Can Mexico’s new president sustain AMLOnomics?

Claudia Sheinbaum—the political heir of Andrés Manuel López Obrador (known to many as AMLO)—was sworn in as Mexico’s president on October 1. Following the impressive results her party achieved in the June election—in which Sheinbaum won 60 percent of the votes, the largest share in almost 40 years—it seems likely that her administration will attempt to replicate AMLO’s economic formula for another six years. Sheinbaum’s implicit mandate is to continue to support the “Fourth Transformation,” AMLO’s term for his sweeping agenda of regime change. Central to this agenda is an economic strategy built on stability, redistribution, and increased government participation in the economy.

This strategy delivered on some fronts, but it also led to negative growth in average real per capita income. Growth was lower than it had been in any president’s term of office period in four decades and among the weakest in Latin America during the last six years. In terms of stability, AMLO’s fiscal and monetary policies were, for the most part, as conservative as those of his predecessors. In his last year in office, however, AMLO ran the largest fiscal deficit in over 30 years—almost 6 percent of GDP—to secure his party’s electoral victory. The central bank also adopted a cautious stance during his term, being the slowest in Latin America to reduce rates during the pandemic and the last to initiate the easing cycle once inflationary pressures began to subside.

AMLO’s redistribution efforts were anchored in two key pillars: increasing social spending and raising the minimum wage. During his presidency, pension benefits and social transfers grew by nearly 2 percentage points of GDP, and the real minimum wage rose 90 percent. These policies boosted labor’s share of GDP, reduced poverty, and improved the distribution of income. His economic reforms largely reversed the energy policies of the previous two decades, limiting private sector participation in oil, gas, and electricity and prioritizing state-owned enterprises in these sectors. In other sectors, AMLO weakened regulators, creating substantial uncertainty with respect to regulatory frameworks and the tax code.

To fund his redistribution agenda without implementing tax reform, AMLO’s government exercised strict control over spending in areas such as health and education, sometimes at the expense of critical needs like medical supplies and post-pandemic remedial education. It significantly raised non-oil tax revenues by increasing tax enforcement.

AMLO inherited off-budget funds amounting to roughly 2 percentage points of GDP, which he used to support social expenditures. In 2022 and 2023, high inflation worked to his advantage, allowing the government to pay negative real interest rates on long-term domestic currency debt. President Sheinbaum will not have access to the significant government savings her predecessor enjoyed: The fiscal impulse (the change in the exogenous component of the budget) is projected to exceed 2.4 percent of GDP in 2024, according to the IMF and Mexico’s Treasury budget documents, and another surge in inflation, which would help ease the burden of long-term fixed-rate debt, is unlikely. In addition, unlike AMLO—who as the moral leader of the Morena movement, faced little opposition to his budgetary choices—Sheinbaum may need to rely on public expenditure to manage internal pressures within her party, making it difficult to maintain both high social spending and fiscal discipline without implementing tax reform.

The new government will also face massive challenges in the energy sector. Mexico’s oil production fell from almost 3.5 million barrels per day (mbpd) in 2004 to less than 2 mbpd in 2024, as Pemex became the most indebted oil company in the world, and oil prices are not likely to rise in the near future. On the electricity side, significant investments are needed in generation and transmission to accommodate the increased demand coming from the potential reallocation of manufacturing production from Asia.

Mexico’s external balance was supported by a massive inflow of remittances, which increased by 2 percentage points of GDP over the course of AMLO’s presidency. It is unlikely that remittances will continue to grow at this rate over the next six years.

As for the minimum wage, after huge increases under AMLO, it is now near the average wage in Mexico, making it difficult to raise without reducing employment. The space for redistribution through social transfers, pensions, and wage hikes is also shrinking. To continue supporting the redistributive agenda, the new government will need to focus on raising productivity by increasing the investment rate, investing in education and health, and promoting competition to reduce excessive rents accruing to capital, thereby lowering the relative prices of goods consumed by the population.

The new president will face a rocky start, as it is likely that the Mexican economy will fall into recession in 2025. This contraction will be driven by the traditional deceleration that takes place in the first year of every new administration in Mexico (because of uncertainty regarding policy and regulatory changes), the budget contraction needed to bring public finances back to a sustainable path, the significant uncertainty created by implementation of the judicial reform, and the prospects of a Trump presidency and the renegotiation of the United States-Mexico-Canada Agreement (USMCA) on terms that would not be favorable to Mexico. Medium term growth might also be affected by the judicial reform recently approved by Congress that increases the unpredictability of legal outcomes and reduces the ability of the private sector to protect itself from discretionary actions by the executive and a Trump presidency that imposes tariffs on imports from Mexico.

Continuing AMLO’s strategy without adjusting it could increase fiscal, external, and productivity risks, potentially undermining Sheinbaum’s redistributive goals. These risks will not materialize in the short term, as Mexico’s financial situation is sound. But as the late Rudi Dornbusch once said about economic crises, “things take longer to happen than you think they will, and then they happen faster than you thought they could.”

To succeed and avoid facing financial market stresses, Sheinbaum must pivot toward a strategy that focuses on growth, productivity, fiscal sustainability, and increased competition. If she implements tax reform that centers on increasing revenues from the property tax (with changes to the income and valued add tax structures as well); increases private sector participation in the energy sector, to make the electricity sector more dynamic and fix Pemex’s financial situation; gives the antitrust commission a stronger mandate; and quickly undertakes a favorable the renegotiation of the USMCA, her administration could take advantage of Mexico’s unique position to reap the benefits of nearshoring. These accomplishments would deliver inclusive and sustainable growth, setting the stage for years of strong income redistribution, poverty reduction, real wage recovery, and economic growth.