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Changing of the guard: despite good macroeconomic numbers, the incoming Mexican government faces serious obstacles.

Mexico, the world's 10th-largest economy, is in a strange position. Macroeconomically, it has been quite stable, yet its leaders have failed to carry out structural reforms in the areas of energy, tax and labor the country needs to keep up its competitiveness against other emerging economies.

"Without reforms Mexico cannot grow," says Cesar Flores Esquivel, executive president of the Mexican Association of the Automobile Industry (AMIA). To get an idea of why reforms matter, he says, one need only examine the automotive sector. In 2005, vehicle output grew 6.6% compared to 2004, to a total of 1.6 million units, If reforms were in place, Mexico could be producing 4 million vehicles per year minimum, Flores argues.

President Vicente Fox's government has managed to get a handle on macroeconomics, improving public accounts and the deficit. In fact, 2005 closed with inflation at 3.3%, the lowest since 1969, the first year inflation was measured in Mexico. The inflation figure is expected to be steady through the end of 2006. Yet economic growth has been mediocre. In 2005, the economy grew just 3%, and this year growth is expected to be 3.7%. Just 577,000 new jobs were created last year, less than half what the country needs.

Direct foreign investment for 2005 totaled US$17.80 billion, positioning Mexico among the top 10 destinations for such monies worldwide, according to U.S. ratings agency Standard & Poor's. Yet even that figure could be increased substantially. "The country continues to be favorable to investment because of its comparative advantages: geographical location, trade deals that provide access to more than 48 countries, and its proximity to the largest world market," says Flores.

During nearly six years in office, Fox spent a lot of political capital trying to move those reforms ahead in a divided Congress, one in which his National Action Party (PAN) is in the minority. The former Coca-Cola executive will turn control over to his successor in December of this year. Whoever wins the July 2 vote will face a very similar political landscape.

"Unfortunately, I do not believe reforms have a lot of future. Fox's pretext is that Congress did not approve them, but he should have sought other ways," says Jonathan Heath, chief economist for HSBC Bank Mexico. Eliminating bureaucracy, for instance, would have saved money for private investors, Heath says.

For example, opening a business in Mexico takes 58 days and involves nine procedures, placing the country 84th in a global ranking. In Chile, there are also nine steps but it only takes 27 days, according to the World Bank. "In matters of deregulation efforts, the government presumes it has advanced, but at the corporate level nobody feels much has been achieved," Heath says.

One of the greatest challenges for the next administration will be to lobby Congress to push ahead on the reforms or to seek alternatives. "Without a doubt, one of this government's main accomplishments is maintaining and improving macroeconomic stability. But its largest failure is a really significant decrease in the country's competitiveness," Heath says.

Expectations. Fox assumed the presidency in December 2000 with high expectations, considering he was the first president from the opposition after 71 years of unbroken rule by the Institutional Revolutionary Party (PRI). Yet, one of his mistakes, analysts say, was to make ambitious promises he would not able to fulfill, such as generating 7% growth and more than 1.2 million jobs a year, on top of the stalled reforms.

Front-runner Andres Manuel Lopez Obrador, a center-left candidate from the Democratic Revolution Party (PRD), has said that he is not against reforms but he is not likely to invest his six-year period in carrying them out, Heath says. Lopez seems to prefer to believe reforms will not happen, although he recognizes it would be positive if they did. "What can we do to make this country more competitive without reforms?" Heath asks. "I believe none of the three possible presidents will have the opportunity to work miracles, and none will have the opportunity to make stupid mistakes. Each time we build stronger institutions, like the Bank of Mexico, it almost guarantees stability, especially in prices."

Three candidates will face off in the electoral battle for Mexico's presidency, one of toughest in the country's history. At press time, Lopez was at the top of the polls; in second place was Felipe Calderon Hinojosa, of Fox's own right-wing PAN; and in a distant third was centrist Roberto Madrazo of the PRI.

Calderon holds back when it comes to campaign pledges. "I will not give a [growth] figure, but I know how to make the economy grow more," he says. Without citing specifics, Calderon explains that, with energy reform, the country would be able to generate additional growth of 2.5% a year, and that with each additional percentage point of growth, 280,000 jobs are generated. "Still, even without Congressional support on reform, rule of law in Mexico alone would generate more growth," he says.

One of the most prominent issues on the candidates' plates is energy, including, clearly, state-run oil giant Pemex. The world's fifth-largest petroleum producer, it has been tangled in corruption scandals and is a decade behind in technological terms. Calderon says that, if elected, he will seek to install a model where the state would continue to handle oil and gas exclusively but would participate in petrochemical production with private investors and technological partners, among others.

In energy matters, Lopez proposes to harness oil as a development tool for Mexico but without constitutional reform, that is to say, private participation would continue to be regulated by the current legislation. Not only would the state direct investments in regards to exploration, as is currently the case, but also in terms of refining, petrochemicals and natural gas.

According to the Mexican government, the sector in 2005 saw investments of $19.53 billion. Pemex's slice of that investment was $10.80 billion. Of that amount, $9 billion was invested in long-range infrastructure projects. For 2006, total infrastructure investment for the state oil company is slated to be $13.10 billion.

Lopez's advisors say constitutionally sound ways to involve private investment must be sought, including public-private partnerships, although they reiterate that, at least at first, they do not expect to try to change the Constitution. Once Mexicans begin to trust Pemex, a subsequent phase can be carried out with joint participation and the company's globalization.

Projections for the first year in an eventual Lopez administration call for recovery of 3% of gross domestic product (GDP) through savings from cuts in unnecessary expenditures and government austerity, a figure equal to $22.40 billion. One percent of this amount would be spent on new investments in the energy sector, they say.

Gerardo Esquivel Hernandez, economic advisor to Lopez and a Harvard University doctorate in economics, expects to have 2% of GDP available by means of austerity and redirection of productive expenses, and an additional percentage point by battling tax evasion, administrative simplification and elimination of certain senseless tax exemptions. "The tax evasion rate calculated by the federal government is around 50% of potential collection, that is to say, five or six points of the GDP are not being collected," he says.

Madrazo, the PRI candidate, proposes that the state continue to control oil but that public finances should be kept separate; now, the federal government simply absorbs oil revenues. Nevertheless, some in Mexico look upon Madrazo as the face of the old PRI. There has been an exodus from the party that was in power for seven decades, leading to a perception that Madrazo will lose the race. "I believe that Madrazo would try to restore the old PRI political machine, which has fallen apart," says Jose Antonio Aguilar of Ciencias Politicas del Centro de Investigacion y Docencia Eeonomicas (CIDE), a state agency.

Whoever takes the top job will take charge of a nation with healthy public accounts. "One merit of the current administration has been to maintain a creative and responsible attitude towards the economy," Aguilar says. "And although this government did not meet expectations, it will not leave the country in a state of crisis, which until 1994 was customary."

Fox also has reduced Mexico's foreign debt. In January, the Japan Credit Rating agency elevated Mexico's debt rating. The Japanese agency believes that the country's fiscal situation will remain solid and that conditions inside and outside the country will remain favorable. The Japanese rating is similar to issues last year given by U.S. ratings agencies Moody's and Standard & Poor's. At press time, country risk--the indicator used to evaluate a nation's capacity to comply with its financial obligations--was at 134 points, according to investment bank JPMorgan. Mexico now sits far above countries such as Brazil and Argentina, whose country risk is at 232 and 351, respectively, as this edition closed.

"We have set the foundation for a strong economy and indicators show it," Fox told reporters at the end of 2005. International reserves at the end of the year were $68.70 billion, according to the Bank of Mexico. Fox believes that if structural reforms had been approved, the country would be growing at rates superior to 5%. In 2006, the construction and services sectors will continue to grow at 3.3% and 4.2% each. The automobile industry, which last year saw a 3.3% jump in sales, expects similar numbers for 2006.

According to U.S. auto giant Ford in Mexico, during the last four years the automotive sector in Mexico has produced more than 1 million units annually and has grown between 3% and 4% each year. "This year we expect Ford to continue growing as fast as the market," says Louise Goeser, president of Ford Mexico. Vehicle sales for 2006 are projected to hit 1.2 million units, according to the auto trade group AMIA.

The automotive sector will drive other sectors toward growth. "The metallurgical industry depends on the automobile industry a great deal, so in 2006 we expect 4% growth," says Salvador Macias, member of the executive board of the World Foundrymen Organization.

Better credit. Domestic consumption is expected to perform positively this year, driven by cash from outside the country--remittances home from Mexicans living abroad--that in 2005 added up to more than $20 billion. Other factors include increasingly available credit, better employment prospects and rising salaries, says Jorge Sicilia, chief economist for BBVA Bancomer, Mexico's largest private bank. The bank estimates that construction industry growth for 2006 will reach 3.5%, while the mortgage loan business will jump a surprising 42.5%.

Christian Barrios, president of Software AG, a European software company, also looks with optimism upon the future of the Mexican economy. "In 2005 we grew 15% in turnover and this year we expect that figure to be 35%," he says. Nevertheless, Mexico still has challenges to face, says Arturo Flores, a researcher at the Autonomous National University of Mexico. "If there is no political will or a common vision, the next six years will be the same. Macroeconomics indicators don't matter; we need a strong domestic economy to move forward."

The hopefuls

ANDRES MANUEL LOPEZ OBRADOR

DEMOCRATIC REVOLUTION PARTY

Andres Manuel Lopez Obrador, 52, at press time led the polls for Mexico's presidency. If elected, he would be the first Mexican leader to emerge from the center-left Democratic Revolution Party (PRD). Born in the state of Tabasco, in southern Mexico, Lopez studied political science and public administration at the Autonomous National University of Mexico. After running for governor of Tabasco twice, in 2000 he won the post of mayor of the capital, Mexico City, a position in which he achieved approval ratings in excess of 80%. Last year, there was an attempt to impeach Amlo, as he is popularly known, for ignoring a court order to stop building a road to a hospital. The impeachment drive fell apart. A widower, Lopez lives in a modest apartment with his three children. His adversaries compare him to Venezuelan President Hugo Chavez, but Lopez Obrador rejects the label "I'm neither a populist nor a neo-liberal," he says."I just want justice for my country."

ROBERTO MADRAZO PINTADO

INSTITUTIONAL REVOLUTIONARY PARTY

A government employee since the age of 19, Madrazo grew up in a family that has long been linked to Mexican politics. From 1994 to 2000, he was governor of his native state Tabasco. In those elections, he beat Democratic Revolution Party presidential candidate Andres Manuel Lopez Obrador. Madrazo assumed the presidency of the Institutional Revolutionary Party (PRI) in 2002 following the party's dramatic loss of the presidency in 2000, ending 71 years of PRI rule in Mexico. Madrazo is still associated with the PRI's old guard. Madrazo, 53, at press time was a distant third in the polls and some surveys showed 40% of Mexicans have a negative image of him personally. His honesty and the origin of his wealth, officially declared to be US$3 million, have been questioned, although the candidate defends his personal wealth as legal and reputable. The candidate is married for the third time to Isabel de la Parra, a child psychologist, and they have five children.

FELIPE CALDERON HINOJOSA

NATIONAL ACTION PARTY

Felipe Calderon Hinojosa, 43, has been an active member in the National Action Party (PAN) since his youth. At press time, he was second in the polls to win the Mexican presidential race. He says that if elected he will continue to improve the social programs started by the incumbent. He defines himself as a centrist despite his party's right-wing line. in September of 2003, Fox appointed Calderon Secretary of Energy, but he abandoned the position in May 2004 after being criticized by Fox once his own name was mentioned as a possible presidential candidate. Calderon presents himself as "the man with clean hands," saying that he has never taken kickbacks. He has a law degree from the Escuela Libre de Derecho and master's degrees in public policy and economics from Harvard University and the Autonomous Technological Institute of Mexico, respectively. He has three small children and has been married for 12 years to PAN Congresswoman Margarita Zavala.

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Title Annotation:OUTLOOK
Author:Rueda, Marisol
Publication:Latin Trade
Geographic Code:1MEX
Date:Jun 1, 2006
Words:2365
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