Analysis-Honeymoon for Mexico's Sheinbaum tainted by mentor's reform

By Cassandra Garrison

MEXICO CITY (Reuters) - Just three months ago, Claudia Sheinbaum was riding high, winning the largest vote tally ever secured in Mexico's history to become the country's first woman president.

The currency was just off a multi-year high, relations with the U.S. amicable, and investors shared a quiet optimism that Sheinbaum could finesse a course correction from her predecessor and mentor Andres Manuel Lopez Obrador's polarizing style.

The summer months since have proved turbulent.

This week, senators are likely to pass a controversial reform to Mexico's judiciary that critics say both threatens the country's rule of law and risks spoiling her honeymoon before she even takes office on Oct. 1.

On a self-proclaimed crusade to transform Mexico, Lopez Obrador is using his final days to ram through a reform which will require judges - even Supreme Court justices - to be popularly elected. It is also expected to reduce the level of experience needed to hold judicial posts.

A separate reform, expected to pass before Lopez Obrador leaves power, will abolish several oversight agencies which, like the courts, had provided an occasional check on his hard-charging agenda.

The proposals are seen by opponents as placing an alarming concentration of power in the hands of his ruling Morena party.

Both the fallout and the implementation will fall to Sheinbaum. Suddenly, Mexico's rosy outlook is wilting.

A ballooning deficit and potential hit to investment from the judicial reform could pose a threat to the country's investment grade debt rating as well as the welfare spending Sheinbaum promised, and a review of the North American USMCA trade pact looks increasingly ominous.

"She could have started on a very strong note, first woman president - one with a landslide - immensely popular party, economy growing, strong currency," said Damian Fraser, chief executive of Mexico City-based consultancy Miranda Partners. "But this move to reform the judiciary and strip away the independence from autonomous agencies has made it much more difficult."

Sheinbaum has publicly supported the election of judges, but sources close to her say it would not have been an immediate priority at the start of her term.

Lopez Obrador argues the overhaul will boost accountability and reduce corruption. Indeed, many agree the current judicial system is deeply flawed.

"The Mexican judiciary is, by most accounts, in desperate need of reform. The question is, is this really the right way to reform it?" said Gustavo Flores-Macias, a specialist in government and public policy at Cornell University.

WHOSE LANDSLIDE?

One challenge for Sheinbaum is the popularity of Lopez Obrador which was instrumental to Sheinbaum and Morena's huge success at the polls.

That success set the stage for a rockier transition by unexpectedly giving Morena enough votes in the lower house, and almost enough in the Senate, to ram through constitutional changes.

Sheinbaum had carefully walked the tightrope between continuing Lopez Obrador's most popular policies - such as generous welfare payouts - and hinting at changes to some of his most controversial, like the environment and clean energy.

But the judicial reform has laid bare the limits to that balancing act. Despite pressure from investors and core trade partners Canada and the U.S., Sheinbaum has been unable or unwilling to publicly distance herself from the reform.

The peso has weakened about 17% since June 3. Ratings agency Fitch has said that Mexico will likely struggle to lower its deficit to previous levels and its sovereign rating hinges on governance reforms and Sheinbaum's fiscal strategies.

The USMCA is also up for review in 2026, with the U.S. warning the judicial reform could impact investment and undermine the trade relationship.

Lopez Obrador was quick to lash out at criticism of the reform by the U.S. and Canadian ambassadors, "pausing" relations with both countries' embassies in Mexico.

The onus will be on Sheinbaum to turn the page with both countries, especially as she prepares to build a relationship with a new U.S. president post-November, said Jorge Bravo, political scientist at Mexico's National Autonomous University (UNAM).

"The damage is done," he said. "So, how are you going to build bridges so the damage is less serious?"

(Reporting by Cassandra Garrison; additional reporting and editing by Stephen Eisenhammer; Editing by Nick Zieminski)