Nine months ago, legislators brawled on the floor of Congress, while protesters rallied on Mexico City’s main boulevard. Amid chaos, Felipe Calderón slipped in through the back door of Congress, took the speaker’s platform and, in a lightning-fast ceremony, became Mexico’s new president. Now, however, the fracas is a distant memory.
More than a year has passed since Mexico experienced one of its rockiest elections ever. On July 2, 2006, Mr Calderón, a former energy minister whose father helped found his National Action Party (PAN), won the presidential race by a hair. His leftist rival, Andrés Manuel López Obrador, of the Party of the Democratic Revolution (PRD), refused to accept defeat and mounted a series of street protests that, for several months, put in doubt whether Mexico’s next president – dubbed an illegitimate usurper by the opposition – would be able to govern.
Drugs offensive
However, in his first nine months, Mr Calderón, 44, has found his footing. Out of the gate, he began tackling one of Mexico’s foremost problems: the powerful drug cartels and the violence they spread along the country’s northern border and, increasingly, in central states such as Michoacán and Guerrero.
In December, only days into his six-year term, the new president launched Mexico’s largest anti-drug offensive, sending thousands of troops to take on the cartels, town by town. Although the offensive’s success remains in serious question – violent crime and execution-style killings still make daily headlines and the United Nations opposes using the military as a police force – Mr Calderón is receiving high public approval ratings for his determination to sustain the crackdown.
He is also gaining confidence among investors. Mr Calderón, a skilled lobbyist, is expected to make more progress on long-awaited structural reforms than his predecessor, Vicente Fox. Although Mr Fox was hailed for defeating the long-ruling Institutional Revolutionary Party, his six-year administration was set back by congressional inaction and the absence of a firm political strategy.
“Fox backed away when confronted by Congress,” says Guillermo Aboumrad, a senior economist at UBS’s unit in Mexico City. “So instead of trying to move forward, we saw him lean on oil revenues. Calderón has that option, too, but I don’t see him going that way. He seems determined to push for reforms.”
Pensions reform
So far, the government scored an early reform victory in March. That is when the Senate passed a pension bill designed to control years of unchecked spending on civil servant pensions. But a far bigger test awaits: revamping Mexico’s antiquated tax policy. Mexico’s tax take is estimated at about 11% of gross domestic product (GDP), one of the lowest rates in Latin America. The country’s huge informal workforce avoids taxes and so do many corporations.
The tax revenue shortfall makes the government heavily dependent on income generated by Petróleos Mexicanos (Pemex), the state-owned oil monopoly. For years, Mr Fox attempted to reform tax policy, but routinely failed because the controversial measures attached to his proposals, namely a value-added tax on food and medicine, created legislative deadlock.
Unlike Mr Fox, Mr Calderón’s reform strategy is more pragmatic. The tax proposal currently before Congress, while not immune to fierce debate, is politically safe. Although big business is lobbying against an included restriction on corporate write-offs, Mr Calderón’s tax reform is largely free of measures that could kill it from the outset. “The idea is to avoid big-bang reforms and take small steps,” says Rogelio Ramírez de la O, an economist in Mexico City. “If Calderón manages to break the inertia in Congress, it’ll look good in Congress and Calderón will win, too.”
Rating upgrade
It remains unclear to what extent the opposition PRD, the second largest party in Congress, will co-operate with Mr Calderón. Even though Mr López Obrador has largely faded from view, divisions of the PRD still vow to block structural reforms. Nevertheless, the more upbeat reform scenario helped convince rating agency Standard & Poor’s to raise Mexico’s credit ratings outlook in July from “stable” to “positive”.
Still, Mr Calderón faces no shortage of challenges. Economic growth is forecast to be lower this year, expanding at about 3.6%, down from 4.8% in 2006. The slowdown is largely tied to sluggish growth in the US, which snaps up about 90% of Mexican goods. While Mexico’s economic fundamentals are strong – international reserve levels are healthy, the currency is steady and so are inflation and interest rates – worries persist about the country’s competitiveness and its ability to withstand US economic swings.
One ongoing problem is Mexico’s creaky infrastructure, which is ranked worse than that of China and India, and is a source of frustration and increasing costs for businesses, big and small. So a close eye will be kept on Mr Calderón’s recently announced five-year public-private infrastructure programme.
The programme includes building three new airports, serving tourism hotspots, the expansion of 31 existing airports and record-level investment in highways, railways and ports.
“For years, Mexico has counted on the competitive advantage of being next to the US,” says Sergio Luna, senior vice-president of economic analysis at Banamex, Mexico’s biggest bank. “But we need to push beyond that and tackle infrastructure, which is a huge problem. It’s one of those areas where we see the world moving forward and we’re still behind.”
Oil revenues
Another contentious issue is Mexico’s heavy dependence on oil revenues. Although the country is the world’s ninth largest crude oil exporter, Pemex is struggling to upgrade its infrastructure and increase production, as the bulk of the company’s earnings go to fill government coffers. In 2006, Mexico’s overall oil exports dropped 1.3% from the previous year, with production down at Pemex’s enormous Cantarell oil field in the Gulf of Mexico. Further, lower volumes come as global oil prices begin to moderate from historic highs in recent years.
“The question of macroeconomic stability will become more complicated if Mexico sees a major fall in oil revenues,” says Mr Ramírez de la O. Yet the idea of opening Mexico’s energy sector to foreign investors, which would allow Pemex to partner with private companies and help it share the costs of more exploration and production, is too politically sensitive and will not garner support from nationalist politicians.
“The PAN will try to build momentum,” says Mr Aboumrad of UBS, but he thinks, nonetheless, the time is ripe for reform. For now, hopes are that fiscal reform will ease the government’s reliance on Pemex’s earnings and allow the company to shape up. Speaking to bankers in late June, Mr Calderón said: “It’s time we transformed this dependence on oil before it’s too late.”
Banking bounceback
One area of strength is Mexico’s financial sector. After recovering from the country’s 1994-95 financial crisis, the banking sector now enjoys solid supervision and a far improved regulatory environment. Increasing competition between heavyweights such as Spain’s BBVA Bancomer, Banamex, owned by Citigroup, and UK-based HSBC is raising credit levels and fuelling business in areas such as mortgages and microfinance that were only budding a few years ago.
“The reactivation of the financial sector is continuing,” says Mr Luna. “And Mexico’s young demographic, with the 20 to 27-year-old age range growing, will only keep the banking business dynamic.”
Nevertheless, banks in Mexico will not escape the government’s radar. In July, the central bank chief, Guillermo Ortiz, announced that commercial banks will soon be required to lower certain fees and offer free accounts to low-income consumers – a move to encourage more Mexicans to enter the banking system. Banks also must improve fee transparency.
“I agree with the new rules,” says Luis Peña Kegel, CEO of Banorte, Mexico’s fifth-largest bank. “Legislators and bankers alike must work to bring more Mexicans into the banking system. Mexico’s financial penetration rate, in terms of credit to the private sector, is at about 18%. That’s below 30% or 40% in Chile or Peru.”
Privately, though, some bankers grumble at the new regulations. But considering Mr Ortiz’s strong international reputation, Mr Calderón’s high public marks, and banks’ steady profits, financiers are, for now, keeping their complaints to a minimum.
