Five challenges facing Mexico’s Claudia Sheinbaum
Investors were taken aback by the outcome of Mexico's elections, which also sent reverberations through the boardrooms of various companies.
Claudia Sheinbaum, the candidate representing the ruling party, achieved a resounding triumph with an overwhelming vote count. Her political party, Morena, along with their associated allies, have the capability to obtain the two-thirds majority required to smoothly implement constitutional changes that have sparked debates. This may be achieved before Sheinbaum takes office on the 1st of October.
The changes were thought up by Sheinbaum's previous leader and guide, President Andrés Manuel López Obrador. He has maintained great popularity through a combination of approaches and charisma. He's hoping these changes will help to make sure he's remembered for a long time.
Even though Sheinbaum won the election convincingly on Sunday, she will have a lot of tasks waiting for her when she officially becomes Mexico's first-ever woman leader. These are the top five obstacles that she must overcome:
"The Budget Shortfall"
López Obrador's government focused on fiscal prudence as one of its principles, providing minimal financial assistance amid the Covid-19 crisis that claimed the lives of hundreds of thousands of Mexicans. However, his budget for the election year was marred by excessive spending, funding several large-scale social programs and infrastructure projects, eventually leading to a projected deficit of 5.9% of the GDP for this year.
The money department plans to reduce the amount of debt it has by almost half in the upcoming year. However, financial experts believe that this could be harmful to the already-declining economy in Mexico. The president, López Obrador, has stated that his finance minister, Rogelio Ramírez de la O, will continue to hold his position for an undefined period. This news may ease the minds of potential investors.
Sheinbaum declared that she won't immediately increase taxes to diminish the deficit. Instead, she plans on enhancing the collection of revenue and preventing tax evasion. Nonetheless, a lot of experts speculate that if she wishes to fulfill her promises of improving social welfare spending and public services, there's a high possibility that she will have to enlarge taxes.
Individuals with knowledge of the issue have shared that government representatives are examining strategies to increase their income from the banking industry, which is exceedingly lucrative.
Tackling Crime And Violence Together
During López Obrador's time as leader of Mexico, violence has reached unprecedented levels. The official numbers report over 175,000 homicides and 43,000 people who are missing. However, many independent organizations state that these figures do not reflect the true scale of the issue.
Illegal drug dealers have expanded into profitable new ventures, including extortion schemes and smuggling people across borders, and have progressively increased their presence throughout the nation. The president's approach to avoiding direct confrontation with influential dealers of cocaine and fentanyl has received criticism from opposition groups, claiming it is a form of appeasement.
Sheinbaum has expressed her desire to evade direct conflicts with the cartels. However, she aims to diminish criminal activities by implementing similar measures that were successful during her previous role as the mayor of Mexico City. Some of these plans include enhancing detective expertise and introducing social campaigns to deter youths from engaging in delinquent behavior on the streets.
The upcoming president has also shown her desire to enhance the capabilities of the National Guard, which is a federal police force administered by López Obrador. Nevertheless, polls indicate that the populace's foremost concern is the prompt decrease of violence, and analysts specializing in security are skeptical about Sheinbaum's recommendations being impactful.
"Struggling Finances Of Pemex"
Pemex, the energy company of Mexico, is currently the oil company with the highest debt globally, as it owes more than $100bn. Additionally, its production has been diminishing for several years.
López Obrador successfully overturned a significant move towards allowing private investment into the energy market and pledged to "save" the corporation. However, Pemex's monetary situation has continued to decline. Additionally, the president has allocated a minimum of $19 billion for a new oil refinery, which industry experts believe will have a hard time generating profits.
The market is of the opinion that if the debt of Pemex is not reorganized, there is a possibility that it may impact the investment-grade rating of Mexico's sovereign debt. This is because the state may have to intervene financially to help out the company.
Sheinbaum used to work as a climate scientist and obtained a PhD in energy engineering. Her objective is to speed up the process of transitioning towards renewable energy sources. Despite this, she has promised to uphold her support for Pemex and to oppose any effort to privatize its properties. However, she has not given any specifics regarding this matter.
US Relations: A Closer Look
The ongoing trade tensions between the United States and China have opened up a significant opportunity for Mexico to lure new factories to its land. However, the distrustful talk of President López Obrador against corporations and his lack of investment in crucial water and electricity infrastructure have reduced the appeal of Mexico to global companies.
The nation took the title of the biggest trading partner of the US in the previous year. However, a trade agreement called USMCA, which involves the US, Mexico, and Canada and serves as the foundation for commerce and investments in North America, is scheduled for a review in 2026. In case Donald Trump reclaims the US presidency in November, the treaty might need to be entirely re-negotiated.
The United States is strongly urging Mexico to reduce the high levels of illegal migration and drug trafficking taking place across the border. These issues have become a major concern for American voters as the country prepares for the upcoming election.
López Obrador is an expert at making deals and he was able to establish a productive partnership with both Trump and Biden. Sheinbaum believes she can do the same, but some experts believe her ideological beliefs may make her less willing to comply with the United States' requests.
One of Sheinbaum's biggest obstacles will be managing the conclusion of a political period controlled by the previous leader. The captivating populist leader controlled the news cycle by hosting a lengthy morning press briefing that drew in millions of viewers.
Amlo, which is short for López Obrador, thoughtfully mentioned a quaint village famous for their delicious cheese on Monday whilst also indulging in a well-loved traditional song. This is in stark contrast to Sheinbaum's serious and focused speeches regarding accomplishments and regulations.
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Mexico has a rare opportunity for nearshoring. The success of this opportunity depends on how the newly chosen president deals with the challenges. If handled properly, Mexico can benefit greatly from this once-in-a-lifetime opportunity. Otherwise, Mexico could fall into a state of decline.
According to a note from Citi, a bank specializing in investment, Sheinbaum faces a critical decision regarding Mexico's future. On the one hand, there is a promising opportunity for Mexico, but on the other hand, the Mexican peso may face a turning point, and investment grade may be lost.
