Mexican Stocks Plummet, Peso Drops To 20-Month Lows As Investors Run From Judicial Reform

Mexican financial assets have come under significant selling pressure on Tuesday as investors react negatively to domestic political developments.

Concerns are mounting over a judicial reform proposal, which many see as a threat to judicial independence and a potential compromise to justice and democracy in Mexico.

The iShares MSCI Mexico ETF EWW fell 2.8% by 3:15 p.m. ET, following a 2.3% decline the previous day. The Mexican peso also took a hit, plunging to 19.73 per U.S. dollar, marking its lowest level since late December 2022.

The Controversial Judicial Reform

In February 2024, Mexican President Andrés Manuel López Obrador (AMLO) introduced a highly controversial judicial reform proposal aimed at overhauling the nation's judicial system. The proposed changes include the introduction of popular elections for judges, including those on the Supreme Court, and a significant restructuring of the judicial system's oversight.

The reform has ignited intense political debate and is expected to face a critical vote in Congress by September 2024. This vote comes as AMLO enters the final months of his presidency.

President-elect Claudia Sheinbaum, who holds a “supermajority” in Congress, has voiced strong support for the reform, signaling it will be a priority for her administration.

Diplomatic Tensions Rise Amid Concerns Over Judicial Independence

Tensions between Mexico and the United States have escalated over the judicial reform.

AMLO stated on Tuesday morning that relations with the U.S. Embassy in Mexico are “on pause” following critical remarks from U.S. Ambassador Ken Salazar regarding the proposed changes. Salazar has expressed serious concerns, noting that the reforms could undermine the rule of law in Mexico.

“Based on my lifelong experience supporting the rule of law, I believe popular direct election of judges is a major risk to the functioning of Mexico's democracy. Any judicial reform should have the right kinds of safeguards that will ensure the judicial branch will be strengthened and not subject to the corruption of politics,” Salazar said in a statement.

One of the most contentious aspects of the reform is the proposal to elect judges by popular vote, which critics argue could compromise the integrity of the merit-based selection process.

As stated by local Mexican newspaper El Economista, the International Association of Judges (IAJ) has also voiced deep concern, stating that the reforms could jeopardize judicial independence and contravene widely accepted international principles.

Rating Agencies, Investment Banks Reject Reform

The proposed reforms have also raised alarm within the financial sector. AMLO has dismissed warnings from international rating agencies and investment banks regarding the potential economic impact of the judicial reform.

“Hindering those counterweights weakens certainty, which is valuable for companies when evaluating their investments in the country,” said David Crisóstomo, director of research and analysis at S&P Global Commodity Insights.

“The proposed judicial reforms in Mexico could negatively affect the investment appetite and business environment of non-financial corporates if their implementation impedes the autonomy and quality of the judicial system,” Fitch Ratings said last month.

Fitch Ratings raised concerns that Mexico’s proposed judicial reform could dampen nearshoring opportunities to the United States, particularly in sectors tied to manufacturing, export-oriented industries, and industrial real estate. The rating agency warned that, under this scenario, Mexican companies might experience a more challenging operating environment characterized by slower economic growth.

Last week, Morgan Stanley downgraded its recommendation on Mexico to Underweight, implying that the country's stocks are expected to underperform relative to the region. This downgrade came in response to the proposed judicial changes, reflecting broader concerns about the country's economic stability.

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