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The election results had the immediate effect of a depreciation of the exchange rate. It is not going to be the only economic indicator to suffer. The impact will depend on what kind of economic policies the new government implements, but we can already expect a short-term impact on key economic variables. What impact will the election result have on the economy?
First we need to establish how the economy was before the election. Annual growth was only 1.9 percent in the first quarter of the year, and annual inflation was 4.7 percent in May. As a result, growth is low and inflation is high. For its part, the Citibanamex Expectations Survey expects growth of 2.2 percent and an inflation rate of 4.3 percent in 2024. These and other economic indicators will deteriorate due to the election results.
It seems to me that Claudia Sheinbaum’s success was already anticipated by the markets; However, Congressional control by Morena and its allies was surprising and resulted in exchange rate depreciation. This already represents the materialization of an important risk to inflation: deflation will make the process of deflation difficult. This, in turn, could lead to Banco de Mexico keeping interest rates high for a longer period of time.
In terms of economic growth, uncertainty about the type of legislation the new government will propose could deter some investment. Also, high interest rate will act as a hindrance to growth. In short, the short-term effect of the new government’s legislative control is a heavily devalued peso, high inflation, high interest rates, and low economic growth.
We know the direction of changes in economic indicators, what needs to be known is their magnitude and, above all, the medium and long-term impact. It depends on the steps taken by the new government. In this sense, the first point to consider is the decision to have Rogelio Ramírez de la O as Secretary of the Treasury and the dialogue he had with investors.
The Treasury Secretary’s meeting with investors has both positive and negative aspects. On the plus side, Claudia Sheinbaum cares about private investment and its role in the Mexican economy. This is a very positive feature. Negatively, beyond this show of interest, Ramírez de la Ove’s news is unlikely to restore calm to the markets.
Investors already had expectations of a certain continuity in economic policy, but more worrying is the possibility of legislation without a counterweight. The new government has broad powers and lacks clarity about what it will do. That is what creates uncertainty among investors and can hinder the country’s economic growth.
Point Rogelio Ramírez de la O cannot guarantee the markets; Claudia Sheinbaum should do it. To minimize the negative impact on the economy, the president-elect needs to clarify what his plans are, what he will and won’t do. It needs to clarify what its fiscal and public debt policy will be, what it will do with Pemex, what will be the priorities for public investment and whether it will invest in infrastructure, water and energy, respect autonomous bodies, and what the legal framework will look like. Change, other important issues for investment.
Election results will have a negative impact on the economy. This effect may be small and limited, or it may cause a recession depending on what the new government does now. Uncertainty at the start of López Obrador’s government led the economy to a slight recession during his first year in office. Claudia Sheinbaum avoids this by eliminating uncertainty, even if investors don’t like everything she proposes. The sooner it becomes clear what the new government’s plans are and the more detailed this information is, the more likely the economy will suffer.
