Assessing Political Risks Ahead of Mexico and US Elections

The next 12 months will be critical for Mexico’s business environment. The country has presidential, congressional, and several subnational elections, potentially affecting the regulatory, legal, electoral, and macroeconomic landscape. Moreover, the upcoming US elections will also profoundly impact the bilateral trade relationship. 

This article outlines the main political risks for Mexico’s business environment over the next 12 months. While focusing on the risks, I also want to highlight that Mexico is likely to remain an attractive investment destination, with a stable, but slow-growing GDP, projected to expand by 2.1% in 2024 and 1.9% in 2025. 

The most immediate risk comes from the Mexican elections. A key difference between this and previous elections is that in 2024, citizens will decide between competing national projects that go beyond parties or candidates. The composition of the leading party coalitions illustrates this point. The incumbent coalition (MORENA, PT, PVEM) proposes reformed electoral and judiciary systems relying on a stronger presidential authority, referendums, and the popular election of the Electoral Tribunal, judges, magistrates, and Supreme Court ministers. On the other hand, the opposition (PAN, PRI, PRD), composed of electoral rivals from the 1989-2018 period, aims to strengthen a decentralized system developed through the last three decades. The systemic impact of the 2024 elections will hinge on the results of the legislative elections. Specifically, on whether the ruling coalition can uphold or expand its congressional majority. 

The most likely scenario is a Claudia Sheinbaum victory, with the MORENA, PT, PVEM coalition maintaining an absolute majority (50%+1) in Congress. This would entail a moderate level of risk for businesses, as Sheinbaum would push for MORENA’s legislative agenda, aiming to eliminate autonomous market regulators. However, these reforms would need a qualified majority (66%), which MORENA may lack. In this scenario, a Sheinbaum administration could control government budgets, potentially hindering the operations of autonomous institutes. 

Autonomous institutions, including COFECE, CRE, CNH, IFT, CONEVAL, and INAI, are critical to maintaining checks and balances, as well as keeping politics far from market regulations. While these institutions have flaws, they are a key component of an efficient, democratic, and fair competitive environment. Moreover, these institutions are receiving support from the private sector and civil society groups, which is a good sign amid a challenging outlook. 

Another major risk, particularly for the medium-term, comes from the growing fiscal deficit. Over the last 25 years, Mexico has excelled in macroeconomic stability when compared to other emerging markets. However, yellow flags emerged in 2024. Mexico has incurred its largest fiscal deficit in three decades, reaching -5.4% in 2024, and surpassing the debt to GDP threshold of 50%, compared to 45.6% in 2018. While this is still low compared to Brazil (77.3%), Colombia (59.1%), and Argentina (91.8%), it is higher than Chile (40.8%). Therefore, the next administration will likely increase property taxes, simplify the collection of corporate taxes, and cut spending in 2025 and 2026.  

The growing fiscal deficit can impact the business environment in at least three ways: It forces the government to prioritize debt servicing over other expenses, like education, health, or infrastructure. Additionally, it increases the likelihood of a fiscal reform, which could increase taxation, potentially affecting both consumption and corporate revenues. Finally, it imperils Mexico’s sovereign credit rating, which can increase borrowing costs and deter foreign investment – a key factor to consider amid the rise of the nearshoring trend. Mexico’s government is proposing a tighter budget for 2025 — which is a good signal for the long run — but as the deficit increases, it will be harder to maintain fiscal discipline.

At the international level, the elephant in the room is the US election and the potential victory of Donald Trump, which is FrontierView’s base-case scenario. A Sheinbaum-Trump combination could mirror US-Mexico relations during Trump’s first administration. This entails frequent clashes over security, immigration, and trade, but also the ability to find agreements on key bilateral issues. 

In this scenario, the Mexican market faces three main risks. The first is the risk of tariffs, which could come as protectionist measures for US industries, or as coercive diplomatic tools to influence Mexico’s immigration and security policies. Either way, tariffs could significantly damage Mexican exports. 

Another risk is the revision of the USMCA in 2026, when the three countries will decide whether to extend the treaty beyond 2036.  Although the treaty may be renewed, this process could cause friction over rules of origin. For example, US stakeholders are concerned that Chinese products might bypass US tariffs by entering through Mexico.

Finally, the security crisis in Mexico could contaminate the US-Mexico trade relationship. A decade ago, the idea of using US military force against organized crime in Mexico bordered on political fiction. However, today it is a mainstream narrative for some Republican stakeholders, as evidenced by the Republican presidential primary debate in August 2023 and Donald Trump’s alleged plans to use US special forces in Mexico. Mexico’s government and society would adamantly oppose this policy, which could disrupt binational supply chains, trigger financial and currency volatility, and damage international tourism. While the scenario remains unlikely — especially if Mexico boosts its security operations — the narrative is concerning. 

Therefore, companies operating in Mexico face important political risks for the next 12 months, including the potentially disruptive reforms to market regulators, the judiciary and electoral systems, and a challenging US-Mexico relationship. Despite these risks, Mexico’s geographic location and breadth of free trade agreements make it an attractive market compared to other emerging economies. Furthermore, over the last 25 years, Mexico’s macroeconomic system has demonstrated a remarkable resilience to internal and external shocks, while its civil society continues to mature into a robust counterweight to questionable government policies.

In sum, the business environment will face strong challenges. However, there are reasons to believe that Mexico could remain an attractive investment destination with stable economic growth.