By Michael D Zezas, Morgan Stnaley Global Head of Fixed-Income Research
If you haven’t been paying attention to Mexico, this is a good time to start. Last week, the country elected its first female president, Claudia Sheinbaum, and a governing coalition that will give her a stronger-than-anticipated position in Congress. In the past, investors not focused on emerging markets might have glossed over this event. But based on recent conversations with our clients, interest is much broader today – with good reason, in our view. Mexico's political economy is a nexus of key themes for markets.
First, Mexico should be a key beneficiary of the 'multipolar world', but near-term risks are rising. As we’ve written previously, the emergence of China as an economic challenger to the US in recent years has created new trade barriers, giving multinational companies incentives to conduct more business in countries that are more politically and economically aligned with the US. Mexico has a competitive cost of labor, proximity to the US market, and a free-trade agreement with the US, making it a potential beneficiary in this rewiring of global trade. Our economists estimate that marginal export gains for Mexico could reach as much as US$155 billion over a five-year period starting in 2023. But key risks could create headwinds to this trend, including the costs of producing enough electricity to support potential growth. Other risks stem from public policy, including the following dynamic.
