Mexico
Richer, more confident, but still looking to the US
When Felipe Calderón, Mexico’s president, sits down this Christmas to eat stuffed turkey and “romeritos”, a typical festive dish made with herbs, dried prawns, potatoes and chilli, the chances are that he will feel a certain degree of accomplishment after his first year in office.
Within the space of nine months, he has managed to contain the threat from Andrés Manuel López Obrador, the left-wing candidate in last year’s closely-fought and controversial election.
Just as surprisingly, perhaps, he and his administration have pushed through three significant reforms. The first, to the public sector’s pension system, came as a bolt from the blue.
The other two, to the tax regime and to the electoral laws, were slower and more complicated. But they confirmed Mr Calderón’s ability to negotiate with Congress – something lacking during the previous administration of Vicente Fox.
Indeed, there is perhaps no clearer proof of how much more relaxed Mr Calderón feels than the fact that for the first time since he came to power last December, he is planning to take a few days off over the Christmas period. How confident should Mr Calderón feel as he faces his second year in power?
On the surface, there are plenty of reasons for optimism. Beyond the success in reaching deals with Congress, public finances have rarely been in better shape. Thanks to policies put in place by Ernesto Zedillo, who presided over the country during and after the tequila crisis at the end of 1994, the budget is balanced.
In 2000, it was still running a budget deficit equivalent to 1.1 per cent of gross domestic product. Net public debt, meanwhile, has fallen consistently and is now just 23 per cent of GDP. Moreover, much of the external debt was swapped for peso-denominated debt during Mr Fox’s administration.
This year, net external debt accounts for roughly 7 per cent of GDP compared with 24 per cent in 1995. “It has all become boring,” says Damian Fraser of UBS in Mexico City. “But that is fine. We love boring.”
Even inflation, which has started to creep up again after it dipped below that of the US for the first time in 2005, still appears to be under control.
Consensus forecasts from the private sector suggest it will finish the year at about 3.85 per cent.
That may be close to the roof of the central bank’s inflation target of 2 per cent to 4 per cent. But it is a long way from the double-digit inflation Mexico had to live with until the end of the 1990s.
Even with Mexico’s more-than-disappointing overall growth over the past few years, this relatively new-found economic stability has helped push the number of families earning between 9,000 and 20,000 pesos a month from just 5m in the 1990s to more than 12m, according to Ernesto Cervera at GEA, a consultancy in Mexico City.
As Guillermo Ortiz, governor of the central bank, told the FT in a recent interview: “Economic stability has made a difference.”
Another positive element is that the government has launched an aggressive infrastructure project next year. Last month, Agustín Carstens, the finance minister, confirmed that the government intends to boost infrastructure spending from about 3.2 per cent of GDP this year to about 5 per cent in 2008.
In practice, says Alejandro Hope, an analyst with GEA, that will mean about $40bn for roads and an additional $7bn for development of about five ports.
“For the first time in many years we might actually run a counter-cyclical fiscal policy,” he says.
Yet to conclude from all this that Mr Calderón’s second year in power is going to be considerably easier than the first would be a big mistake. Mexico’s economic fortunes still depend heavily on those of the US.
More than 70 per cent of the country’s exports go to its northern neighbour and any weakening in US industrial production inevitably spells problems for Mexico.
The problem for Mr Calderón is that economists’ forecasts for the US economy are far from pretty. In fact, they are growing uglier by the day.
In a recent interview with the FT, Mr Carstens said he remained confident Mexico would come out relatively unscathed from events north of the border.
But many economists disagree. Rogelio Ramírez de la O, who last year was tipped to be finance minister had Mr Lopez Obrador won the election, believes Mexico is highly vulnerable.
He calculates, for example, that about 30 per cent of the country’s GDP depends directly on the US through a mixture of exports, remittance flows of about $23bn a year from migrant workers living in the US, and tourism. Moreover, he already sees signs that the economy is starting to suffer.
Just one of many indicators, he argues, is that year-on-year growth in the manufacturing sector has fallen to 8.1 per cent this year from about 17 per cent last year.
“The main reason we haven’t seen a more serious deterioration yet is that the game is only just beginning,” he says.
Another potentially dark cloud is Mr Calderón’s apparent dwindling appetite for addressing the problem of competition – or the lack of it. Mexico’s corporate landscape is dominated by large and powerful companies that, in many cases, have established a stranglehold over strategic sectors of the economy.
Enrique Quintana, an influential columnist with Reforma, one of Mexico’s daily newspapers, is particularly disillusioned – even though he recognises the difficulties involved.
“The issue of monopolies has disappeared from presidential speeches altogether,” he says.
“The risk is that if the government thinks about the political cost of everything it would stop doing what needs doing.”
On the reform side, there could be cause to damp enthusiasm, too.
While most analysts agree that Mr Calderón has delivered far more than anybody expected this year, they also say that the next big reform – that of energy – will prove considerably harder than those that went before.
With oil production falling and Pemex, the country’s state oil company, desperately short of funds for exploration, nobody doubts the need for reform.
However, in Congress there is no consensus on the issue of energy.
Besides, Mr Calderón will need the backing of the Institutional Revolutionary Party (PRI), the third-largest force in Congress, to make any headway.
That could prove difficult given the party’s string of election results this year and its growing confidence to demand ever greater concessions in return for legislative support.
What will all this mean for Mexico? According to Mr Fraser at UBS, it probably needs a gradualist approach in which the government manages to further its reform agenda but, a little like this year’s tax reform, falls a long way short of what it would have liked. If that turns out to be true, it will doubtless rule out the huge transformations many economists consider necessary to improve significantly Mexico’s competitive edge and put it on a secure path to becoming a truly developed nation.
But most, in the country and outside, would also agree that even this less ambitious route would be a significant advance on the six previous years.
Politics: Calderón faces a challenging year ahead
Just over a year ago, the most popular talking point among the chattering classes in Mexico was not how well Felipe Calderón, the country’s recently-elected president, would do in office but how long he would last.
The left, presided over by the swarthy and charismatic Andrés Manuel López Obrador, was insisting that Mr Calderón’s electoral victory in July had been the result of fraud.
In one huge march on the Zócalo, the capital’s main square, Mr López Obrador proclaimed himself Mexico’s “legitimate president” before hundreds of thousands of supporters. He promised to make life impossible for his adversary.
Today, most of those threats have dissipated.
Mr López Obrador has all but disappeared from the political scene, Mr Calderón’s popularity ratings are at a more-than-respectable 60 per cent and his administration has pushed through three significant reforms in less than 12 months – considerably more than the previous government in six years.
“Calderón has risen far above expectations,” admits Rogelio Ramirez de la O, an economist and a favourite for the post of finance minister had Mr López Obrador emerged victorious.
Much of the success is the result of Mr Calderón’s decision, barely a week into his presidency, to declare war on organised crime.
In recent years, partly as a result of the US crackdown on supply routes through the Caribbean, Mexico has become an important transit country for cocaine and other narcotics.
But the drugs trade has also brought rising levels of violence as the various cartels fight for control of the business. As Mr Calderón said recently: “The biggest threat to the country’s future is insecurity and organised crime.”
Against that backdrop, his decision to send thousands of police and members of the armed forces to win back territory controlled by the cartels went down well with a population feeling vulnerable and under attack.
The other element that helped Mr Calderón to consolidate power during his first year is the left’s inability to capitalise and build on the strong electoral showing of last year.
While Mr López Obrador’s Democratic Revolution Party (PRD) is now the second-biggest force in Congress, it has been almost entirely excluded by Mr Calderón’s National Action Party (PAN) and the Insitutional Revolutionary Party (PRI), the third-biggest congressional force.
As for Mr López Obrador, an exhaustive tour of the country’s municipalities has barely received any media coverage.
The tour served only to isolate the former candidate from mainstream politics, making Mr López Obrador “an exile in the wilderness”, says Alejandro Hope, a political analyst at GEA, a consultancy in Mexico City.
Indeed, some political analysts believe Mr Calderón’s successes have been so great during his first 12 months in office that even his defeats have turned into victories.
In elections for governor in the southern state of Tabasco, victory for the PRI over the PAN provided sufficient goodwill among the party’s rank and file to support Mr Calderón’s tax reform in Congress.
“Without that victory it is doubtful whether the fiscal reform would have survived as it did,” says Jorge Zepeda, a political analyst in Mexico City.
In spite of Mr Calderón’s unexpected success, Mr Hope and others believe the coming 12 months may be a different story.
One reason, argues Mr Hope, is simply political wear and tear. The difficulty of producing clear results in the war against drugs combined with the difficulties of sustaining high popularity levels in office have already begun to show in the polls.
According to GEA, Mr Calderón’s popularity has declined from 69 per cent in June to 60 per cent today. “These are still good numbers but the downward trend is clear,” says Mr Hope.
Dan Lund, a political analyst in Mexico City, goes further.
He argues that apart from the war against drugs, Mr Calderón has no defined political agenda beyond trying to increase his party’s share of power in the 2009 mid-term congressional elections.
Meanwhile, economic growth has been disappointing and the impediments to boosting that growth, such as Mexico’s powerful business monopolies, have remained in place.
“Calderón has not taken any difficult decisions on transforming Mexico,” says Mr Lund.
The second reason the next 12 months could prove more difficult is that Mr Calderón will almost certainly have to take on the delicate issue of energy reform over which there is much less political consensus than on the reforms passed this year.
Oil revenue has risen in importance in recent years and now represents almost 40 per cent of total government income.
Yet production is falling because of lack of exploration investment at Pemex, the state oil monopoly, and because of the constitutional prohibition on joint-association contracts with private companies.
It is no secret that Mr Calderón would like to give Pemex greater flexibility to involve private companies in the risk-sharing process but he needs the support of the PRI to do so.
But the PRI has strung together a series of election victories this year that have increased its confidence in raising demands in return for co-operation on structural reform.
The overall result will almost certainly be a difficult year ahead for Mr Calderón and his team.
As Mr Hope puts it: “The honeymoon is definitely over.”
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