The recent judicial reform in Mexico, which allows for the popular election of judges, has raised significant concerns about the country’s economic stability and growth prospects. Experts and analysts warn that this unprecedented change could negatively impact the business environment and investment outlook, adding uncertainty to the complex economic landscape.
The approval of this unprecedented reform has placed Mexico’s economy on a challenging path. It is now the first country to elect all its judges by popular vote. This significant shift has prompted warnings from credit rating agencies like Moody’s and business leaders, who fear the amendment could undermine the balance of powers, weaken institutions, and ultimately harm the country’s financial health.
Outgoing President Andrés Manuel López Obrador, who has championed judicial reform in Mexico to combat corruption, has downplayed these concerns, highlighting the record levels of foreign investment attracted during his administration. However, the constitutional change raises critical questions about the future of Mexico’s investment, trade, and economic growth.
What Are Investors Afraid Of?
The central fear among investors is that the judicial reform in Mexico could weaken the independence of the judiciary. Moody’s report warns that the reform could politicize court rulings, particularly at the Supreme Court level, and compromise the legal system’s ability to counterbalance the executive and legislative branches. Investors are deeply concerned that judges, subject to election, may prioritize decisions that appeal to voters rather than those grounded in the rule of law. This concern is especially poignant in light of previous judicial decisions that blocked radical legislative changes, such as those aimed at increasing state control of the energy sector.
If judges begin to issue rulings that align with popular opinion rather than legal precedent, it could lead to a significant loss of investor confidence. The potential for a weakened judiciary to erode legal protections for businesses is one of the key risks posed by the judicial reform in Mexico, and it needs to be addressed urgently.
How Will It Impact Trade?
The judicial reform in Mexico could also have significant implications for trade, particularly with the United States and Canada under the USMCA agreement. Mexico’s foreign trade is heavily concentrated with these two partners, with goods worth approximately $750 billion exchanged in 2023. The legal framework governing this trade could be altered if judges focus more on voter preferences rather than strict adherence to Mexican law and international agreements.
This reform is critical, as the USMCA is due for review in 2026. The scheduled review was already expected to be contentious, and the addition of the judicial reform in Mexico further complicates the situation, making Mexico more vulnerable to potential trade disputes.
What Does It Mean for Nearshoring?
The rise of nearshoring, where companies relocate manufacturing and supply chains closer to the U.S. market, has been seen as a significant growth opportunity for Mexico. However, experts warn that the judicial reform in Mexico could hinder future nearshoring investments. Moody’s highlights the potential negative impact on legal certainty, which is critical for companies considering nearshoring. While the flow of investment into Mexico may not halt entirely, the reform could make boardrooms more cautious and less enthusiastic about committing capital to the country.
The legal uncertainties introduced by Mexico’s judicial reform will likely be an additional risk for businesses already navigating global supply chain challenges. This could ultimately slow the pace of nearshoring investments critical for Mexico’s long-term economic growth.
Will It Slow Growth?
Regarding broader economic growth, the judicial reform in Mexico could have serious consequences. Investment, trade, and business confidence are interconnected, and potential damage in these areas could slow Mexico’s GDP growth. Mexico’s central bank has already lowered its growth forecasts for this year from 2.4% to 1.5% and from 1.5% to 1.2% for 2025. Some analysts, like Gabriela Siller of BASE Bank, warn that the judicial reform in Mexico could lead to long-term stagnation or even a recession.
The peso’s reaction to the reform offers a glimpse into the financial market’s concerns, with the currency hitting a two-year low before rebounding. Oxford Economics suggests that while the reform may not immediately affect growth, it will likely cool private investment, which could drop by as much as 12%, further dragging down GDP expectations after 2025.
In conclusion, the judicial reform in Mexico introduces significant risks to the country’s investment climate, trade relationships, and overall economic growth. While the full impact of the reform will take time to materialize, there is little doubt that it has already created an atmosphere of uncertainty that could deter investment and slow Mexico’s economic momentum.
In conclusion, the judicial reform in Mexico presents profound challenges for the nation’s economic trajectory. By shifting the judiciary to a popular election system, the reform risks politicizing court decisions, weakening the legal system’s independence, and eroding investor confidence. Judicial rulings could reflect voter preferences rather than the rule of law, introducing significant uncertainty for businesses, particularly those already navigating Mexico’s complex regulatory landscape. This shift could negatively affect industries like nearshoring, which depend on legal stability to make long-term investments. Moreover, the reform’s timing amid the upcoming USMCA review exacerbates concerns about Mexico’s ability to maintain strong trade relations with its North American partners. In this context, businesses may adopt a more cautious approach, reassessing their plans for growth and expansion in Mexico. While President López Obrador emphasizes the administration’s achievements in attracting record levels of foreign investment, the judicial reform could slow or even reverse this trend, potentially leading to reduced private investment, weaker GDP growth, and a more volatile economic outlook. Ultimately, the judicial reform in Mexico may affect whether the country can navigate these risks and sustain its long-term growth, as well as its ability to reassure investors of its commitment to a stable and impartial legal framework.