Reform could undermine Mexico’s credit quality – Moody’s

Mexico City.- Approval by Congress of the judicial reform proposed by President Andrés Manuel López Obrador would pose various credit risks for Mexico’s rating and a significant challenge for investments in the country, Moody’s Ratings warned.

“Judicial reform would undermine Mexico’s sovereign credit quality,” the rating agency warned in a report on Wednesday.

“The credit implications of the change to the Judiciary could be significant for Mexico’s sovereign credit quality, more moderate for rated financial and non-financial companies, as well as for electric and infrastructure companies, and relatively low for banks,” the agency detailed. It should be remembered that Moody’s contemplates a review of the country’s credit profile in the last quarter of 2024, when it will have more details of the economic plan of the president-elect, Claudia Sheinbaum.

Moody’s added that the reform could further weaken institutional checks and balances, which would impact other key aspects of Mexico’s credit quality, such as its economic and fiscal strength.

“As the judiciary increasingly realigns with the executive and legislative branches, its role in checking and balancing the other branches of power will deteriorate,” it projected. In addition, it said that the judicial system in Mexico has prevented the Executive from overstepping its boundaries in recent years, as it blocked some of the radical legal changes that the AMLO Administration had proposed and that Congress endorsed, especially in sectors such as energy. It also indicated that a greater risk of politicization and less independence of the Judiciary increases the likelihood of deterioration in the control of corruption in Mexico and in its rule of law. It specified that judicial reform does not directly affect the dynamics of growth, but it does imply a challenge for investments. “New investments have slowed since 2022. The reinvestment of profits has constituted a greater part of the dynamics of Foreign Direct Investment (FDI), while new investments have not generated a significant increase in FDI,” the agency emphasized. Finally, it warned that the reform also risks being challenged by Mexico’s trading partners in North America, particularly with regard to compliance with the Agreement with the United States and Canada (T-MEC). “These challenges would lead to a controversial review of the T-MEC in 2026, which would further undermine investor confidence and economic stability,” Moody’s said. “The Ambassadors of the United States and Canada in Mexico have already expressed concern about the changes and stated that these modifications could affect certainty, transparency and professionalism in the handling of judicial matters.”