GENTLY DOES IT
COUNTRY REPORT / MEXICO
Investors are generally optimistic about the outlook in Mexico under new president Felipe Calderón.
He faces plenty of challenges, but Mexico’s newly elected president, Felipe Calderón, might just be the right man to meet them. If anything, few people dare underestimate him any longer.
Against all odds, Calderón won the PAN party’s nomination to become presidential candidate in the teeth of heavy opposition from outgoing president Vicente Fox and other PAN stalwarts. Then he managed to win the July 2006 presidential elections (albeit with a small margin) despite his rival, Andrés Manuel López Obrador, having handsomely led nearly all polls for more than a year before.
Winning the election, however, was just the beginning. The 44-year-old lawyer, economist and former energy secretary will have to bring to bear all his skills to help Mexico overcome a series of challenges that include low competitiveness, insufficient energy, growing crime and political instability. “He’s shown that he’s right-minded,” says John Welch, chief Latin America economist with Lehman Brothers in New York. “He has an agenda for reform [and] has taken a different tack than Fox.”
Fox was seen as too weak in dealing with opposition and was criticized for implementing too few reforms. “Calderón will do much more than Vicente Fox, but that is a low bar since Fox did nothing,” says Pamela Starr, a Washington, DC-based Latin America analyst with Eurasia Group.
Welch praises Calderón for his choice of economic team, which includes finance secretary Agustin Carstens and former energy secretary Jesús Reyes-Heroles, who will lead state oil giant Pemex, Latin America’s largest company.
While he does face some challenges, not all is bleak for Calderón as he takes over the reins. “Mexico is growing well,” Welch says, pointing to a well-managed monetary policy, a reasonable exchange rate, continued high FDI and remittance levels, and solid exports. Mexico’s GDP, Latin America’s second largest after Brazil, is expected to grow by 3.3% in 2007, following 4.4% growth in 2006, according to the International Monetary Fund. Exports were expected to reach $256.9 billion in 2006, a 19.9% increase from 2005, according to preliminary estimates from the Inter-American Development Bank.
However, analysts point out, Calderón needs to deal with several key issues, including public sector pension reform, tax reform and energy reform.
Both Pemex and state electricity company CFE, which charges some of the world’s highest prices for power, are seen as inefficient and in need of reform. The high electricity rates, coupled with high telecommunications prices, are two key factors behind Mexico’s relatively low competitiveness. Calderón will probably move slowly in terms of telecom competition. “Calderón has wisely chosen not to fight [Telmex] at the starting gate,” Starr says.
Another key challenge will be public security. “He wants to completely restructure law and order in Mexico,” says Starr. That means fighting both politically motivated protesters as well as drug cartels wrecking havoc along the US border. Calderón will likely get support from PRI, one of the opposition parties, in fighting crime, according to Starr, but even that is not guaranteed. “The first challenge is to build political capital,” she says. Calderón needs support from PRI to pass legislation and offset the staunch opposition from PRD, another opposition party, which has declared López Obrador as the “legitimate” president of Mexico.
Starr says that “2007 will be about political capital,” adding that “most economic reforms will come after that.”