December 8, 2011 / 2:59 PM / 6 years ago

FACTBOX-Key political risks to watch in Mexico

MEXICO CITY, Dec 8 (Reuters) - A mounting drugs war death toll and concerns that Mexico’s fragile economic recovery will fall victim to the European debt crisis are clouding the outlook for Mexico ahead of a presidential election next July.

DRUGS WAR

Anger is growing about the roughly 45,000 lives that have been lost since President Felipe Calderon launched a war on drug cartels in late 2006, and violence has spun out of control in large areas along the U.S.-Mexico border. [ID:nN15124805]

There are now signs it is moving further to the south. On Nov. 24, suspected drug gang hitmen killed at least 26 people and dumped their bodies near a major landmark in Mexico’s second city, Guadalajara. [ID:nN1E7AN0MZ]

It was the fourth mass public dumping of bodies in regional centers in just over two months, a rash of killings officials blame on brutal turf wars between rival drug cartels.

Local media said a message with the bodies in Guadalajara purported to be from the brutal Zetas gang and was directed at Sinaloa cartel boss Joaquin “Shorty” Guzman.

Officials blamed a group with ties to Guzman for two mass dumpings of more than 60 bodies, seen as a signal to the Zetas, in the eastern port city of Veracruz in September and October.

The violence continues to weigh on support for Calderon’s conservative National Action Party, or PAN, and it trails in early polls ahead of the presidential election on July 1, 2012.

The main opposition Institutional Revolutionary Party, or PRI, won an election in the central state of Michoacan on Nov. 13, beating out Calderon’s sister who ran for the PAN,

As the clock ticks down to the start of the official election campaign, the PRI and the leftist Party of the Democratic Revolution, or PRD, have already decided on unity candidates.

Left-wing firebrand Andres Manuel Lopez Obrador will run again for the PRD, six years after his wafer-thin loss in the last election sparked massive street protests. [ID:nN1E7AE1A1]

And the PRI’s Enrique Pena Nieto, who holds a huge lead in opinion polls, is uncontested as the party’s candidate. The PAN still has three hopefuls vying for the party’s nomination, including former finance minister Ernesto Cordero.

Analysts say it is too early to call the presidential vote. Calderon cannot run again but could help the PAN candidate if he remains popular.

Money markets have mostly shrugged off the violence, but business leaders are concerned the security situation is hurting Mexico’s attractiveness for foreign companies.

What to watch:

- Political assassinations or attacks against civilians ahead of the presidential election.

- Companies freezing investment plans.

- More signs that the violence is hurting the PAN.

RECOVERY SLOWS

Mexico’s recovery from a deep recession in 2008-2009 is faltering after a strong rebound last year. Economists have revised down their outlook for growth in 2011 after a slowdown in the United States, Mexico’s top trading partner.

Still, quarter over quarter growth data in July to September was better than expected while consumer confidence improved in October and jobless rolls have shrunk to their smallest in two years. [ID:nN1E7AL0J3] [ID:nN1E7AO0G6]

But the fate of the domestic economy is far from certain with signs that the manufacturing sector has begun to slow.

That slice of the economy, which includes factory output, expanded 0.54 percent in the third quarter - less than half the pace seen in the second quarter.

The government sees growth this year at about 4 percent, slowing to 3.5 percent next year.

The more pessimistic growth outlook has helped weaken the peso, which fell to its lowest level in more than two and a half years last month amid global market turbulence.

Foreign investment in Mexican bonds is at a record high, leaving the country vulnerable to a sudden crash if investors spooked by the high level of uncertainty in the global economy pull their investments back to safe havens.

Still, Mexico has international reserves worth more than $140 billion and access to a $72 billion credit line with the International Monetary Fund, safety nets that it did not have in the 2008 financial crisis.

Policy makers said on Nov. 29 they will intervene to support the peso if it falls more than 2 percent in a single session, a move which should put a floor under the currency.

The central bank has said it is open to lowering interest rates from the current 4.5 percent to boost the economy but markets are not convinced, with rates seen on hold through 2012. BOMWATCH2

What to watch:

- Actual intervention in currency markets.

- Reversal of capital flows.

REFORMS

Economists say Mexico’s Congress needs to pass pending reforms such as liberalizing the labor market to bolster growth. [ID:nN1E76J1UU] However, there is no sign of significant progress as the election nears.

    Calderon failed to force through a request for an extra session of Congress over the summer to try to pass several pending reforms. Political gridlock has dogged Mexico since the PAN took power in 2000, ending the PRI’s 71 years of rule.

    If Congress does not approve any major laws before the election, investors will be hoping the next administration can address Mexico’s paltry tax take, improve education, open up the job market and bolster security.

    Legislative deadlock, a deep recession and heavy dependence on oil revenues led rating agencies to downgrade Mexican debt in late 2009, although it still has investment grade.

    All three ratings agencies have said they see few risks to Mexico’s rating of BBB or equivalent and have not been concerned by the 2012 budget. [ID:nN1E77I1PP]

    Lawmakers pushed up the deficit proposed in the budget from 0.2 percent of gross domestic product to 0.4 percent, still below the 0.5 percent approved for 2011. [ID:nN1E7AE21V]

    What to watch:

    - Revisions to credit outlooks from rating agencies.

    - Signs of an impact on growth from the euro zone debt crisis

    OIL WORRIES

    Oil output, which funds about one-third of government spending, has stabilized after slumping by nearly a quarter between 2004 and 2009. The government says it should hold steady at around 2.6 million barrels per day through 2012.

    But Mexico, the world’s No. 7 oil exporter, could become a net importer if current domestic supply and demand trends persist, a study showed. [ID:nN29154903]

    State oil monopoly Pemex [PEMX.UL] has spent billions of dollars at its geologically complicated Chicontepec project, but results are way below expectations. Pemex needs a massive overhaul after years of under-investment and also faces a huge pension deficit from a large, aging work force.

    Lawlessness stemming from Mexico’s drugs war has added to Pemex’s troubles. Gangs tapping Mexican pipelines stole oil and gas worth almost 70 percent of Pemex’s first-quarter profit in the first four months of this year alone. [ID:nN16229502]

    In August, three private companies won the first contracts to operate mature oil fields in a bid to modernize the sector. Pemex says the number of fields operated by private firms will jump by the end of 2012 as it unwinds a seven-decade ban on private investment. [ID:nN1E77H17R]

    Key figures from the opposition PRI have said they support even more foreign involvement in the state-run sector. [ID:nS1E78Q0V1] Pemex says it plans to increase its stake in Spanish peer Repsol (REP.MC), a move that could help it boost its external sources of revenue.

    What to watch:

    - Foreign companies’ interest in new contracts.

    - Any improvement in the performance of Chicontepec. (Editing by Kieran Murray)

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