership in generation opened, and the participation of the private sector rose to more than 50% of the installed capacity, with a strong boost to renewable energy, including that financed by funds from Canadian pensions (CDPQ, OTPP, PSP, etc.) and companies (TransCanada). However, after the victory of López Obrador in 2018, he tried to reverse the 2013 constitutional reform, but failed, leading to absence of certainty over the legal framework that regulates the sector.

Given the delay that has accumulated in both generation and transmission capacity, this issue has become critical in the electoral cycle. Candidate Galvez’s campaign has suggested that, if she wins, she will return to the application of the 2013 reform, which is very likely to see a significant recovery in private investment in the sector. On the other hand, Sheinbaum’s campaign has suggested that they would formally seek to end the 2013 reform at the Constitutional level, but that the sector would not be closed to private investment and that a 46% ceiling on the percentage of generation is likely to be applied to the private players. We interpret Sheinbaum’s message as suggesting that some form of PPP scheme will be introduced, possibly under the build-operate-and-transfer modality. This could lead to a significant recovery in private investment in the electricity sector—as long as her administration is willing to seek middle ground with private players.

• Fiscal: As we noted earlier, the incoming administration will inherit an important fiscal challenge, as the outgoing government’s broad definition of the deficit (the PSBR) is budgeted to close at 5.9% of GDP. As is typical in a Mexican electoral process, neither campaign has been willing to speak about the potential introduction of new taxes (in Mexico that is seen as political suicide). Looking at Mexico’s tax collecting structure its apparent that corporate tax collection increases would harm the country’s competitiveness (corporate tax collection is already high, even more so taking into account close to 50% informality). Sales & goods tax collection is low, but rising VAT in Mexico has proven extremely hard politically in the past. Social security contributions, although low as a share of GDP are already rising substantially due to AMLO’s pension reform, through which employer contributions will rise from just over 2% of worker’s salaries to 11%. This leaves Mexico’s very low property tax collection, but in the country that is a municipal tax, and hence there is some speculation that the Federal government could introduce asset taxes (potentially only on real estate holdings, but it could also apply to broader assets/wealth). Finally, last week the FT reported that the government is considering introducing taxes on bank’s profits. Given the lack of formal discussion of this issue, this is but speculation at this point, but some form of tax reform could become necessary to stave off threats to Mexico’s credit ratings (table 2).