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Key Political Risks to Watch in Mexico
 Robin Emmott & Robert Campbell - Reuters
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November 01, 2010
Mexico City - Mexico is seeking to contain escalating drug violence, which has killed more than 30,000 people since late 2006, even as it struggles to reinvigorate Latin America's No. 2 economy after a punishing recession.
DRUG WAR
President Felipe Calderon is under pressure to show he is making progress nearly four years after he launched a crackdown on drug gangs and sent thousands of troops across Mexico.
Calderon has jailed hundreds of cartel henchmen, seized some 90,000 weapons, and captured major drug lords including Edgar "La Barbie" Valdez.
But some investors are concerned a steady drumbeat of bloody attacks - beheaded corpses strung up from bridges, women and children gunned down at parties - will cloud Mexico's reputation as an attractive destination for foreign investors and as a vacation spot for U.S. and European tourists.
Violence has spread from dusty cities along the U.S. border to Monterrey, Mexico's business capital city, and other once quiet areas. Hitmen have stepped up attacks on public officials and are using new, bolder tactics.
U.S. officials including Secretary of State Hillary Clinton, who compared Mexico to Colombia at the height of its fight against cocaine-smuggling gangs, say they are worried.
Calderon, whose conservative PAN party may pay a price for the drug violence in 2012 polls, faces criticism over a failure to end corruption in Mexico's police, courts and prisons.
The drug war has not yet become a major drag on Mexico's peso MXN= MEX01 or bond yields, but violence is becoming a real business concern. Some U.S. firms are rethinking investment plans in northern Mexico.
Credit Suisse said in a September report that organized crime had become a threat to Mexico's economic recovery.
Finance Minister Ernesto Cordero said in October that drug violence was affecting economic decision in some areas. Generally, he says, countries with crime problems can see 1.2 percentage points sliced off their annual growth.
What to watch:
• Political assassinations or more attacks on civilians.
• Foreign or local companies freezing investment plans.
• Broad protests or signs that violence is seriously eroding Calderon's support.
RISKS TO RECOVERY
Mexico is recovering from one of the world's worst economic contractions and the economy is expected to grow around 4.6 percent in 2010, although not enough to make up for last year's 6.5 percent contraction. A slow recovery in the United States is hurting growth in Mexico's export industries.
As central bankers in other Latin American countries raise interest rates to cool stronger recoveries, most analysts think Mexico's weak economy will keep the central bank from raising interest rates until at least late 2011.
Deutsche Bank predicts Mexican policymakers will cut rates only late next year to help the economy.
The head of Mexico's central bank said on Oct. 8 that the bank is still focused on the threat of inflation, apparently playing down speculation in the market that policy makers could cut rates next.
While employment data has improved in recent months, consumer spending remains anemic, further threatening the recovery.
What to watch:
• Pace of recovery in Mexican exports or a contraction.
• Any changes in weak consumer demand.
• Central bank darkening growth or inflation outlooks.
STRUCTURAL REFORMS
Calderon is likely to have a hard time in the remainder of this term pushing through the major reforms he hoped would be his signature, including steps to increase Mexico's tax take, relax labor laws and increase investment in the energy sector.
Calderon started his presidency looking nimble as he built support in Congress for a landmark pension overhaul and modest fiscal and energy reforms, but Congress has grown more partisan as parties eye the 2012 presidential election.
A lack of meaningful reform could hinder Mexico as other Latin American nations, like Brazil and Chile, take off.
Already, political deadlock on reform led Wall Street rating agencies to downgrade Mexican debt last year.
Calderon is fighting to make major reductions to the budget deficit by the end of his term. The Senate approved a plan in October to trim the deficit next year, although by less than the government had proposed.
What to watch:
• Revisions to credit outlooks from rating agencies.
• Signs Calderon will back off his plan to balance the budget by 2012.
OIL POLICIES
While Mexican oil production has stabilized after slumping by nearly a quarter between 2004 and 2009, it is unlikely to return to its 2004 peak. The government says output will hold steady at 2.6 million barrels per day in the medium term.
A top exporter to the United States, Mexico relies on oil for a third of the federal budget, and the output decline was a major factor behind last year's debt rating downgrades.
A 2008 law was supposed to open the door to bringing foreign companies into Mexico's oil industry and boost deepwater exploration, but it has been held up by a challenge to the scope of the government's powers under the law.
Managers, hoping to boost Pemex's profitability, are studying a plan to import foreign crude oil for the first time in more than 30 years to improve the performance of its refineries.
But the company's finances, featuring debts greater than its assets and a mammoth pension liability, are in dire straits.
While major spending on Pemex's giant Chicontepec project has drawn criticism, the company has few alternatives for keeping output steady in the medium term.
What to watch:
• Any resolution to a court case challenging the validity of the proposed 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 monthly oil output figures.
(Additional reporting by Jason Lange; Editing by Kieran Murray) |
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