Sheinbaum likely to continue to validate an active and interventionist public sector.

BY ALBERTO M. RAMOS

“Order, unity, and continuity are human inventions”.
Bertrand Russell (May 1872 – Feb 1970); British mathematician, philosopher, and 1950 Nobel Prize in Literature.

On Sunday, June 2nd, 99.1 million registered voters will participate in the largest general elections in Mexico’s history—14.9 million voters between 18 to 24 years old are eligible to vote for president for the first time and close to 30% of the electorate is under 30 years old. The country is polarized, and younger voter cohorts’ connection with, and loyalty to established political parties are weak.

Presidential, legislative, and several local elections will take place simultaneously. Voters will elect a new president and Congress (500 Lower House representatives and 128 senators). Furthermore, 9 gubernatorial (including Mexico City), close to 1,800 mayoral, and several state and municipal legislative elections will take place on the same day.

The popular incumbent president, Andrés Manuel López Obrador (AMLO) is serving a six-year term and cannot run for reelection. The presidential election is decided by a single round of voting. The new Congress will be sworn in on September 1, and the president-elect will take the oath of office a long four months after the election, on Oct 1.

The elections will take place against a backdrop where the median voter feels better about the economy, the personal economic/financial situation, and overall social conditions given the government focus on targeted transfers to certain cohorts (elderly, youth, etc.). But at the same time, surveys suggest voters continue to feel exposed to high levels of corruption and less safe given rising violence and organized crime activity.

Assuming that the consistent and persistent signal from the polls is validated on Election Day, Mexicans are expected to largely vote for policy and political continuity, and to validate the current dominant presence of the Morena party and its allies in the central and local power structures.

The latest polls suggest that voters will give a strong mandate to the left-leaning Morena presidential candidate. Former Mexico City Mayor Claudia Sheinbaum—the leftist candidate running for AMLO’s Morena-PT-PVEM coalition—led the race in the pre-campaign polls and seems to have consolidated the lead halfway through the official campaign.

According to three main poll aggregators (Oraculus, Polls.mx and Bloomberg), Ms. Sheinbaum leads the race with roughly 60% of the effective voting preferences, a commanding +24pt lead on average over senator Xóchitl Gálvez—the candidate representing the three-party coalition between the center-right PAN, the centrist PRI, and leftist PRD. Lower House lawmaker Jorge Álvarez Máynez, from the smaller MC (Citizens Movement) party, is polling in a distant non-competitive third place with less than 7% of the voters’ preferences.

Ms. Sheinbaum’s bid for the presidency is benefiting from AMLO’s broad populist appeal, enduring high approval ratings and long political coattails. The economy is also helping, given a backdrop characterized by a robust labor market, moderating inflation, strong currency, high wage growth (including very generous minimum wage increases), rising social transfers and the broadening of the social safety net under the current administration.

Ms. Gálvez, a self-made businesswoman with a computer science degree, has limited government and party experience but has managed to energize the opposition through her direct and high-spirited communication style. Nevertheless, the candidate is still struggling to shake off the generally poor public image of the main opposition leaders and parties while finding a message and policy program that, beyond public security issues, truly resonate with the broader electorate.

An Election Where Change Means the Status-Quo

Mr. Sheinbaum, a former mayor of Mexico City with a BA in physics and Ph.D. in energy engineering, carries the banner of the political left, positioning, like AMLO did six years ago, as a nationalist, socially progressive, anti-corruption, and political elites’ antagonist candidate.

While in 2018 Mr. López Obrador was the candidate for change and campaigned as an anti-establishment agent who was not corrupted by traditional politics and party structures, Ms. Sheinbaum is campaigning on a platform of policy and political continuity, seeking to cement AMLO’s popular change-legacy while broadening and extending the economic and political agenda of the so-called Fourth Transformation vision pioneered by the current president. In that sense, the desire to cement the change that started six years ago (i.e., not going back to the previous political equilibrium dominated by the discredited traditional parties) is leading a large share of voters to opt for continuity through the Morena candidate. Relatedly, Ms. Gálvez is finding it challenging to convincingly signal that she represents true change as her presidential bid is backed by a trio of traditional parties whose image remains poor across large swaths of the electorate.

According to a March Mitofsky poll, among those who in the 2018 election voted for President López Obrador, a commanding 79% would now vote for Claudia Sheinbaum, the Morena-coalition candidate. Furthermore, a third of those that in 2018 voted for the PRI candidate José Antonio Meade, and one-sixth of those that voted for the PAN candidate Ricardo Anaya, would switch party allegiance and now vote for Ms. Sheinbaum (Exhibit 6). Strikingly, among those that did not vote in 2018, a significant 50% would now turn out to vote and would choose Ms. Sheinbaum (versus only 24% for Ms. Gálvez). In our assessment, this shows: (1) the broad electoral pull of Ms. Sheinbaum, and (2) the inclination of voters to endorse and preserve the status-quo.

Claudia Sheinbaum Enjoys Broad-Based Voter Appeal

President López Obrador seems to have managed to successfully transfer a significant part of his political capital and favorable public opinion of his administration to the less charismatic Ms. Sheinbaum. Given that the president cannot stand for reelection but was very engaged in the candidate selection process and is featured prominently in the campaign materials and strategy, in the eyes of many voters the popular Mr. López Obrador is running by proxy through Ms. Sheinbaum. Ultimately, polls show that the majority of voters wish Morena to remain in power and Ms. Sheinbaum is perceived favorably compared with the other two presidential hopefuls.

For a clear majority of voters, the main challenge the country is facing is public security/crime, followed by corruption, and in a distant and declining third place the economy, all issues on which the popular AMLO administration has not performed particularly well, according to opinion surveys. The administration gets high marks for its social programs, though, and low-income households see President López Obrador as a strong advocate for them. The security/crime concerns have been heavily explored and are at the core of the opposition candidate’s Xóchitl Gálvez campaign, but political analysts and critics argue that the strategy proposed to deal with them seems to lack punch and is not very innovative or clear-cut.

On key personal attributes (e.g., honesty, intelligence, experience, prepared to be president) Ms. Sheinbaum polls significantly better than the other presidential hopefuls and she is also seen as the most capable candidate to manage the economy, create jobs, attract investment, manage a crisis, and handle relations with the US and drug trafficking issues. Conspicuously, despite promising broad policy continuity, Ms. Sheinbaum is seen as the “candidate of change” which we interpret as meaning the candidate that will deepen and consolidate the change/rupture from the old political establishment status-quo brought about by the López Obrador 2018-2024 presidency.

Finally, voting preferences seemed to have consolidated to a significant extent, in particular for the leading presidential candidate Claudia Sheinbaum, which given the large and steady lead in the polls will likely require a major political event or campaign mistake to turn the election odds significantly against the Morena candidate.

Morena-Led Coalition Is Likely to Remain Largest Political Bloc in Lower House and Senate

More than the presidential race, which so far does not appear competitive, investors have been focusing on the legislative election and the composition of Congress. The balance of forces in Congress will be critically important for governability and policy direction.

President López Obrador has been clashing with key institutions, most visibly the Supreme Court and the electoral authority (INE) and has stated that in the June 2024 elections a key objective is to attain two-thirds qualified majorities in Congress that would allow Morena and allies to approve constitutional amendments. Given the current political dynamics and electoral rules (revamped to prevent over-representation), and without AMLO on the ballot box, even if the Morena candidate is the favorite to win the presidential election it would be a challenge for Morena to reach such a large representational presence in Congress, particularly in the Senate. Furthermore, without Mr. López Obrador, Morena and the party coalition it leads could turn into much less cohesive and disciplined political entities.

According to the latest voting intention by party, Morena and allies are expected to retain a simple majority in both the Lower House and the Senate, i.e., still short of the two-thirds majority needed to approve constitutional reforms. There are currently no polls for the composition of Congress, and predicting the size of party benches is notoriously difficult given that the final composition of the Congress depends on the regional distribution of the vote and is a function of a rather complex mixed proportional and majority seat-assignment system (see Box).

A strong performance by Claudia Sheinbaum and a landslide election for the governing coalition could eventually allow Morena and allies to expand their legislative bench to close, or even exceed, the two-thirds threshold, though that is not currently the expectation of most pollsters and political analysts and our Senate simulation based on state-level data.

Projections for the Senate generated from state-level data by a pollster that conducts random robocalls (Rubrum) show that in the 32 states (this total includes the Distrito Federal) in play the PRI-PAN-PRD parties are leading in only 6 states and are running in second place in another 24. This would give it 36 senators and given its roughly 36% share of the national vote, the coalition parties could elect another 11 senators from the proportional assignment of 32 seats according to the national vote. Hence, if these figures hold on election day the opposition PAN-PRI-PRD coalition will elect a bench with only 47 Senators (37% of the Senate floor), which would be well short of the 75 seats (59% of the Senate floor) projected for the ruling Morena-PT-PVEM coalition. In this simulation the ruling coalition would be 11 senate seats short of a qualified two-thirds majority but would enjoy a comfortable simple majority that would allow it to approve the budget and other ordinary bills.

Furthermore, in the 25 states in which Morena is leading in Senate races, there are only 2 where the lead-margin is less than 5pts, and another 3 where the margin is between 5pt and 10pt. That is, 21 to 23 states seem somewhat safe for Morena. In addition, in 7 states in which the Morena coalition is running second it is competitive in 1 (Nuevo León) and is in the running in another one (Guanajuato).

Control of the Lower House (simple majority) would give the new president the ability to set budgetary spending priorities (the spending chapter of the budget needs approval by only the Lower House). Control of the Senate and House would give the future president additional leeway on the revenue side as tax legislation and debt issuance must be approved by both chambers. Furthermore, the Senate is constitutionally in charge of ratifying cabinet appointments, central bank directors, and senior officials of a number of regulatory boards. Finally, the Senate may also be tasked with reviewing and ratifying any eventually revamped USMCA trade agreement in 2026.

Given that the PAN (center-right) the PRI (center-left), and PRD (left wing) parties have traditionally been on opposing sides of the political spectrum, and the fact that their coalition in the recent legislature was not always particularly cohesive given different ideological and policy preferences, the post-election effectiveness and durability of a PAN-PRI-PRD opposition parliamentary bloc is questionable. Hence, even if the Morena-led coalition falls short of achieving a two-thirds super-majority of 334 (86) seats in the House (Senate), it may still end up close enough to effectively build post-election working super-majorities by co-opting support from a few opposition legislators, particularly from the PRI and the Citizens Movement (MC).

Morena Expected to Remain a Dominant Political Force at the Local Level

Morena is also expected to do relatively well in the 9 state gubernatorial races. Morena and allies are the incumbents in six of the nine states: the PAN in 2, and the MC in one. Governorships are powerful and influential offices due to the financial and logistical resources they manage and the political power they often wield over legislators.

Based on the most recent polling data, Morena’s coalition candidates are expected to easily hold the Chiapas and Tabasco governorships, but may be facing competitive races in Morelos, Veracruz, and potentially in Mexico City. The current governor of Morelos (from the PES/Morena) is unpopular, and protest-vote may open a window of opportunity for the opposition to flip the state. In Puebla, Morena still leads comfortably but voter satisfaction with the performance of the Morena governor has deteriorated, creating another opportunity for the opposition.

The pivotal Mexico City (home to 8.1% of the electorate) is a coveted prize for both Morena and the opposition. The opposition is betting and investing heavily in the Mexico City governorship race with Santiago Taboada (PAN-PRI-PRD) slowly narrowing the gap to Clara Brugada (Morena-PT-PVEM).

Overall, on a good night for the opposition presidential candidate, Morelos, Veracruz and eventually Puebla could flip; and potentially Mexico City in case of a very strong poll-defying showing by Xóchitl Gálvez.

The PAN coalition candidates are ahead in Guanajuato and Yucatán; though in both races the Morena coalition challengers seem to be running competitive races. In Tabasco and Yucatán, the PRD is fielding its own candidate, with both faring poorly according to the most recent polls. The small MC is ahead in Jalisco, in another competitive race with the Morena coalition candidate.

Morena Will Remain in the Driver’s Seat… But the Road Ahead May Get Bumpier

The overall policy mix and governability may deteriorate after the 2024 election. Many investors fear that the-hitherto conservative fiscal stance (apart from the expansive 2024 election-year budget) is a personal attribute of President López Obrador, one that is not broadly shared by his Morena political party, or potentially even by the next president. The fiscal situation over the next presidential term is likely to be more challenging giving rising pension payments and other social program pressures, and the fact the President López Obrador depleted existing counter-cyclical funds and deepened the financial dependence of PEMEX on budgetary transfers. Following the visible fiscal expansion in 2024, the next administration will be compelled to consolidate the public finances in 2025 through difficult spending cuts. Overall, the next president may have to embrace a fiscal reform to raise tax revenue at some point during their term, and potentially to revisit the costly recurrent transfer of funds to PEMEX.

The departing administration submitted to Congress in February a large package of broad-reaching bills, many involving constitutional revisions, to reshape key institutions such as the Electoral Institute and the Supreme Court (e.g., election of supreme court judges) and weaken/eliminate autonomous agencies, alongside populist and costly pension and minimum wage proposals. Assuming continuity in the presidency, this agenda would condition the policy room and direction of the next administration, at least initially. Some bills are perceived as leading to institutional erosion and weakening the current checks and balances; and several are not viewed as market friendly.

A Morena-led two-thirds qualified majority in Congress (although this outcome is currently viewed as unlikely) would be seen negatively by the market, as that would facilitate the approval of a significant part of the controversial February legislative package of bills and pave the way to reshape the Supreme Court. However, we highlight that even without a qualified majority in Congress to approve a judicial overhaul, the next president will be able to nominate 4 new supreme court justices and through them possibly give the court a pro-government tilt. That could allow a Morena-led administration to push key parts of the pending legislative agenda through ordinary bills that would then more easily survive constitutional challenges in a leaning Supreme Court. Hence, the next administration will have to steer the populist and institutionally risky agenda inherited from AMLO without hurting business and investor sentiment, and/or worsening the medium-term fiscal baseline. A key issue in this regard for Claudia Sheinbaum, would be to lighten the populist bite and institutional hazards of these bills and lead a more technocratic market-friendly administration without in the process jeopardizing critical political support from López Obrador who, on the sidelines, is still expected to be highly influential.

None of the presidential candidates seems to come close to AMLO’s populist charisma and strong emotional connection with voters. Were Claudia Sheinbaum to win the election, as a likely less popular leader she may struggle to maintain AMLO’s tight grip on the fractious Morena party (a party created by and shaped around Mr. López Obrador), and the Morena governors may not show the same acquiescence to Ms. Sheinbaum as they did to Mr. López Obrador, particularly with regard to the tight control of federal fiscal transfers. Hence, the next presidential term may be more unstable than the current one.

The US presidential election later in the year may turn into an additional driver of asset price volatility and medium-term policy challenges for Mexico on longstanding issues, such as, migration, asylum policy, drugs/fentanyl, and security cooperation/gang violence, and new ones related to trade; the flow of Chinese investment and exports to the US via Mexico, national content rules, and the USMCA renegotiation in 2026. On these issues and disputes, we expect the next Mexican administration to work to lower the temperature and to privilege a constructive/cooperative relationship with the US to preserve smooth access to the US market (i.e., avoiding punitive US import tariffs or other trade restrictions) and foster the continuation of the North American manufacturing integration drive and near-shoring investment and export potential.

Like AMLO, Ms. Sheinbaum seems to hold a similar nationalistic/populist worldview and favors a policy mix that is likely to continue to validate an active and interventionist public sector, both directly, and indirectly through state-owned companies. This approach may cap much-needed domestic and foreign investment and could also lead to a significant misallocation of resources in the economy that could, over time, erode macroeconomic efficiency and productivity growth.

In the critical oil, gas, and power sectors, resource nationalism is expected to continue, through regulation and concessional financial support that continue to give inefficient state-owned companies a privileged and protected market position in their sectors, Pemex and CFE first and foremost. However, a potential Sheinbaum administration may ultimately embrace a more pragmatic and softer approach in order to attract private investment, boost renewable energy supply sources, and accelerate the hitherto haphazard and reluctant transition to a greener low-carbon economy.

A Long Transition Period Between the Election and the Oath of Office

During the long 4-month interregnum between election and the oath of office, the market will be paying particular attention to public statements from the president-elect and the profiles of key cabinet appointees and advisers to better assess policy direction and governing style. Market friendly signals to the private sector and the local business community would be important and welcome, particularly after several episodes that shook the relationship between the departing administration and the private sector.

While a potential Claudia Sheinbaum administration may not significantly compromise macro stability, limit the independence of the central bank, or significantly weaken the fiscal stance, a Morena administration and Morena led Congress may ultimately be reluctant to approve the necessary reforms and/or adopt the measures required to attract investment, leverage the near/friendly-shoring opportunity, and keep Mexico on a medium-term fiscally disciplined path.

All in, the political transition in 2024 may entail non-trivial policy, political, and governability risks. The main challenge for the next president will be to bolster market sentiment and provide a predictable and investment-friendly policy and regulatory framework. Disciplined management of the budget and of SOEs and progress on public security are also key to preserving market sentiment and sovereign debt ratings.

Ultimately, the new administration will be challenged not to encroach on private sector activity and free markets, and to avoid further erosion of institutional quality. A strong and functional partnership with the private sector would be critical to support investment and through that, generate growth and economic and social opportunity for underprivileged and disenfranchised segments of Mexico’s population. In the meantime, ¡Viva México!

Alberto Ramos is chief Latin American economist at Goldman Sachs Group.

This article is based on a client note by Goldman Sachs. Republished with permission.

 

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