Impact of the Judicial Reform on the Mexican Economy, According to Moody's

The recent approval of the reform to the Judiciary in Mexico poses serious risks to its autonomy and impartiality. In this context, Moody's warns that the credit implications could have a significant impact on the country's solvency. Currently, its credit rating for Mexico is Baa2, with a stable outlook. For companies in both the financial and non-financial sectors, as well as electric and infrastructure firms, the effect is anticipated to be moderate, while for banks it is seen as relatively low. The rating agency believes that this reform could weaken Mexico's economic and fiscal stability.

The firm notes that "as the Judiciary aligns more closely with the Executive and Legislative branches, its role as a check on these powers will be compromised." It recalls that in previous instances, the Judiciary has held back drastic legal changes. "Investor anxiety over the lack of legal certainty has increased volatility in the short-term financial market, and a prolonged impact on confidence could drive up debt costs and limit private investment, negatively affecting projected growth for 2025 and beyond." A negative impact is also expected in corporate sectors that require concessions and significant investments, such as mining and telecommunications. "Changes to the judicial system could be particularly harmful to future investments in nearshoring." Additionally, if uncertainty continues to affect the Mexican peso, this will harm the credit metrics of companies with costs in dollars but earnings in pesos. Regarding the infrastructure sector, the judicial modification, along with the elimination of regulatory bodies, will increase uncertainty around rules and processes, making it less attractive for private investment. "The greater the perception of risk, the higher the returns investors will seek, which in turn will raise additional costs for legal analysis and due diligence." Concerning the banking sector, Moody's indicates that it is already facing serious complications in complying with guarantee laws and the lengthy processes to resolve bankruptcies. "Recent events will erode the expected benefits in transaction volume and profitability that were anticipated from nearshoring activities."

The current state of the Judiciary and its potential weakness against other powers could bring long-term instability to the Mexican economy. This affects not only investor confidence but also credit quality and growth prospects. It would be wise for authorities to seek ways to ensure the independence of the judicial system to maintain a favorable and predictable economic environment that encourages investment.