Mexico’s Treasury Secretary tries to reassure nervous investors

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Mexico’s treasury secretary sought to reassure investors in a hastily scheduled call Tuesday that the leftist government remained committed to fiscal discipline after its landslide election victory.

But traders continued selling the peso fearing a radical constitutional change after voters gave a huge mandate to President-elect Claudia Sheinbaum in Sunday’s vote and gave the ruling Morena party a supermajority in Congress.

Markets spooked after the result, fearing that the resounding victory would allow the government to advance plans that investors worry could dismantle checks on the executive branch and threaten the rule of law.

That led Sheinbaum to announce that Finance Minister Rogelio Ramírez de la O, respected by investors, would remain in his cabinet after President Andrés Manuel López Obrador handed over power in October.

The minister spoke to investors in a two-minute call on Tuesday morning promising to reduce the budget deficit next year and stick to orthodox economic policies.

“Our project is based on financial discipline, respect for (the central bank’s) autonomy, compliance with the rule of law and the facilitation of domestic and foreign private investment,” he said, according to a recording of the call.

However, Ramírez de la O did not answer questions and the brief call did not address key concerns about the constitutional reform.

Markets reacted negatively to the magnitude of Sheinbaum’s victory, with the country’s weight falling 5 percent since the result. The benchmark IPC stock index fell 6 percent on Monday, with banking stocks hardest hit, but rebounded 3.3 percent on Tuesday.

Aaron Gifford, sovereign credit analyst at T Rowe Price, said the call did little to allay concerns. “It looks like we will have to wait for more details on the transition plan, especially given fears that AMLO will push through some reforms during the month that overlaps with the new congress,” he said, referring to the president by his initials.

Voters on Sunday gave strong support to the government of López Obrador, a charismatic nationalist who doubled the minimum wage and expanded social assistance programs.

López Obrador, Sheinbaum’s longtime mentor, also increasingly concentrated power in the presidency.

López Obrador said after the election that he would meet with Sheinbaum to discuss constitutional reform proposals, adding that judicial reform was a priority. The president has been fighting the Supreme Court since it blocked many of his key legislative changes.

“We cannot maintain a judiciary that is not at the service of the people,” he said Monday.

Their solution is to dismiss the court and hold direct elections for substitute judges. This is one of the 20 constitutional reforms proposed in February.

Other measures include setting minimum wage increases linked to inflation, reforming pensions, guaranteeing state healthcare for all and education scholarships for the poor.

Currently, only Bolivia elects Supreme Court judges, and legal experts and civil rights activists strongly oppose a move they say would politicize the court and increase government control.

When the reforms were proposed, Morena did not have the two-thirds majority in Mexico’s Congress to approve the reform package, but when the new Congress convenes in early September, Morena and its allies will have a constitutional majority in the Lower House and will only be missing a few seats in the Senate.

Political analysts say it will probably be easy for the government to win additional votes by cajoling demoralized opposition lawmakers into switching parties, a process known in Mexico as “grassshopping.”

The proposals that worry investors most are directly electing judges, increasing pension spending and eliminating independent regulators. The opposition and civil society will most likely not be involved in shaping the reforms, said Valeria Moy, director of public policy think tank IMCO.

“The negotiation will not be with anyone else, only between themselves,” he said of the ruling party. “When you have all the power, you use it.”

“The reform will become a reality. The battle is over how deep it is,” said Saúl López, a professor at the Tec de Monterrey school of government, adding that it remains to be seen whether Sheinbaum will seek less radical technical reform or focus on the symbolism of elected judges. .

The president believes that independent regulators are “neoliberal” entities subject to industry capture, and has proposed eliminating them.

Sheinbaum has broadly backed the proposals, but on Monday he posted a message promising dialogue and that he would act responsibly. Moy said: “The country from now on will depend on the prudence of one person.”

Additional reporting by Philip Stafford

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