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 Business News | June 2007 
Calderon No Fox in Mexican Pension Crisis, Bid to Raise Taxes
 Adriana Arai & Patrick Harrington - Bloomberg
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| | Calderon (L) personally lobbied for the pension bill - a sharp break from Fox, who held himself above the political fray. (Carmen Cobos González) |
A week after taking office in December, President Felipe Calderon called three cabinet ministers and several advisers to Los Pinos, his official residence, for an urgent meeting. Under his predecessor, Vicente Fox, a plan to rein in out-of-control spending on pensions for civil servants had languished for five years. Calderon was coming off a neck-and-neck election in which his main rival, Andres Manuel Lopez Obrador, had sought to overturn the result by staging mass street protests.
Looking for a quick victory to build confidence, Calderon told his aides he wanted to pass a pension bill within the next four months, according to two officials who participated in the meeting.
What followed were more than a dozen strategy sessions personally conducted by Calderon, a lawyer and former congressman who led the National Action Party, or PAN, to its second consecutive election victory in July 2006. To assess progress, Calderon, 44, relied on 39 spreadsheets that specified such details as when aides should visit a particular union official or speak publicly about the plan, says Miguel Angel Yunes, a former legislator who participated in all of the meetings.
Calderon also personally lobbied for the bill - a sharp break from Fox, who held himself above the political fray, says Yunes, 54, who witnessed political negotiations under both administrations. "He took charge," says Yunes, who heads the Institute of Social Security and Services for State Workers, the agency that is the target of the pension law changes.
No Early Retirement
The strategy worked. On March 28, the Senate voted by a margin of 85 to 32 to cut pension spending by raising the minimum retirement age for civil servants to an average of 59 by 2028 from 49.5 in 2010. The bill also increases workers' contribution to the pension system to 6.125 percent of their salaries by 2012 from 3.5 percent in 2007.
It was the first major piece of economic legislation passed in Mexico since a tax increase in 1995. Under Fox, who like Calderon led a minority government, Congress rejected a laundry list of initiatives designed to speed growth and create jobs. Investors are hoping Calderon's pension victory signals that his hands-on, methodical approach will bring real change, says Alonso Cervera, an economist at Credit Suisse Group in New York.
Calderon, whose father, Luis Calderon, helped found the PAN in 1939, is trying to maintain his momentum. Last week, he sent a bill to Congress that would boost tax collection and help wean the country off oil revenue, which funds more than a third of federal spending. The proposal aims to boost revenue by about 300 billion pesos by 2012, mainly by collecting more taxes from corporations.
Boosting Non-Oil Revenue
Mexico has Latin America's second-lowest tax collection rate, after Guatemala. It must boost revenue from sources other than oil and partner with other companies to drill more crude, Calderon says, because Cantarell, the main oil field of state monopoly Petroleos Mexicanos, is producing less and less petroleum.
The field, which accounts for half of the country's oil production, yielded 12 percent less oil in 2006 than in 2005, and production will fall another 15 percent this year, according to Pemex estimates.
Calderon, a former energy minister under Fox, says crude oil from the Gulf of Mexico buried in waters as deep as 1,500 meters (4,900 feet) represents the future of the oil industry. Pemex doesn't have the technology to drill so deep, and Calderon is seeking the help of companies such as Brazil's Petroleo Brasileiro SA to acquire it.
Mexico's constitution and laws say the government owns all oil resources. According to Calderon's development plan, issued on May 31, he'll offer legislation allowing private companies to profit from certain oil activities that weren't specified.
Cross-Party Agreement
Phillip Blackwood, who manages $2.2 billion of emerging- market debt at Jyske Invest in Silkeborg, Denmark, says Calderon has a real chance to get additional legislation passed. "Calderon is actually going out and seeking and creating cross- party agreement," Blackwood says. "If he plays his cards right and treads carefully, there certainly is a basis for moving some of the reforms forward."
Calderon, who has a master's degree in public administration from Harvard University's John F. Kennedy School of Government in Cambridge, Massachusetts, presides over a schizophrenic economy.
By many measures, the country of 105 million people has never been more prosperous. Gross domestic product grew 4.8 percent in 2006, while record oil prices helped the government create its first budget surplus in 10 years. Inflation dropped to about 4 percent in 2006 from 9 percent at the beginning of Fox's administration in 2000.
The combination of stability, accelerating expansion and low inflation led to a 387 percent rise in Mexico's Bolsa stock index during the five years ended on June 22. Yields on a basket of dollar-denominated Mexican bonds are just 0.85 percentage point above comparable U.S. debt, near the lowest spread on record, according to JPMorgan Chase & Co.
Growth is Slipping
Yet Calderon began his administration with a warning that the good news may not last unless Mexico becomes more competitive. Growth fell to 2.6 percent in the first quarter of this year because of slowing U.S. demand for Mexican exports such as auto parts.
In 2003, China displaced Mexico as the second-biggest U.S. trading partner, after Canada, and has continued to gain. China exported $287.8 billion worth of goods to the U.S. in 2006 compared with Mexico's $198.3 billion.
Forty-seven percent of Mexicans live in poverty, according to a 2004 government study. A lack of jobs prompts 500,000 Mexicans to cross the U.S. border each year, according to the Pew Hispanic Center in Washington.
A Narrow Victory
Calderon won the 2006 election by a narrow margin. The PAN took 35.9 percent of the vote compared with 35.3 percent for the Party of the Democratic Revolution, or PRD - a difference of 233,831 votes. The Institutional Revolutionary Party, or PRI, which ruled Mexico for 71 years until Fox's election in 2000, got 22.2 percent.
The new president's job rating climbed to 68 percent by the end of April, according to a poll by Mexico City's El Universal newspaper, from 58 percent at the end of January. The rise was in part due to a high-profile bid to bring drug-trafficking cartels to heel. Since January, Calderon has sent about 30,000 troops to round up drug dealers from Michoacan to the tourist resort of Cancun.
If Congress now passes a Calderon tax bill, that will help build his political capital and shore up support for other initiatives, says John Welch, a senior Latin America economist at Lehman Brothers Holdings Inc. in New York. "Momentum is very important," Welch says.
The opposition is galvanizing its forces after the pension defeat. "We were completely unprepared," says Manuel Camacho Solis, a member of the political committee of a PRD-led coalition, the Ample Progressive Front. "Now we're preparing ourselves so that this doesn't happen again."
Preformatted Lawsuits
The PRD, which accused Calderon's party of fraud in the 2006 presidential election, has vowed to block any tax increase that it says hurts the poor and to prevent the sale of Mexico's oil assets. It's even making a bid to reverse Calderon's pension victory. The party has provided state workers with preformatted lawsuits demanding suspension of the new pension legislation. More than 167,000 of Mexico's 2.5 million civil servants have filed legal briefs challenging the law.
At the same time, unions that support the PRD-led coalition are staging new street protests. Although not as large as the post-election demonstrations that paralyzed the capital last year, they can be disruptive. The Mexican Stock Exchange had to cancel the closing ceremony of the International Options Markets Association annual summit on May 24 after hundreds of protesters blocked the building. "Structural reforms are criminal acts," the protesters chanted.
A PRI Alliance
Calderon won the pension vote by persuading the PRI to support him. Coming off its worst defeat in history in the 2006 presidential election, the PRI is betting it can improve its public image by backing some of Calderon's economic initiatives, says Roberto Madrazo, who was president of the PRI during most of Fox's administration and its 2006 presidential candidate. "This is possible because President Calderon is willing to achieve agreements, which we didn't see with President Fox," Madrazo, 55, says.
The alliance is fragile. In February, less than a month before the PRI helped him pass the pension bill, it embarrassed Calderon by rejecting his nominee for the central bank's five- member board.
No PRD Votes
Calderon can't count on any votes from the PRD, so if the PRI resumes a strategy of opposing every government initiative, as it did under Fox, little will be accomplished. "If they go that way, then even the personal lobbying by Calderon won't make a difference," says Federico Estevez, a professor of political science at the Autonomous Institute of Technology of Mexico in Mexico City.
The president faces an uphill battle on his tax bill in any event. In a bill sent to the Congress June 20, Calderon proposes a minimum corporate tax of 19 percent of net revenue by 2009. Though under existing law companies are required to pay 28 percent, many reduce the amount, sometimes to zero, through deductions, finance ministry officials say. Armando Paredes, head of Mexico's Business Coordinating Council, says his group is withholding judgment on the tax change. "We'll have to see how it affects different sectors," he says.
In the Congress, Senate President Manlio Fabio Beltrones, a PRI leader, says any tax bill would be "incomplete" if it didn't include a reduction in the heavy taxes paid by Pemex. Levies on Pemex amounted to 38 percent of federal government revenue in 2006. "This reform is much more complicated than the new pension-reform law," says Jorge Estefan Chidiac, a PRI member who heads the finance committee in the lower house of Congress.
Boosting Tax Collection
The parties are committed to reaching an agreement by September, when the government must submit the budget for 2008. At a press conference on April 18, Fernando Sanchez Ugarte, a deputy finance minister, said the government seeks to boost tax collection during the next six years by 3 percentage points, to 13 percent of GDP from 10 percent. "If they get 1 percent more, they will have done well," Welch says.
The opposition shouldn't discount the negotiating skills Calderon displayed in selling the pension bill, says Jose Luis Guerrero, CEO of Empresas ICA SAB, Mexico's largest construction company. "Felipe Calderon is more effective than Fox," Guerrero says. "It's his personal style."
The pension offensive began even before Calderon won the 2006 election. He was the only candidate to accept an invitation from the 1.5 million-strong National Union of Education Workers to debate solutions for Mexico's pension dilemma.
Living Longer
Yunes's agency, which has administered the civil servants retirement system since it was created in 1959, provides free medical care for government workers and retirement after 30 years at full final salary. The system fell into deficit in 1988 as workers began to live longer. Last year, the government contributed almost 37 billion pesos ($3.4 billion) to make up the shortfall.
Once in office, Calderon wasted no time. Days after being sworn in as president, he held his first meeting on pension change. As he delved into the details of the deficit, the discussion stretched on for 3˝ hours. "He noticed that some of the calculations we presented were based on gross domestic product for 2005," Yunes says. "So he asked me, 'How can we bring these to net present value?"' Aides scrambled to update the numbers, Yunes says.
When talks began with opposition politicians and the two unions that represent 90 percent of government workers, Calderon would often swoop in to close agreements he had delegated to his aides.
Last Minute Bargain
On one occasion in February, he sent Finance Minister Agustin Carstens to work out an incentive for unions to back the pension bill - a one-off 8 billion peso payment for increased medical services, 2 billion pesos to fund a union-managed personal loan program and the incorporation of 300,000 government contract workers into the pension system.
When the deal was sealed, Calderon followed up with a phone call to the union leaders to thank them for their support. "I saw it as recognition of the union's work," says Joel Ayala, president of the state government workers union and also a PRI legislator.
A few weeks later, Calderon had all PRI deputies over to Los Pinos for a lunch of pork chops. The meal wasn't really free. Mexico's new president spent the time lobbying the lawmakers to support him when the next important vote came up in Congress.
To contact the reporters on this story: Adriana Arai at aarai1@bloomberg.net; Patrick Harrington at pharrington8@bloomberg.net. |
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