Index trend
Previous Quarterly Editions
Expropriation Risk: 57 60 65 66 ▲Political Violence Risk:57 57 57 57 ►Terrorism Risk:63 63 63 70 ▲Exchange Transfer and Trade Sanction Risk: 54 54 54 54 ►Sovereign Default Risk:55 47 47 47 ►
Overall Risk Temperature: 62 (Significant 2) TREND ▲
Special topic: Political polarization
Acute polarization was relatively subdued in Mexico until the 2000s. Its surge was spearheaded by Andres Manuel Lopez Obrador (popularly known as AMLO), who won the presidency in 2018 after failed attempts in 2006 and 2012. His divisive discourse found fertile ground in a country where both racism and classism are intertwined. Mexico is not only quite economically unequal but also a country where wealth is highly correlated with skin color; the more ‘indigenous’ a person is, the more probability they have for earning a lower income. Fair skin and blonde hair not only constitute beauty ideals for many but also are considered a sign of affluence. Mexican racism is, therefore, directed against its own people and origins (on average about 55% of Mexicans’ genes are from indigenous inhabitants).
AMLO — whose skin is considered brown — exploited these issues. After his second presidential defeat, he founded the Movement for National Reconstruction (Morena) as a political party. The word ‘Morena’ not only means a dark-skinned female but also is identified with the dark-skinned Virgin of Guadalupe, Mexico’s patron saint. His campaign slogan was, “For a better Mexico, first the poor.” In 2018, he won the election by a landslide.
AMLO deepened this discourse as president, criticizing the wealthy while characterizing poverty as being where “honest and decent” people stood. He instituted a daily press conference that he used to explain government actions and to attack those who questioned his administration, notably in the mass media and social networks.
He also established various social programs giving cash directly to the beneficiaries, notably a universal pension for all individuals above 65 years of age, at a huge cost, causing a major fiscal deficit by 2024.
Those programs were incredibly popular and partly explain Morena’s continued electoral prowess: Reelection is forbidden by law, but AMLO’s chosen successor, Claudia Sheinbaum, won the presidency in an even greater landslide. The supermajority that Morena and its allies managed in Congress in 2024 allowed them in recent months to erode the autonomy of the judiciary and other autonomous bodies. Opponents fear a regression to an authoritarian, one-party regime of the sort that existed until the mid-1990s.
Amid these developments, Mexicans have become more politicized and also greatly polarized into two blocks: those who support AMLO, Sheinbaum and Morena, and those who are against them. These differences, centered on political preferences, have evolved into affective polarization, damaging friendships and even family relations. Sheinbaum, who took office last October, has continued AMLO’s strategy; therefore, polarization looks set either to continue at its current high level or to increase further, as Sheinbaum has no incentive to lessen a divisive but successful political strategy.
Sheinbaum has also followed AMLO’s policies, which include nationalist and statist positions against some foreign investments, notably in the energy sector. She is also an enthusiast of a dirigiste stance, seeking to direct domestic and foreign investments toward certain sectors and regions.
Private investments will be hurt by constitutional changes and new laws being enacted by the Morena-dominated Congress. Investors will no longer be able to rely on Mexican courts as a defense against government actions. The current Supreme Court, along with federal magistrates and judges, will be replaced by popularly elected substitutes, many nominated by government officials.
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Expropriations were infrequent under AMLO but did happen. His usual strategy was to threaten to expropriate assets or directly take over a certain company and then expect those affected to negotiate from a weakened position. This risk may have lessened under Sheinbaum. She is as radical and nationalist as her predecessor, but the statist changes AMLO wanted to achieve have already been enacted in recent months. Yet she has been in office a relatively short time. She may also, like AMLO, consider sovereignty (as defined by her) takes precedence over legal stipulations or international treaties. Crucially, she may quickly modify laws and even the constitution, undermining judicial independence, a bulwark against arbitrary government action.
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Criminal groups, particularly drug cartels, control territorial enclaves or greatly influence some municipal and even state governments. A major failure of AMLO’s administration was violence: His policy of “hugs, not bullets” represented failure in the government’s fight against such groups. Sheinbaum has begun a different approach, though she avoids stating this publicly, to avoid an open divergence with AMLO. Notably, she has extradited criminals long sought by the U.S. government. She is apparently acting to avoid tariffs by the Trump administration and, moreover, direct U.S. military action against cartels in Mexican territory. The short-term effect may be to trigger greater violence from drug cartels.
Drug cartels and other criminal groups routinely use terrorist tactics to intimidate local communities, businesses, and municipal and state governments. They have also branched out into other criminal activities, such as selling ‘security’ to businesses. A 2024 study of 218 companies by the American Chamber of Commerce in Mexico showed that 45% had received demands for protection payments. The Trump government in February designated eight Latin American criminal groups, six of them Mexican, as terrorist organizations. This potentially raises prosecution risks in the U.S. for multinational companies.
The Bank of Mexico (Banxico) has been autonomous since 1994. Contrary to what was done with several autonomous bodies, AMLO and Sheinbaum did not curtail that autonomy. Exchange rate policy, which can be modified by the finance ministry, has also been unchanged, maintaining a free-floating peso.
When designating members of the Banxico Governing Council, AMLO appeared to privilege loyalty above expertise, but, in her first designation to that body, Sheinbaum nominated a respected long-time Banxico functionary.
The central bank has proven inclined to adopt a looser monetary policy, but there is no evidence that there was any government-inspired pressure fostering the recent rate reductions. Currently the central bank rate stands at 9.00%, still offering a high real interest rate.
Mexico has studiously avoided mirroring tariffs imposed by the Trump administration, with Sheinbaum rather stating that a “cool head” is needed. Her government may still enact specific tariffs as a response, but it clearly wants to avoid trade clashes with the U.S.
The substantial jump in the 2024 fiscal deficit increased public debt significantly. While the debt trajectory cannot be categorized as explosive, budget pressures may spook the capital markets, already wary of the enormous debt owed by state-owned Pemex and its need for significant financial injections in order to avoid a default on its $97 billion debt (not including $20 billion owed to suppliers). Under Sheinbaum, Pemex has begun to curtail investments, but that may prove insufficient. Credit rating agencies may eventually downgrade the federal government’s debt if the oil giant requires a massive financial rescue. Pemex’s bonds have had a junk credit rating since 2020.
