Index trend
Previous quarterly editions
Expropriation Risk: 60 60 57 60 ▲Political Violence Risk:57 57 57 57 ►Terrorism Risk:63 63 63 63 ►Exchange Transfer and Trade Sanction Risk: 54 54 54 54 ►Sovereign Default Risk:55 55 55 47 ▼
Overall Risk Temperature: 59 (Significant 1) TREND ►
Special topic: Gray zone aggression
Degree to which the country relies on outbound gray zone action to achieve its strategic objectives1 = Not at all5 = Gray zone action is a core tactic
1
Impact of inbound gray zone attacks on the country1 = Negligible impact5 = Significant impact on economic growth and/or political stability
2
Mexico and the United States have deep economic integration, so Mexico is very unlikely to initiate any gray zone aggression against the United States. However, two issues — illegal immigration and illegal narcotics — are large political issues in the U.S., and these could be sources of what is in effect gray zone aggression against or inside Mexico, especially with the return of Donald Trump for a second presidential term from January 2025.
After taking office as president in December 2018, Andres Manuel Lopez Obrador (AMLO) stated that migrants crossing Mexico to the U.S., mainly coming from Central American countries, would do so unhindered, causing numbers to rise. A few months later, then President Trump announced that the Mexican government had 10 days to start staunching that flow or all Mexican exports to the U.S. would pay a 5% tariff, a level that would increase every month by 5 percentage points until the problem was solved. AMLO’s government reversed its migration policy days later, practically sealing the southern border with the army to reduce illegal crossings.
U.S. President Joe Biden’s administration is more subtle, so much so that it is not certain if the administration was behind what probably was the kidnapping of the powerful Sinaloa cartel leader, Ismael “Mayo” Zambada, who was put on a plane that travelled from Mexico to U.S. territory, where Zambada was arrested. That kind of action (entailing a blatant but not open violation of Mexican sovereignty) may not be the last considering that parts of its territory have become de facto enclaves controlled by drug cartels amid increasing violence.
TREND ▲
AMLO’s administration ended on October 1, with his chosen successor, Claudia Sheinbaum, starting her six-year period as president. Sheinbaum won the June election in a landslide vote for AMLO’s National Regeneration Movement (Morena). She has pledged to follow his policies; it is unclear whether that will include AMLO’s positions against some foreign investments, notably in the energy sector but also mining and communications.
The expropriation risk became significant in the specific instances that AMLO considered important for the government to intervene, even if it meant violating international treaties, domestic legislation or contracts agreed by previous administrations. The usual strategies were to enact legislation, threaten with expropriation or directly take over a company through force and then expect those affected to negotiate from a weakened position. The president showed repeatedly that he was willing to pay for the consequences, including any financial penalties and reputational costs. AMLO considered that sovereignty issues (as defined by him) were superior to legal stipulations or even international treaties.
Sheinbaum could adopt a similar stance. Moreover, on September 11 the new Congress, where Morena and its allies hold a supermajority, radically changed the constitution at AMLO’s behest. All Supreme Court judges, magistrates and federal judges will be substituted from mid-2025 by others elected by popular vote, with the candidates mostly chosen by the president and Congress. A bulwark against government arbitrariness against private interests, an independent judiciary, has been destroyed. It can be argued that Mexico is rapidly transitioning from a democracy to an authoritarian regime controlled by the president and a dominant political party, as was the case for most of the previous century.
TREND ►
A major failure of AMLO’s administration was violence: His policy of “hugs, not bullets” represented in reality a shortcoming by the government in the fight against criminal groups, particularly drug cartels.
Such groups practically control territorial enclaves or greatly influence some municipal and even state governments. The president himself has shown public sympathy toward the Sinaloa cartel and its imprisoned (in the U.S.) former leader. Sheinbaum may follow a similar path unless she opts to start an all-out war against cartels.
As mentioned, activities by criminal organizations are causing major Mexico-U.S. tensions. Some Republican legislators in the U.S. are openly calling for direct U.S. military action against cartels in Mexican territory, particularly aiming to arrest the illegal trade of opioid fentanyl coming from Mexico that is causing significant drug addictions and related problems in the U.S.
Drug cartels and other criminal groups routinely use terrorist tactics to intimidate local communities, businesses, and municipal and state governments in Mexico. They have also branched out into other criminal activities, such as the selling of “security” to businesses (protection rackets), which has become a widespread problem even for small and midsize firms. They are not ideologically motivated terrorism, but the tactics have similar dynamics and effects.
The Bank of Mexico has been autonomous since 1994 and has earned great respect in its fight against inflation. AMLO did not attempt to curtail that autonomy or alter exchange rate policy (that can be modified by the finance ministry). However, AMLO arguably showed a cavalier attitude when designating members of the Banxico Governing Council, privileging loyalty above expertise.
Nonetheless, the central bank has maintained a strict monetary stance to arrest inflation. The benchmark rate has been lowered slowly and, at 10.75%, offers a quite high real interest rate. The exchange rate that this monetary stance brought about, helped by a massive inflow of remittances from Mexicans living abroad (mainly working in the U.S.), remained quite strong from 2022 until June 2024.
The departing actions of the AMLO administration, such as the aforementioned destruction of an independent judiciary, sparked a significant depreciation. Moreover, that action, along with others that Congress is expected to approve (such as the abrogation of several regulators and the Federal Competition Commission) may spark significant trade disputes with the U.S. and Canada due to violations of the U.S.-Mexico-Canada Agreement.
TREND ▼
The substantial jump in the 2024 fiscal deficit will increase public debt significantly. While the debt trajectory cannot be categorized as explosive, budget pressures may spook the capital markets. Such markets are already wary of the enormous debt owed by state-owned Pemex and of its need of significant financial injections in order to avoid a default on its $100 billion obligations (it is the most indebted oil company in the world). Pemex’s bonds have had a junk credit rating since 2020.
Sheinbaum has pledged to maintain AMLO’s stance with respect to oil. The skyrocketing cost of the Dos Bocas refinery is expected to reach at least $25 billion (the original estimate was $8 billion). A combination of Pemex’s severe financial problems and the major fiscal expansion may push credit rating agencies to downgrade the federal government’s debt during 2025, and also if Congress maintains the course of radically altering the constitution, marking a significant political regression.
