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Puerto Vallarta News NetworkEditorials | Issues 

Key Political Risks to Watch in Mexico
email this pageprint this pageemail usRobin Emmott - Reuters
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July 02, 2010



Mexico's President Felipe Calderon (R) shakes hands with South Korea's President Lee Myung-bak at the presidential residence Los Pinos in Mexico City July 1, 2010. South Korea's President Lee Myung-bak is in Mexico on a three-day official visit. (Reuters/Eliana Aponte)
Mexico City - Raging drug violence, a tepid economic recovery, flagging momentum on economic reforms and declining oil output are all risks to watch for this year in Mexico, which needs to keep up investor confidence to maintain its debt ratings and emerge from recession.

DRUG WAR

Since President Felipe Calderon came to power in late 2006 and launched an army-led campaign against drug traffickers, he has had some success in removing cartel leaders, but turf wars between rival gangs have spun out of control, worrying Mexicans, foreign investors, tourists and the U.S. government.

The drug war death toll since Calderon took power now stands above 25,500 and the violence is intensifying. More than 6,000 people have been killed in drug violence just this year, the deadliest period of Calderon's rule, and a jump in civilian deaths is hurting support for his crackdown.

Suspected drug hitmen ambushed and killed the front-runner candidate for a gubernatorial election in the northern state of Tamaulipas in late June, in the worst sign so far of political intimidation by smuggling gangs. [ID:nN28512369]

Traders sold Mexico's peso on June 28 as TV images showed the bodies of Rodolfo Torre, 46, and four aides from the opposition Institutional Revolutionary Party, or PRI, which holds power in Tamaulipas, lying on a highway.

Economists warn that any escalation in political killings by drug gangs could spark a bigger sell-off in future.

U.S. President Barack Obama backs Calderon's drug war and is providing Mexico with more than $1 billion in funding to train police and buy anti-drug gear and helicopters. But Calderon blames much of the bloodshed on the flow of assault weapons that crosses the border from the United States.

Despite the killing of the PRI candidate in Tamaulipas, the drug war is not hitting Mexico's peso or bond yields on a regular basis. Yet polls show voters are increasingly worried by drug violence, even if the economy remains the top issue.

Some U.S. companies are starting to reconsider future investment plans, particularly in the city worst hit by Mexico's drug war, Ciudad Juarez. [ID:nN16238458] Mexico's vital tourism industry is also under pressure. [ID:nN13234162].

Days ahead of elections in 12 states, Calderon's popularity is near the lowest levels of his presidency and his party is trailing the PRI, which ruled for seven decades until 2000.

Most Mexicans support the drug war and Calderon has vowed to stick to his military strategy [ID:nN13221622].

But the longer the bloodshed goes on and the worse it gets, the weaker Calderon looks and the more he risks losing support. Incidents of children being killed in cartel shootouts have sparked protests against Calderon, who admits that whoever wins the 2012 presidential election will still be facing off with drug gangs.

What to watch:

-- More political killings or deliberate attacks on the public.

-- Companies scaling back investment plans because of security concerns.

-- More protests or signs that Calderon is losing support.

WEAK ECONOMIC RECOVERY

Renewed exports to the United States are powering Mexico's recovery from a deep recession but the country's consumers continue to lie low.

The economy is expected to grow up to 5 percent this year -- not enough to make up for last year's 6.5 percent contraction.

Household spending will drive growth in the second half of the year as the export-oriented factory sector cools, the finance ministry says.

The chief risk to growth would be another drop in U.S. demand for Mexican exports, even if it were more mild than the one that caused Mexico's 2008-2009 recession. And even if the U.S. recovery continues, Mexican consumers could stay timid, crimping the recovery.

Mexico's seasonally adjusted unemployment rate rose in May, another factor that could give the central bank more room to leave interest rates low to support the economy. [ID:nN24121258]

Mexico is already lagging behind the likes of Brazil, whose economy is more balanced around commodity importers like China and benefits from stronger domestic demand.

Mexico is still bruised from getting sovereign debt downgrades last year from two credit ratings agencies, leaving Mexico only one notch above the lowest investment grade.

Fitch and Standard & Poor's said they were concerned about Mexico's public finances given declining crude oil output and dismal prospects for passing any far-reaching fiscal reforms.

The central bank kept a key lending rate at a 6-1/2 year low on June 18 to help the economy, though it played down concerns about Europe's debt crisis. [ID:nN18124571]

What to watch:

-- Signs of consumers continuing to lie low, or starting to spend again.

-- Any dimming of the central bank's growth outlook.

STRUCTURAL REFORMS

Investors are impatient for Mexico to pass significant reforms to boost its low tax take, relax labor laws and allow more foreign investment in the state-controlled oil sector.

Calderon looked nimble on the legislation front early in his term, passing moderate pension, fiscal and energy bills, but since his party lost mid-term elections last year he is seen unlikely to be able to push anything substantial through the opposition-led Congress for now.

Investors want to see deep overhauls to energy laws and reforms to weaken monopolies in other industries. The antitrust proposal, however, may struggle in Congress.

Since last year's credit rating downgrades by Fitch and Standard & Poor's, the government is under pressure to do something to boost investor confidence for the year ahead.

What to watch:

-- The details of any government tax reform proposal and how the opposition-led Congress receives it.

-- Signs of opposition parties taking lead on new reform initiatives in order to benefit should they win power in 2012.

-- Any revisions to credit outlooks from rating agencies.

FALLING OIL OUTPUT

Mexico's oil production, a boon for the country in the 1980s and 90s, has slid drastically in the last few years, with output down nearly a quarter from 2004 peaks, due mainly to a lack of new projects to replace the flagging Cantarell field.

Output fell for the fifth straight year in 2009, and while it has stabilized in recent months, production was flat in May. [ID:nN25179063]

The government says Mexico's oil production will hold steady at 2.6 million barrels per day in the medium term. [ID:nN29163813]

But some analysts fear another decline this year if output at state oil monopoly Pemex's flagship Chicontepec project remains sluggish. Government regulators have urged Mexico to cut its Chicontepec oil and gas reserves forecasts by a third. [ID:nN16157981]

Mexico's prospects for quickly starting production in the crucial deepwater oil sector look dim. [ID:nN11209249]

A top exporter to the United States, Mexico relies on oil to fund around a third of the federal budget. The decline in output and exports was a key factor behind last year's debt rating downgrades.

A 2008 law was supposed to open the door to lucrative new contracts to bring foreign oil companies into Mexico's oil industry for the first time in decades, to boost deepwater exploration efforts and output for unconventional fields.

But Pemex's chief executive Juan Jose Suarez says the reform is overly complicated for the company and that it still needs fine tuning [ID:nN12217398].

Carlos Morales, the head of Pemex's upstream oil and gas production arm, is optimistic the company could issue up to 14 incentive-based contracts by the end of the year to get private sector assistance to develop mature oil fields as well as the Chicontepec project [ID:nN03221138].

What to watch:

-- Any resolution to the court challenge to new contracts

-- Any improvement in the performance of Chicontepec

-- Any deep sea oil finds by Pemex, which has yet to confirm forecasts of deepwater reserves.

-- Further declines in Pemex's monthly oil output data or bleaker government forecasts for the coming years.

(Reporting by Robin Emmott in Monterrey and Jason Lange and Mica Rosenberg in Mexico City; Editing by Frances Kerry)



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