(Bloomberg) -- Over the last six years, investors knew they had at least one place to appeal when they didn’t agree with Andres Manuel Lopez Obrador: Mexico’s courts.
They turned to the Supreme Court when the government threatened to jail anyone accused of tax fraud even before their cases were heard. And again, when AMLO, as the president is known, wanted to pass a nationalist electricity law.
Now, on the precipice of a drastic overhaul of the judiciary, investors are dreading the day when they have nowhere to direct their pleas. And that day will likely come soon.
Senators passed a bill early on Wednesday that mandates judge selection by popular vote, at a time when AMLO’s party has more public support than ever. It will likely give the ruling party Morena control over all three branches of government, which opposition members argue eliminates the final check and balance on the presidency. The bill now only has to be approved by state legislatures before it’s published into law.
The peso, which was earlier in the year one of the world’s top performing currencies, sank as it became clear that AMLO would push for the reform and is now more than 14% weaker since the start of the year.
The reform could set back the business climate by 50 years, critics say, when the country’s politics were dominated by the rule of a single party, the PRI. Back then, power was consolidated around the executive and the party did not shy away from repressing the opposition. The government nationalized Mexico’s banks in 1982. At the time, oil and telecommunications were already some of the industries that were mostly state-run.
“We had taken such important steps in forming our democracy, in separating powers and in not having a single political party hold so much power,” Jose Medina Mora, head of business group Coparmex, said in an interview Monday. “We’re going back to a regime where all the power is centralized in the president — it’s back to Mexico in the 1970s.”
While smaller companies might not be as affected by the changes to the court system, larger firms might seek to invest in other countries if they have the option to take their money elsewhere. Already, in August, Global Companies in Mexico, a group that includes Nestle SA, AT&T Inc. and MetLife Inc. among others, said the bill could discourage investment. The group urged the government to amend it so it guarantees judicial independence and adheres to international trade regulations.
S&P Global Ratings’s analyst Omar De la Torre said on Wednesday that the company did not have a preference on whether judges should be elected. However, he said he would be watching to see if Mexico’s judicial overhaul hurt investments or fiscal accounts, which could have a negative impact on Mexico’s credit rating. Currently, it still has a stable outlook for Mexico.
The lower house has been discussing another piece of legislation that would get rid of independent regulatory bodies, including the commission of economic competition Cofece, the telecommunication regulator IFT and energy regulator CNH. If passed by both houses of Congress, the regulators’ work will be absorbed by different ministries, and they would lose their independent budget and autonomy.
“Mexico has been deteriorating as a destination for foreign direct investment,” Medina Mora said.
Reforming the judiciary the way AMLO has proposed, Medina Mora said, will not only delay fresh foreign investment but “outright” stop it, as international corporations tend to avoid countries with weak rule of law.
Fighting Tendencies
AMLO is no stranger to picking fights with international companies operating in Mexico.
There was Spanish Iberdrola SA, with whom he eventually reached a $6.2 billion deal to purchase power plants and a wind farm, after accusing the company of predatory practices in the electricity market. He’s threatened to take over the limestone quarry of US-based Vulcan Materials Co. China’s top lithium firm, Ganfeng Lithium Group Co., initiated an arbitration process with Mexico after the government canceled what would have been the country’s first commercial lithium mine.
It’s part of the not-so-friendly relationship AMLO has struck with Mexico’s business community and foreign companies. He’s invested in public-private agreements for infrastructure projects, celebrated Mexico’s rise to become the top trading partner of the US, and taken a hands-off approach to banks.
His administration has worked closely with billionaire Carlos Slim’s Grupo Carso and Canada’s TC Energy among others, but he continues to vilify certain parts of the business sector.
At a press briefing ahead of the reform’s approval, Lopez Obrador said that if the government did not carry out the proposed changes, the country’s judges would “continue defending foreign companies that come to sack, steal, and affect Mexicans’ economy.”
He pointed to his defeated proposal to prioritize using power from Mexico’s state-owned utility company over energy from private firms including producers of renewables, after it reached the desk of Mexico’s Supreme Court justices.
“We’ve seen how they canceled laws that were meant to guarantee there was no increase in electricity costs,” the president said, “because they want the foreign companies to stay dominant.”
US congressional lawmakers have put pressure on US Trade Representative Katherine Tai, warning in a letter that the reforms under consideration could make the 2026 review of the North American free trade agreement “more difficult” and potentially compromise US investors’ access to a “stable, predictable, and unbiased regulatory framework.” They urged her to seek to negotiate with AMLO and President-elect Claudia Sheinbaum, who takes power on Oct. 1.
Sheinbaum, for her part, has dismissed criticism against the reform, saying Monday that “domestic and foreign investors should know that their investments will be well protected in Mexico and that this reform to the judiciary strengthens democracy and justice.”
Marcelo Ebrard, who was appointed to serve as Economy Minister in Sheinbaum’s cabinet, told press on Wednesday that the judicial reform would not affect Mexico’s relationship with its trade partners or dent investments.
“There’s no part of the judicial reform that could put investments at risk. There’s no reason why it should,” he said. “Mexico has international trade agreements and the Constitution protects both property and investments.”
But domestic and international pushback has grown.
On Tuesday, protesters against the reform sought to halt congressional proceedings, pushing their way onto the Senate floor. When lawmakers resumed the session in an alternate building hours later, police lined up outside to prevent marchers from breaking in again.
The Morena party also faced criticism for supposedly twisting the arm of an opposition senator, Miguel Angel Yunes Marquez, to vote in favor of the judicial overhaul. The president on Wednesday denied to the media that his government had offered the senator money or threatened him in exchange for his vote, calling it “a political decision.”
Domino Effect
Investors aren’t comforted by AMLO and Sheinbaum’s assurances.
The “possible politicization” of judicial appointments “would open the door for judges to face external pressures that could compromise their independence and impartiality,” said Jose Domingo Figueroa, president of the Mexican Institute of Financial Executives.
That increased legal uncertainty would have a domino effect: Investors would lose confidence, and a slowdown in new foreign direct investment could lead to Mexico losing its investment grade, affecting its ability to obtain new financing, he said.
It would also risk erasing Mexico’s appeal to foreign businesses in recent years.
Many companies had seen Mexico as a viable place to invest to be closer to the US’s gigantic consumer market, a process called nearshoring. If that changes with the judicial reform, it could affect 1.9% of gross domestic product per year, said Gabriela Siller, Grupo Financiero Base’s head of economic research.
One workaround for foreign investors, according to a Base report, is to require that disputes be resolved under US jurisdiction.
It’s too soon to know if that will be enough.
“We’re not the only option to manufacture,” said Jorge Gonzalez Henrichsen, co-CEO of the Nearshore Company, which helps US firms move part of their production to Mexico. “There’s Vietnam, other parts of South East Asia, there’s Colombia, there’s India — and there’s Texas.”
--With assistance from Michael O'Boyle.
(Update with commentary from credit analyst in 9th paragraph and incoming economy minister in 22nd paragraph.)
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