Mexico votes on Sunday, and the new leader faces some tough challenges. Claudia Sheinbaum, the candidate for the ruling Morena party and a former Mexico City mayor, remains the front-runner to succeed President Andrés Manuel López Obrador, the spendthrift nationalist leader who has been in power since 2018.
As of May 28, Scheinbaum was leading his main rival, businesswoman Xochitl Galvez, by 23 points, according to polling data compiled by Oraculous.
The winner of the June 2 presidential election will inherit the largest budget deficit since the 1980s, rising pension costs, sluggish per capita GDP growth and a changing trade environment.
As voting day approaches, here are some of the key issues facing the nation's lenders.
Will there be a new tax on banks?
Mexico's next government faces the delicate task of reducing the country's ballooning budget deficit while preventing a sharp slowdown in economic growth, Elijah Oliveros Rosen, chief emerging markets economist at S&P Global Ratings, said in a recent research note. At least part of that could be accomplished by tightening the screws on the country's banks.
The Financial Times reported last week that measures authorities were considering to reduce the budget deficit included limiting tax deductions for domestic financial institutions and imposing a temporary tax on profits. Finance Minister Sheinbaum and the Treasury Department declined to comment on the report.
The idea to target banks comes amid broader concerns about the rule of law in the country, where President Lopez Obrador last year proposed having Supreme Court justices and election officials chosen by popular vote. His Morena party did not get the votes needed to pass the proposal in Congress but plans to try again after next week's elections.
Mexico's opposition believes such a move would destroy the independence of Mexico's judiciary, but Sheinbaum told the Financial Times this month that foreign investors in the country “have nothing to worry about” and that “their investments will be guaranteed.”
Is Nearshoring Feasible?
In an increasingly fragmented international trade environment, Mexico's proximity to the United States makes it seen as one of the main beneficiaries of the “nearshoring” trend, in which companies relocate some of their production closer to key markets.
More than 3,000 Asian companies have set up shop in Mexico so far, with Chinese companies in particular trying to minimize the impact of rising trade tensions between the U.S. and China. Since the U.S. began imposing tariffs under President Trump, Chinese imports to the U.S. have fallen sharply, and Mexico overtook China to become the U.S.'s largest trading partner last year.
Foreign direct investment in Mexico linked to supply chain relocations grew by 47% in the first nine months of 2023, according to a study by the Mexican Institute of Competitiveness.
But while Mexico's economy – and its banks' revenue streams – have benefited from the nearshoring phenomenon, the benefits are far below what could be achieved, said Felipe Carballo, a senior credit officer at Moody's.
“There are a lot of infrastructure bottlenecks in the country that are preventing us from securing investment,” he told The Banker.
Nearshoring may be happening, but the tide is bringing gentle waves rather than the desired tsunami.
The country recorded $36 billion worth of FDI in 2023, but only $5 billion of this was from new investment, and businesses remain wary of structural issues such as water scarcity and renewable energy shortages, as well as concerns about the government's attitude toward private companies.
“Nearshoring may be happening, but the tide is bringing calm waves, not a welcome tsunami,” the Wilson Center, a Washington, D.C.-based think tank, said in a recent report.
Things may improve under a new administration, but any gains for banks are likely to come slowly.
“Opportunities for banks will arise from 2025 onwards as Mexico embraces nearshoring,” predicts Alejandro Tapia, senior director at Fitch Ratings.
Promoting financial inclusion
An obvious area of growth for Mexican banks is promoting financial inclusion, an opportunity for lenders despite slowing GDP growth, and an area supported by both of the country's main political candidates, Tapia said.
Galvez has repeatedly stressed the need to improve financial inclusion in the country, which remains low by regional standards, while Sheinbaum is keen to further expand the branches of Banco del Bienestar, a development bank established in 2020 to promote financial inclusion through personal savings and lending.
But expanding access to credit remains a challenge for banks, and the new government is pushing for a series of reforms, most importantly changes to the country's long-standing insolvency resolution process, which Moody's said has contributed to high levels of non-performing loans across the banking system.
Credit-boosting consumer loans
According to Moody's, the next government's political capital is expected to be significantly lower than the current government, making it unlikely that major reforms will be passed in the near future.
In the face of this backdrop, consumer lending, buoyed by low unemployment and healthy remittance flows, should support growth over the next 12 months, Moody's Carballo told The Banker, a view echoed by other analysts.
“We expect lending growth of 10 percent this year, driven mainly by consumer lending, as private consumption remains very strong,” Tapia added.
