Mexico's recent elections proved beyond a shadow of doubt that the country is headed toward democracy - an outcome welcomed by investors even though the new political environment raises doubts about the direction of economic policy.
As a first reaction, the markets applauded the transparent and clean elections held on July 6. Mexican bellwether ADR Telefonos de Mexico (Telmex) reached a new high, trading up to 51.875 before closing at 51.75. This year's steady decline of Mexican Brady spreads blithely ignored pre-election jitters. According to Salomon Brothers, from May 20 to July 7 stripped spreads for Mexican discount bonds tightened 55 basis points from 405 to 350 while the par dropped 55bp to 358. The Mexico peso, meanwhile, continued its appreciation, hovering around Ps7.8 to the dollar.
The watershed regional and congressional elections forever transformed the formulation of social and economic policy in Mexico. A highly centralized system, in which the president dictated economic policy to a rubber-stamp legislature, is now offset with an opposition-led congress. The ruling Institutional Revolutionary Party (PRI), which single-handedly governed Mexico for almost 70 years, lost its majority in the congress as well as key gubernatorial positions.