(Bloomberg) -- The “super peso” could fall sharply if Mexico’s next government and congress adopt an unorthodox agenda that undermines institutions, according to Morgan Stanley.

Under a bear case — which the Wall Street bank describes as “institutional backsliding” — the peso would weaken to 19.20 per US dollar from around 17 per dollar currently. Even under a more likely scenario of policy continuity after the June 2 vote, the currency would weaken 5.6% against the dollar in a 12-month horizon, the bank said. 

“Mexico has been dealt a strong hand, benefitting from the strong link to the US and nearshoring potential,” strategists including Ioana Zamfir and Eli Carter wrote in a note Sunday. “Yet significant reforms are needed to fully take advantage of this.”

Claudia Sheinbaum, a former Mexico City mayor from the ruling Morena party and President Andres Manuel Lopez Obrador’s candidate, has a strong lead over opposition candidate Xochitl Galvez ahead of the June vote. In a recent interview with Bloomberg, Sheinbaum said that AMLO’s fiscal austerity during the pandemic was one of the factors that helped shore up the peso. 

Neither of the leading candidates are expected to implement any big fiscal adjustments — at least in the near term. Sheinbaum has been vague about wider fiscal plans, while Galvez said she wouldn’t carry out a fiscal reform in the first phase of a potential administration. 

Morgan Stanley’s gloomiest scenario isn’t based on any current proposals. It assumes a “muted fiscal consolidation,” constitutional changes that lead to risks for institutions such as the supreme court and electricity regulators and a stall in nearshoring momentum. 

The bank sees “only marginal” positive policy changes after the vote, with the country being able to address fiscal and infrastructure challenges. The dollar should peak against the peso amid US election noise in the fourth quarter and then consolidate around 18, it said. 

Strategists say the nation’s stock market and bonds from Petroleos Mexicanos SA offer a better risk-reward ratio to investors looking to trade Mexico ahead of the vote. 

“On credit, we see sovereign credit spreads as fair with policy continuity, but Pemex bonds would still offer value,” they wrote. The Mexican peso “offers less upside relative to other asset classes.”

--With assistance from Davison Santana.

©2024 Bloomberg L.P.