Five challenges facing Mexico’s Claudia Sheinbaum

The results of Mexico’s elections have jolted investors and sent shockwaves through company boardrooms.

Ruling party candidate Claudia Sheinbaum not only won a landslide victory but her Morena party and its allies look set to secure the two-thirds majority they need to push through contested constitutional changes, perhaps before Sheinbaum is sworn in on October 1.

The reforms are the brainchild of Sheinbaum’s predecessor and mentor, President Andrés Manuel López Obrador, who has maintained high levels of popularity through a mixture of policies and personality and hopes they will secure his legacy.

Despite her emphatic victory in Sunday’s election, Sheinbaum will have a bulging in-tray when she takes office as Mexico’s first female leader. Here are her five biggest challenges:

1. The fiscal deficit

López Obrador made fiscal austerity a hallmark of his government, offering almost no economic help during the Covid-19 pandemic, which killed hundreds of thousands of Mexicans. But his big-spending election year budget, which funded expanded social programmes and big infrastructure projects, means the deficit is forecast to reach 5.9 per cent of GDP this year.

The finance ministry has said it will cut the deficit by just under half next year, which economists say would be almost impossible without damaging Mexico’s already-slowing economy. López Obrador said on Monday that his respected finance minister, Rogelio Ramírez de la O, would remain in his post for “a while”, which may reassure investors. 

Sheinbaum has said she does not intend to raise taxes immediately to help reduce the deficit but plans to boost revenue collection and crack down on evasion. However, many analysts believe she will need to increase taxes if she is to deliver on her pledges to boost welfare spending further and enhance public services.

Government officials are also looking at ways to raise more revenue from the highly profitable banking sector, said people familiar with the matter

2. Organised crime and violence

López Obrador’s five and a half years in power have been the bloodiest in modern Mexican history, with more than 175,000 murdered and another 43,000 missing, according to official figures that independent groups say underplay the true scale of the problem.

Drug traffickers have diversified into lucrative new side businesses such as protection rackets and migrant trafficking and extended their reach across the country. The president’s policy of avoiding head-on confrontation with powerful cocaine and fentanyl traffickers has been sharply criticised by the opposition, who say it amounts to appeasement.

Sheinbaum says she also wants to avoid head-on confrontation with the cartels. But she is planning to cut crime by deploying some of the same policies she says worked in Mexico City while she was mayor: beefed-up detective capabilities, plus social programmes to keep young people off the streets.

The president-elect has also signalled she wants to strengthen the National Guard, a military-run federal police force created by López Obrador. But polls show reducing the violence quickly is the public’s top priority, and security experts doubt whether Sheinbaum’s proposals will make a big difference.

3. Relationship with the US

The US-China trade war has created a big opportunity for Mexico to attract new factories, but López Obrador’s anti-business rhetoric and a failure to invest sufficiently in water and electricity infrastructure have diminished Mexico’s attraction to multinationals.

The country last year became the US’s top trading partner, but USMCA, the tripartite trade deal between the US, Mexico and Canada that underpins North American commerce and investment, is due for a review in 2026. If Donald Trump wins the US presidential election in November, the agreement could be subject to a full renegotiation.

Mexico is also under heavy US pressure to bring down record levels of illegal migration and drug trafficking across the border, which have become a top concern for American voters ahead of the election.

López Obrador, a consummate dealmaker, struck up an effective working relationship with Trump and Biden, and Sheinbaum insists she can do the same. But analysts say her more ideological background may make her less inclined to agree to US demands.

4. Pemex’s parlous finances

Mexico’s state energy firm Pemex is the world’s most indebted oil company, with more than $100bn outstanding, and its production has been declining for years.

López Obrador effectively reversed a historic opening of the energy market to private investment and promised to “rescue” the company, but Pemex’s finances have continued to deteriorate. The president also spent at least $19bn on a new oil refinery, a facility analysts say will struggle to make a profit.

If Pemex’s debt is not restructured, markets believe it could drag down the investment-grade rating of Mexico’s sovereign debt, because the state will have to bail out the company.

Sheinbaum is a former climate scientist with a doctorate in energy engineering and wants to accelerate the energy transition. But she also has pledged to continue support for Pemex and to resist any attempt to privatise its assets but has failed to provide any details.

5. Following Amlo

Sheinbaum’s most difficult challenge will be navigating the end of a political era dominated by her predecessor. The charismatic populist set the daily news agenda with an hours-long morning news conference watched by millions.

On Monday López Obrador, widely known by his initials Amlo, mused about a small town known for its cheese and played a popular folk song — a sharp contrast to Sheinbaum’s earnest victory speeches and policy announcements.

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How the new president tackles the challenges will define whether Mexico makes the most of its once-in-a-generation nearshoring opportunity or sinks into a period of relative decline.

“Sheinbaum is at the crossroads between a fantastic opportunity for Mexico on one side of the road, but a turning point for the Mexican peso and the eventual loss of investment grade in the other,” said an analyst note from Citi, the investment bank.