Mexico's Judicial Reform and AMLO Party's Bills Call for Caution and Business Risk Assessment
In Short
The Situation: On September 11, 2024, the Mexican Senate approved a bill from President Andrés Manuel López Obrador ("AMLO")'s party that would amend the constitution to provide for the democratic election of judges. The bill was also approved by a majority of Mexico's 32 state legislatures (AMLO's political party, Morena, has a majority in 27 state legislatures); and finally, on September 15, 2024, it was published in the Mexican Official Gazette. As a consequence, the Constitutional reform became effective.
The Result: U.S. press and interest groups have panned the judicial reform as a threat to U.S. investment in Mexico, a possible weaker democracy, and potential violations of Mexico's obligations under the United States-Mexico-Canada Agreement ("USMCA").
Looking Ahead: Because only one reform has passed and neither has been implemented, it is premature to assess the impact of these initiatives on the risk landscape for foreign investment in Mexico. Nevertheless, the reforms are significant and could impact foreign investments in certain sectors, such that foreign companies in Mexico should keep caution and continue to monitor developments.
The Details
This reform will modify the judiciary by providing for the democratic election of all judges in Mexico, including judges on the Supreme Court of Mexico and those serving on other state and federal tribunals. The candidates to become judges will be proposed by the executive branch, the Mexican Congress, and the judicial power.
Judges will be called to extraordinary election within 30 days from the reform's approval (September 15, 2024) to participate in the election process in June 2025. The reform also proposes to eliminate the Federal Judicial Council, and to create the Judicial Administration Body and a Judicial Discipline Tribunal elected by popular vote.
Political opponents and mass media have criticized the reform as threatening Mexican democracy for several reasons:
- The judicial profession could be jeopardized since judges will change during every election period with less incentive to fulfill their commitments.
- The disciplinary process, to be overseen by a disciplinary tribunal elected by popular vote, could be used against judges who issue judgements against the interests of the government.
- The reform could generate heavy costs and voter confusion as the country prepares for the election of thousands of judges.
- The reform could create power centers among groups well-represented during the election.
- The presence of organized crime in the election of judges is a possibility.
- USMCA requires the judiciary to reflect principles of uniformity, impartiality, and legal foundation, all of which could be threatened under the reforms.
Legal Caution and Risk Assessment
Although the Senate and the state legislatures approved the judicial reform to amend the constitution, the reform is not self-executing. The Mexican legislature still must draft and pass implementing legislation. Without implementing legislation, it is impossible to determine the precise effects these reforms will have on the judiciary, much less the business climate in Mexico.
Further complicating the matter, AMLO's presidential term will end on September 30, 2024, leaving the details of implementation to President-elect Sheinbaum. Though she belongs to AMLO's party, it is unclear what influence international treaties, the U.S. government, and a slumping Mexican economy will have on her decision-making.
It is also relevant that Mexico will be renegotiating the USMCA in 2026, which will put pressure on Sheinbaum's government to comply with its current USMCA obligations.
Political opponents may file for an unconstitutional action against the judicial reform, so that Mexico's Supreme Court resolves if the approved reform violates fundamental principles of the rest of the Constitution. Furthermore, the Inter-American Court of Human Rights may be a legal remedy against these reforms since they could contradict principles approved under international treaties under resolutions approved by Mexico.
Four Key Takeaways
- The reforms and other incoming bills create a high degree of uncertainty surrounding Mexico's future investments. Customary countrywide or sectorial risk assessments will both be reliable source, but specific action and business risk assessment must be taken case by case.
- While we do not see clear and immediate risks to foreign investments, we would expect any risks to emerge first in the energy, oil and gas, and telecom sectors, where foreign investments may compete with Mexican monopolies. However, absent concrete threats to specific industries from the government, companies will need to assess their level of risk exposure based on individual positional considerations.
- Another risk area relates to the impact of Mexico's political turmoil and reforms on the peso exchange rate and a possible downgrade of Mexican bonds due to a perception that recent reforms will weaken the rule of law and concentrate power.
- Caution is advised and there will be a need to monitor these developments and their potential impact on foreign investment in Mexico.
