Mexico, Elections, and Animal Spirits

Genevieve Signoret & Delia Paredes

(Hay una versión en español de este artículo aquí.)

We continue to share excerpts from our September 11 report, Quarterly Outlook 2023–2025: Soft Landing Yet Again, where we present three scenarios for the global economy over the next two years. You can think of our scenarios as train tracks: each takes the economy in a different direction. A scenario is built on a group of assumptions. Our three sets of assumptions “pivot” the economy from one track to another.

Mexico faces electoral uncertainty. Again, the issue is not who will win but what a certain individual will do if he loses.

Of course, Mexican President Andrés Manuel López Obrador (AMLO) himself is not running for reelection. But he obviously wants his acolyte, Claudia Sheinbaum, to win. And, in today’s polls she’s the favorite to win on 2 June 2024. And there is broad suspicion that, should she win, AMLO would break with Mexican tradition and try to, if not out-and-out treat her as his puppet, at least influence her from behind the scenes.

Now, voters do tend to be fickle; the polls can change. And Mexico’s opposition seems to have converged on a strong unity candidate, Xóchitl Gálvez. Sheinbaum may therefore end up slipping behind Gálvez in the polls and going on to lose. What would AMLO do then?, Mexicans wonder.

Like Trump, AMLO is known neither as a gracious loser nor as scrupulous upholder of the law. In his daily press conferences, he seldom misses an opportunity to lash out at Mexico’s electoral board, the National Electoral Institute (INE). Is he setting the stage for some sort of rebellion in case Sheinbaum should lose?

You can probably see where this is going: Mexico faces its own tail risk that a constitutional crisis will break out in 2024.

Now, in all our scenarios, we assume tail risks away.  But there’s a related pivotal question as well: how heavily will the uncertainty surrounding this risk weigh on investors?

Our Soft Landing scenario assumes that the effect on animal spirits will be present, but weak.

The peso is crushing the dollar

Dollar indices and one dollar in Mexican pesos

31 December 2019 = 100

Here’s our argument: AMLO’s track record already is well known by fixed and portfolio investors alike. If this risk was such a concern to them, why the persistence today in the Mexican peso’s strengthening trend?