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AmericasNovember 7 2005

Confidence in Mexico is hard to shake

As the main political parties choose their candidates for next year’s presidential election, Monica Campbell reports on the contenders, and prospects for the economy and investment if they succeed.
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Five years have passed since Mexico wildly celebrated president Vicente Fox’s electoral victory, which broke the 71-year grip held by the authoritarian Institutional Revolutionary Party (PRI). Now Mexico is gearing up for July 2006, when the second presidential election since the shift from one-party rule is due to take place. It is too early to call the outcome but already the campaign is rich in crowd-pleasing rhetoric, starved of policy details and centres on a tough battle between long-time political foes.

At present, much of the attention is focused on Andrés Manuel López Obrador of the leftish Party of the Democratic Revolution (PRD). He recently stepped down as the popular mayor of Mexico City and is leading the polls in a race against potential candidates from the PRI and Mr Fox’s National Action Party (PAN). The former mayor, whose nickname is AMLO (his initials), is known for his fiery rhetoric, which can include stinging criticism of everything from drug traffickers and how Mexican immigrants are treated in the US to the 1994 North American Free Trade Agreement (NAFTA), which he claims has helped big multinationals more than average Mexicans.

To average Mexicans, Mr López Obrador wins points for his austere lifestyle and a can-do image. As mayor, his monthly stipends to the elderly and large-scale public works – including new highways and a clean-up of the capital’s historic centre – impressed Mexico City residents. Those living outside the capital hope that the former mayor will do the same throughout Mexico.

To outsiders, Mr López Obrador’s confrontational style garners comparisons to Venezuela’s president, Hugo Chávez, and Brazil’s Luiz Inácio Lula da Silva. Yet a closer look at Mr López Obrador reveals an economic pragmatist. “Macro-economic balance has to be maintained,” he told the press in a recent interview. “It is just common sense. Whenever there is economic instability, it always hits the people who have the least.”

Business shivers

It is his stance on structural reforms, though, that can give the business crowd shivers. He is against opening Mexico’s all-important energy sector to outside investors and pledges to settle old scores, including recouping taxes from Citigroup’s $12.7bn purchase in 2001 of Grupo Financiero Banamex-Accival. He says that it is wrong that Citigroup’s acquisition, which turned the US giant into one of Mexico’s financial leaders, was tax-free because it was conducted via a public offer on the Mexican stock market.

Although Mr López Obrador leads the polls and draws big crowds as he stumps throughout Mexico, he is no shoo-in. It is not the PAN that will derail him; its candidate, Felipe Calderón, Mr Fox’s former energy secretary, remains a distant third in the race and is not expected to be a strong contender. It is the PRI that gives Mr López Obrador grief.

Old guard rallies

Despite its electoral defeat in 2000 and its old-guard, corrupt image, the PRI is rallying. It has marked impressive electoral gains in recent years, beginning with a good showing in the 2003 mid-term congressional elections. It currently has the most legislators in Congress and also has scored recent victories in gubernatorial (state-level) and municipal contests.

How is it that Mexico’s political dinosaurs are staging a comeback? First, the Fox administration has hardly been turbo-charged. From the public’s point of view, it has failed to create more jobs, tackle poverty and lower crime levels. From business executives’ point of view, it has barely advanced its pro-market agenda, which includes efforts to open Mexico’s all-important, state-run energy sector to the private sector.

To be fair, however, a good deal of legislative gridlock has been due to the fact that Mr Fox has never enjoyed a majority in Congress.

Roberto Madrazo, who recently quit as the PRI’s president, is likely to be picked as the party’s presidential candidate. He is a long-time rival of Mr López Obrador’s, belongs to the PRI’s powerful old guard and is revered for his nationalistic hard line. His advantage lies in extensive campaign financing and access to the PRI’s political and (at times, dubious) electoral machinery, which is especially potent in Mexico’s rural areas.

Although the 2006 election carries a great deal of uncertainty (it is hard to call, considering an estimated 40% of the electorate has not aligned with any of the main political parties so far), market jitters over the contest have not appeared yet.

“It’s going to be a very complicated election,” says Luis Peña, CEO of Banorte, Mexico’s only major commercial bank left in local hands. “But we have a much stronger institutional framework now than just six or 12 years ago.”

Specifically, Mr Peña refers to Mexico’s more vocal Congress, efforts to strengthen the court system and the country’s independent and solid central bank. The central bank has successfully kept inflation and interest rates at tame levels, thus restoring confidence in Mexico’s monetary policy following the financial crisis in 1994-95, when the peso collapsed. “Whomever wins will take this institutional framework into account,” Mr Peña told The Banker. “I believe the fiscal and monetary policies we’ve built will stay.”

Deep-rooted confidence

Central bank governor Guillermo Ortiz also has confidence that Mexico will not suffer major market shocks in the lead up to next year’s elections. Even the prospect of an electoral victory by Mr López Obrador does not shake his conviction. Simply put, Mr López Obrador would gain nothing from pursuing fiscally risky policies that “would provoke an immediate reaction in the markets that would frustrate” his intentions, says Mr Ortiz.

For now, Mexico’s economy appears steady. Mr Fox hopes to leave office in 2006 with a budget surplus. He is betting on higher oil prices to fatten the revenues of the state-run oil monopoly, Petróleos Mexicanos.

The US effect

The real risk to Mexico’s economy is not politics but the health of the US economy, which takes in more than 80% of Mexico’s exports. For now, US market demand remains steady and Mexico is expected to post economic growth in 2006, albeit at the continuing sluggish rates for a developing economy of about 3%.

Mexico’s stagnant reform agenda will continue to nag foreign investors and business leaders. While Messrs López Obrador and Madrazo talk plenty about the need to shore up the economy, they have yet to offer the bold policy proposals that many business leaders believe Mexico needs to improve its competitive position versus China and other emerging countries, such as simplifying and making more flexible the labour and tax codes, and opening more areas of the country to the private sector.

Even if the candidates did offer such policy plans, though, the presidency of 2006-12 is not expected to hold a majority in Congress, which means that the legislative logjam is set to continue.

“No movement on reforms will only make Mexico less attractive in the eyes of investors,” says Nathaniel Karp, an analyst at Mexico’s Grupo Financiero BBVA Bancomer. “These are the mosquitoes around the elephant. If nothing is done on this front, Mexico will appear stuck and will see big amounts of investment held back.”

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