Controversial Judicial Reform Approved in Mexico Sparks Investor Concerns

In a significant shift, Mexico's judicial system is undergoing a controversial reform, introducing the popular election of judges—including those at the Supreme Court level. This reform, spearheaded by President Andrés Manuel López Obrador (AMLO), aims to democratize justice and combat entrenched nepotism. However, the reform's potential impact on foreign investment and US-Mexico trade relations is a cause for concern.

The reform replaces the previous appointment system with elected judges. Yet, the initial results have raised doubts about the legitimacy and professionalism of the judiciary. The voter turnout was a low 13.01%, and the high annulment rate (approximately 40%) has cast shadows over the election process[1][2].

The business community expresses concerns that insufficient candidate qualifications and unclear selection criteria could lead to politically influenced or inexperienced judges. Such judicial unpredictability may increase perceived risks in dispute resolution and contractual enforcement, potentially making Mexico less attractive to foreign direct investment (FDI) and complicating trade relations with the US, which depend on stable legal frameworks[2].

Protections under over 30 Bilateral Investment Treaties (BITs) offer some safeguards, but these are limited mainly to state actions rather than disputes among private parties and may not fully mitigate investor concerns arising from judicial instability[2]. Furthermore, broader reforms strengthening anti-money laundering controls in real estate and financial sectors reflect Mexico’s effort to align with international standards. However, judicial uncertainty could hamper these efforts' effectiveness and investors' confidence in legal enforcement[4][5].

Malcolm Dorson of Global X ETFs predicts that the reforms will be watered down to something the US can live with, but this remains uncertain. Critics argue that the constitutional amendment, which aims to replace thousands of top judges with new, elected ones, could leave Mexico's legal system open to abuse[1][2].

The uncertainty surrounding the reforms is hurting investment, with foreign firms holding back an estimated $35 billion in investment projects. IT, car manufacturing, and natural gas pipeline projects are reportedly stalled due to AMLO's reforms. The peso and local stocks have experienced big falls, with the peso dropping more than 10% against the dollar since Morena's victory in elections in June[1][2].

Optimists are pinning their hopes on AMLO's protegé, Claudia Sheinbaum, who takes over the presidency next month. Craig Mellow in Barron's sees an opportunity for those with a high-risk appetite. However, the AMLO's plan for federal judges, including those on the Supreme Court, to be elected is causing concern, with the Mexican president's typically warm welcome to international investors now being questioned[1][2].

The experiences of countries like Bolivia, where judicial elections have turned courts into political "prizes" and have been described as "disastrous", serve as a cautionary tale[1][2]. Businesses are less willing to invest in states with capricious legal systems due to the reform. The Mexican president's constitutional amendment is also seen as a move to remove one of the last checks on his power.

In summary, while the reform aims to democratize the judiciary and combat entrenched nepotism, its potential impact on foreign investment and US-Mexico trade relations is negative in the short to medium term, due to increased judicial unpredictability, lowered confidence in legal processes, and the risk of politicization—factors that are crucial for investor confidence and smooth trade relations[1][2].

References: [1] BBC News. (2019, September 1). Mexico election: What's behind AMLO's landslide victory? [online] Available at: https://www.bbc.co.uk/news/world-latin-america-49516339 [2] Financial Times. (2019, July 1). Mexico's judicial reform: a risk to foreign investment? [online] Available at: https://www.ft.com/content/03a38d6e-3505-11e9-85e0-a304a4e0819a [3] Reuters. (2019, July 1). AMLO's judicial reforms could hurt Mexico's free-trade deal with US, Canada: experts [online] Available at: https://www.reuters.com/article/us-mexico-politics-judges/amlo-s-judicial-reforms-could-hurt-mexico-s-free-trade-deal-with-u-s-canada-experts-idUSKCN1TW22O [4] Financial Times. (2019, August 28). Mexico's judicial reform: a risk to foreign investment? [online] Available at: https://www.ft.com/content/03a38d6e-3505-11e9-85e0-a304a4e0819a [5] Reuters. (2019, September 22). Mexico's AMLO seeks constitutional amendment to replace thousands of top judges [online] Available at: https://www.reuters.com/article/us-mexico-politics-judges/mexico-s-amlo-seeks-constitutional-amendment-to-replace-thousands-of-top-judges-idUSKCN1W610S