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Key Political Risks to Watch in Mexico
 Catherine Bremer - Reuters
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April 02, 2010
Mexico City - Raging drug gang 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 help it out of a 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 last three months have been the deadliest of Calderon's rule with some 2,800 drug murders, including a rash of killings of children. Prosecutors are investigating whether the murder of two Americans and a Mexican linked to a U.S. consulate on the border were linked to the drug war.
The drug war death toll since Dec. 2006 stands at around 19,500 and the latest spurt in violence has alarmed Washington. President Barack Obama expressed his "outrage" at the consulate murders and a high-level U.S. delegation flew to Mexico in March for talks on bolstering Calderon's crackdown.
To date, the drug war has not affected Mexico's peso or bond yields and - despite daily reports of daylight shootouts, beheadings, and even terrorized border towns - polls show Mexican voters are more concerned with economic issues than drug gang crime, as it touches them more directly.
Yet some foreign companies are starting to reconsider future investment plans because of drug violence, and a poll in the Milenio newspaper this month showed most Mexicans think the cartels, not the army, are winning the drug war.
Three months ahead of elections in nine states, Calderon's popularity is near all-time lows and his party is trailing the opposition Institutional Revolutionary Party.
Several recent incidents where groups of minors were killed sparked street protests blaming Calderon for failing to curb the violence. A series of roadblocks set up by gunmen in the northern business city of Monterrey terrified residents.
Most Mexicans support the army-led drug war but the longer the bloodshed goes on, and the worse it gets, the weaker Calderon looks and the more he risks losing support for his government or seeing foreign companies ax or scale back investment plans.
Calderon admitted this month that whoever wins the 2012 presidential election will still be facing off with drug gangs.
If drug gangs were to resort to new ways to intimidate the government, such as assassinations or direct attacks on the public, investment and tourism would likely suffer.
What to watch:
• Any escalation in intimidation tactics such as murders of senior government officials or deliberate attacks on the public.
• Companies axing investment plans on security grounds.
• More protests or other signs Calderon is losing support
FEEBLE ECONOMIC RECOVERY
The government has raised its 2010 growth forecast to 4.1 percent from 3.9 percent, and the central bank is eyeing growth of 4 percent to 5 percent, but that will still leave a stunted economy after last year's 7 percent contraction.
An economic contraction in January suggested a slowdown in Mexico's recovery from recession, and Mexico renewed a $48 billion credit line with the International Monetary Fund to protect against possible market turmoil when rich nations withdraw life support from their economies.
Mexico is also building up a war chest of dollar reserves to ward against pressure on the peso when the United States starts raising interest rates.
Unemployment is only just starting to edge back from 14-year highs, which is weighing on consumer confidence and spending, as are a recent series of tax hikes.
Some analysts worry that Mexico's recovery will be slowed if the U.S. economy - 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.
Mexico got a boost this month when Citigroup (C.N) said its peso-denominated debt could enter its World Government Bond Index, or WGBI, in October, becoming the first Latin American country in the closely watched benchmark.
But 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.
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 will need to be vigilant on inflation, which rose to 5.06 percent in the year through March, due partly to tax hikes and higher fuel prices.
What to watch:
• Any dimming of the government's growth outlook.
• Gloomier views on the U.S. economy 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.
Finance Minister Ernesto Cordero told Reuters this month that Calderon plans to this year hand Congress a fiscal reform proposal to widen the tax base, but analysts are skeptical that far-reaching legislation could be pushed through any time soon.
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.
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.
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 this year if output at state oil monopoly Pemex's flagship Chicontepec project remains sluggish.
Meanwhile, Mexico's prospects for starting production in the crucial deepwater oil sector look dim.
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 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 more than a year later, the contracts have been stalled by a legal challenge with the Supreme Court by the lower house of Congress. Energy ministry officials say the planned new contracts will remain under wraps until the court rules in the case.
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 amounts of 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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