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Key Political Risks to Watch in Mexico
 Catherine Bremer - Reuters
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March 05, 2010
Mexico City - Rampant drug violence, a weak economic rebound, flagging momentum on 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 help it rebound from a deep recession.
DRUG WAR
Since President Felipe Calderon came to power in late 2006 and set the army on drug traffickers, he has had some success in removing cartel leaders, but turf wars between rival gangs have spiralled out of control, alarming Mexicans, foreign investors, tourists and the U.S. government.
January and February were the deadliest two months since Calderon came to power, with around 1,600 drug gang killings that included gruesome torture, beheadings, bodies strung from bridges and the slaying of 13 teenagers at a party in Ciudad Juarez on the U.S. border. The student slayings sparked angry protests at Calderon's inability to stem the violence.
Three Mexican journalists were reported murdered in January, after 12 were killed in 2009.
As fear and resentment grows at the unending bloodshed, tens of thousands of people are fleeing northern Mexico in an exodus that threatens to leave the major manufacturing hub of Ciudad Juarez short of skilled workers.
Most Mexicans are in favor of Calderon's army-backed drug war but polls show support for him at the lowest level of his presidency. A growing perception that he is losing his drug war could weaken his government and prompt foreign companies to axe or scale back investment plans.
Some analysts worry drug gangs could seek new ways to intimidate the government, such as assassinations or direct attacks on the public. That would be a blow to investment and to tourism, a key plank of the economy.
A shift in strategy in Ciudad Juarez, which recently switched command to the federal police from the army, might be applied to other parts of the country but it is hard to say what effect that might have on violence.
Unprecedented growth in local demand for illegal drugs is contributing to the escalating violence, as drug gangs battle over their share of Mexico's estimated $800 million market.
What to watch:
• Any escalation in drug gang intimidation tactics such as an attack against a senior government official or on the general public.
• Companies axing investment plans on security grounds.
• Public protests or other signs that Calderon is losing support for his drug war.
ECONOMIC POLICY
The government recently raised its 2010 growth outlook to 3.9 percent, but that will still leave a stunted economy following last year's 7 percent contraction.
Exports have recovered somewhat from last year's plunge, but tax hikes and rife unemployment are weighing on consumer confidence and dragging on growth.
Some analysts fear Mexico's recovery will lose momentum if the United States - which buys most of Mexico's exports - falters. 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.
Calderon hoped a flurry of infrastructure projects like roads, bridges, ports and airports would give the economy some momentum but most, like a planned new $6 billion port on the Baja California peninsula, have yet to get off the ground.
As it tries to encourage growth, the central bank needs to be vigilant on inflation, which stands well above its target range at 4.76 percent, due partly to tax hikes and higher fuel prices. Central Bank Gov. Agustin Carstens has said interest rates could stay steady at current low levels for a relatively long period of time.
Analysts are also watching to see whether Mexico will partially renew a $47 billion IMF credit line that expires in April for a smaller amount.
What to watch:
• Any downgrade to the government's growth outlook.
• Any dimming in U.S. economic prospects this year.
• Any sign that high unemployment is sending more Mexicans across the border illegally, straining U.S. relations.
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.
Lawmakers are discussing what would be a third tax law, but analysts expect at best modest changes that will have a limited effect on shoring up government coffers.
Investors are keen to see deep overhauls to energy laws and a reform to break down monopolies in other industries, but there is no draft legislation on the table.
Mexico was hit late last year with downgrades to its sovereign credit rating by Fitch and Standard & Poor's, leaving it just one notch above the lowest investment grade, and the government is under pressure to do something to boost investor confidence for the year ahead.
What to watch:
• How the opposition-led Congress handles upcoming tax talks as an indication of whether further bills might succeed.
• 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.
Last year was the fifth year in a row that output fell.
The government says it has stabilized production and will pump an average 2.5 million barrels per day in 2010, but some analysts fear another decline if output at state oil monopoly Pemex's flagship Chicontepec project remains sluggish.
For a graphic on Mexican oil output and exports click on link.reuters.com/kap72j
A top U.S. supplier, Mexico relies on crude oil to fund around a third of the federal budget, and the steady decline in output and exports was a key factor behind the debt downgrades. Lower output left Pemex with a 2009 net loss of $3.5 billion and negative equity of $1.4 billion.
A 2008 law was supposed to open the door to lucrative new contracts to bring foreign oil companies into Mexico's energy industry for the first time in decades, to boost deepwater exploration efforts and output for unconventional fields.
But the contracts have been stalled by a legal challenge in the Supreme Court by the lower house of Congress and Pemex's contract rules were recently changed to avoid further challenges.
What to watch:
• Any resolution to the court challenge to new contracts.
• Any deep sea oil finds by Pemex, which has yet to confirm seismic tests indicating large deepwater reserves.
• Further declines in Pemex's monthly oil output data or bleaker government forecasts for the coming years.
(Editing by Kieran Murray) |
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