Mexico: Sheinbaum to win presidency, MORENA to maintain majority in Congress

• Sheinbaum is likely to record a two-digit victory, all polls grant her a solid advantage
• Congress composition is crucial to determine Sheinbaum's capacity to reform the constitution
• Relevant races remain up for grabs, including Mexico City's
• Sheinbaum represents continuity from the Lopez administration

The presidential election is all but done, Sheinbaum is set to win.

All credible polls show MORENA's Claudia Sheinbaum will win the presidency on June 2. Indeed, we are confident she will trump the opposition's Xóchitl Gálvez, probably with a two-digit advantage. Sheinbaum's victory comes on the back of the robust popularity of President Andrés López and the opposition's incapacity to present a solid alternative to the status quo, in our view. Sheinbaum was also favored by the government-driven erosion of key electoral institutions, as she's campaigned flagrantly for over a year now, in violation of the electoral code; in this sense, it's impossible to say the race has been fair but the expected result is consistent with the will of voters, in our view.

Credible polls diverge on the magnitude of Sheinbaum's advantage, ranging from 13 to 20pps. We expect the final result to be on the tighter side of the range.

What this means for public policy and the economy.

Sheinbaum's likely victory is disappointing indeed, representing continuity from the policy promoted by President López. Sheinbaum has done an outstanding job mimicking the president and says to support all of his projects and policies. This means Sheinbaum will maintain an ambitious welfare agenda and unsound projects that continue to stress the country's public finances.

We insist the next administration must pass a tax reform to finance the government's populistic policies; however, Sheinbaum denies this, saying more efficient collection is all that is needed. We believe the López administration has only managed to finance its agenda by depleting public funds, including the stabilization fund, and by neglecting the maintenance of its assets, and we are confident the next administration cannot continue in this road during the next 6-year administration.

Besides the ambitious welfare agenda, Sheinbaum will have to finance the costly projects promoted by the president, some of which may have a net negative impact on the country's public finances, including the AIFA airport, the Mayan train, and the Mexicana airline. Moreover, a recently passed pension reform creates a massive need of public resources to subsidize pensions; however, it's unclear how much of this fiscal pressure will materialize in the next 6-year administration, with analysts believing the fund created with public capital and unclaimed private sector pension savings of non-working elders should be enough in the short-term.

One of the main issues pressing the country's public finances is the liquidity constraints faced by state-owned oil firm PEMEX. Current Treasury officials believe the legislature will reform the law for the government to absorb part of the firm's debt, officializing the support already anticipated. Even if this reform doesn't advance, we fully expect the Sheinbaum administration to support PEMEX in facing maturing debt.

We believe there is some reason for hope that Sheinbaum may diverge from the López administration on a number of key issues, even if she tries to show continuity in her rhetoric, particularly in the electoral context. We expect her to promote changes in PEMEX and, overall, in the energy sector, given her environmental credentials. This might mean a big contrast from the current nationalistic energy strategy that has hindered clean energy generation and doomed PEMEX's alliances with the private sector. Sheinbaum has denied a big shift from the López administration in this regar; however, we doubt she will accept being an echo to the current administration, surely bringing her own strategies to this and other fronts.

Another worrying side of a Sheinbaum administration is that she is likely to continue feuding with other institutions, including the Supreme Court and the electoral authorities. Indeed, we expect her to continue promoting the erosion of these authorities, hurting the country's governance and balance of power. However, she is unlikely to be as successful as Pres López, considering she is unlikely to have the current president's resilience to all sort of scandals and errors, in our view.

The other June 2 elections and what to watch.

It's crucial to see how Congress is recomposed following the election. We are confident MORENA's bloc, with the Green Party (PVEM) and the Labor Party (PT), will not win a two-thirds majority in either chamber of Congress. This will prevent the bloc from passing constitutional reforms without the support from part of the opposition. However, we believe other legislative groups could join the bloc on a number of issues; thus, the strength of the opposition PRI and the Citizen Movement party (MC) may end up helping Sheinbaum pass constitutional reforms during her time in office.

How many lawmakers MORENA's bloc gets may ease the negotiation with the PRI or the MC parties to pass constitutional reforms, in our view. Still, neither is set to go along with the more concerning constitutional reforms promoted by López and Sheinbaum, including the election of the court's justices by the public.

There are other elections to follow on Sunday, given a number of them remain in the air and some surprises may come about if the opposition's Gálvez does cut her disadvantage. The main election to look at, in our view, is the race for Mexico City's governorship. MORENA's Clara Brugada is currently ahead in polls; however, we believe the opposition's Santiago Taboada has a better than 50-50 chance of taking the city. This would make Taboada an early favorite to run for the presidency in 2030.

Although polls give MORENA's Rocío Nahle a healthy lead in the race for Veracruz's governorship, many in the elite believe she could lose, in what would be a surprising defeat for President López, given Nahle is close to him, having served this term as energy minister.

In any case, although we expect MORENA to lose 3 governorships (out of 9 up for grabs), we fully expect the ruling bloc to post a solid victory this weekend, wining the presidency, most seats in both chambers of Congress and most of the governorships and mayorships. This will allow the ruling bloc to continue to promote unsound economic policies, mostly aligned with those already set in motion by President López. We expect some improvement vis a vis the current administration, with Sheinbaum probably heading a more technical administration, with less improvisation.