Mexico's judicial reform stokes investor fears, though some analysts bullish
Mexico's judicial reform raises investor rule of law concerns
Reform could politicize justice, affect Mexico's financial markets
Concern over courts has not stopped investing elsewhere
By Rodrigo Campos and Noe Torres
NEW YORK/MEXICO CITY, Sept 17 (Reuters) -Mexico's judicial reform has triggered investor concerns about uncertainty over the rule of law and the strength of the government's institutions, yet with the reform now priced in, some analysts argue there may be buying opportunities forming.
Latin America's second-largest economy - a bellwether for emerging market sentiment more widely - has found itself at the maelstrom of international and domestic politics that has inflicted considerable pain on its financial markets.
Last week, the Senate passed the reform that will change the structure of the judicial power by shifting the appointment of judges from nomination by the executive to popular elections.
The Morena-led government - which won a landslide victory in June for President-Elect Claudia Sheinbaum - has pushed for the reform, saying it will address corruption and inefficiencies in the justice system. Its critics say the reform could politicize the administration of justice and drive away investors with institutional uncertainty.
"Any departure from the traditionally held views that Mexico benefited from strong institutions - that's a big change," said Trang Nguyen, global head of EM credit strategy at BNP Paribas.
"So it's U.S. election risk, U.S. growth risk, and Mexico risk. That's not an easy combination for investors to handle."
Mexico's equity market is down over 9% this year at local index level .MXX, and nearly 20% in dollar terms compared to a 6.2% gain in the wider emerging market stock index .MSCIEF.
Dollar bond spreads at 335 basis points continue to be wider than its Latin American peers by some margin, with Brazil coming in and 222 bps -with Peru and Chile even tighter.
The Mexican peso, having been among the best performing currencies globally versus the dollar earlier this year, has suffered a rapid demise. The currency touched a two-year low above 20 per dollar and has tumbled near 12% since the June election MXN=, on track for its largest yearly decline since 2016.
And there might be more pain to come. Citi last week posted a trade with a target of 21 pesos per dollar over the next month.
"With this (judicial) reform, the Mexican government sends a worrying signal about Mexico's institutional fragility, putting at risk the relationship with our commercial partners, the flow of capital and economic growth," Coparmex, Mexico's largest employers' organization, told Reuters in a statement.
The reform "would affect key projects for our economy," the organization said.
Credit rating agency Fitch warned the approval of this and other reforms, if implemented, "may negatively affect institutional quality and Mexico’s checks and balances."
Some warn the ramifications could be felt well beyond the country's borders.
Marco Oviedo, senior strategist for Latin America at XP Investments, said the reforms may contravene principles of the trade agreement between Mexico and its top two export markets, the U.S. and Canada (USMCA), which is up for review in 2026. In case of disputes, it won't be independent institutions who will get to rule on any issues, but government entities, Oviedo said.
"We would need a lot of luck, or the government would really have to change course for this to be corrected," he said.
The economy ministry told Reuters this judicial reform "does not contravene Mexico's obligations under the USMCA," while incoming Secretary of the Economy, Marcelo Ebrard, told reporters "all investments are protected by law in Mexico, there is no provision in the judicial reform that could put a (single) investment at risk."
"I see no reason to think that there will be an impact on investments," he said.
The perception of the rule of law in Mexico has been low for decades, according to the World Bank's world governance indicators, which gives little room for any drop to significantly alter the framework for investors.
Still, developments in other countries haven't stopped investors from throwing cash at emerging markets.
"Concern over democracy and politically-compromised courts has not deterred a generation of investment in low-cost manufacturing locations such as China, Vietnam, Morocco, and Bangladesh," said Tellimer analyst Hasnain Malik in a note.
He argued the case for being bullish on Mexican stocks due to "valuation multiples (both PB and PE) at a discount (to) the 5-year median, positive real interest rates, and recent underperformance."
"There is a possibility that when the President Elect takes over, she can do other positive things, like fiscal adjustment or delay the implementation (of the judicial reform)," said Shamaila Khan, head of fixed income for emerging markets and Asia Pacific at UBS, speaking of Sheinbaum.
"There are a number of things she could do to mitigate some of the impact, which are currently not priced. There's a possibility of some more positives coming out over the coming weeks. So yes, we think that there may be an entry point forming."
Mexico's rule of law perception has been low for decades https://www.reuters.com/graphics/MEXICO-REFORMS/LAW/byprqgbeqve/chart.png
Reporting by Rodrigo Campos in New York and Noe Torres in Mexico City; additional reporting by Libby George in London; editing by Karin Strohecker
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Δήλωση αποποίησης ευθύνης: Οι οντότητες του ομίλου XM Group παρέχουν υπηρεσίες σε βάση εκτέλεσης μόνο και η πρόσβαση στην ηλεκτρονική πλατφόρμα συναλλαγών μας που επιτρέπει στον ενδιαφερόμενο να δει ή/και να χρησιμοποιήσει το περιεχόμενο που είναι διαθέσιμο στην ιστοσελίδα μας ή μέσω αυτής, δε διαφοροποιεί ούτε επεκτείνει αυτές τις υπηρεσίες πέραν αυτού ούτε προορίζεται για κάτι τέτοιο. Η εν λόγω πρόσβαση και χρήση υπόκεινται σε: (i) Όρους και προϋποθέσεις, (ii) Προειδοποιήσεις κινδύνου και (iii) Πλήρη δήλωση αποποίησης ευθύνης. Ως εκ τούτου, το περιεχόμενο αυτό παρέχεται μόνο ως γενική πληροφόρηση. Λάβετε ιδιαιτέρως υπόψη σας ότι τα περιεχόμενα της ηλεκτρονικής πλατφόρμας συναλλαγών μας δεν αποτελούν παρότρυνση, ούτε προσφορά για να προβείτε σε οποιεσδήποτε συναλλαγές στις χρηματοπιστωτικές αγορές. Η πραγματοποίηση συναλλαγών στις χρηματοπιστωτικές αγορές ενέχει σημαντικό κίνδυνο για το κεφάλαιό σας.
Όλο το υλικό που δημοσιεύεται στην ηλεκτρονική πλατφόρμα συναλλαγών μας προορίζεται για εκπαιδευτικούς/ενημερωτικούς σκοπούς μόνο και δεν περιέχει, ούτε θα πρέπει να θεωρηθεί ότι περιέχει συμβουλές και συστάσεις χρηματοοικονομικές ή σε σχέση με φόρο επενδύσεων και την πραγματοποίηση συναλλαγών, ούτε αρχείο των τιμών διαπραγμάτευσής μας ούτε και προσφορά ή παρότρυνση για συναλλαγή οποιωνδήποτε χρηματοπιστωτικών μέσων ή ανεπιθύμητες προς εσάς προωθητικές ενέργειες.
Οποιοδήποτε περιεχόμενο τρίτων, καθώς και περιεχόμενο που εκπονείται από την ΧΜ, όπως απόψεις, ειδήσεις, έρευνα, αναλύσεις, τιμές, άλλες πληροφορίες ή σύνδεσμοι προς ιστότοπους τρίτων το οποίο περιέχεται σε αυτήν την ιστοσελίδα παρέχεται «ως έχει», ως γενικός σχολιασμός της αγοράς και δεν αποτελεί επενδυτική συμβουλή. Στον βαθμό που οποιοδήποτε περιεχόμενο ερμηνεύεται ως επενδυτική έρευνα, πρέπει να λάβετε υπόψη και να αποδεχτείτε ότι το περιεχόμενο δεν προοριζόταν και δεν έχει προετοιμαστεί σύμφωνα με τις νομικές απαιτήσεις που αποσκοπούν στην προώθηση της ανεξαρτησίας της επενδυτικής έρευνας και ως εκ τούτου, θα πρέπει να θεωρηθεί ως επικοινωνία μάρκετινγκ σύμφωνα με τους σχετικούς νόμους και κανονισμούς. Παρακαλούμε εξασφαλίστε ότι έχετε διαβάσει και κατανοήσει τη Γνωστοποίησή μας περί Μη ανεξάρτητης επενδυτικής έρευνας και την Προειδοποίηση ρίσκου όσον αφορά τις παραπάνω πληροφορίες, τις οποίες μπορείτε να βρείτε εδώ.
