Mexico political dispute hits banking plan, raises doubt on reforms

MEXICO CITY Tue Apr 23, 2013 9:40pm EDT

Mexican President Enrique Pena Nieto speaks at the opening ceremony of the annual Boao Forum in Boao, in southern China's Hainan province, April 7, 2013. REUTERS/Alexander F. Yuan/Pool

Mexican President Enrique Pena Nieto speaks at the opening ceremony of the annual Boao Forum in Boao, in southern China's Hainan province, April 7, 2013.

Credit: Reuters/Alexander F. Yuan/Pool

MEXICO CITY (Reuters) - Mexican President Enrique Pena Nieto has suspended plans to present a new banking sector reform due to a dispute between Mexico's main political parties, raising doubts about a wider reform agenda that investors are watching closely.

The dispute is one of the first major challenges to face Pena Nieto, who had drawn up the overhaul which aims to boost lending under a so-called Pact for Mexico he forged with leaders of the opposition to work jointly on reforms.

Cracks in the agreement have appeared due to a funding dispute over July elections in the state of Veracruz, where the opposition has accused Pena Nieto's government of abusing its power to help his Institutional Revolutionary Party, or PRI.

The setback over the banking reform, which was due to be presented on Tuesday, comes as a sweeping telecoms sector bill seeking to curb the power of Carlos Slim's phone giant America Movil and broadcaster Televisa is very close to full approval.

If fighting between the parties intensifies, it could not only endanger the telecoms legislation but also interfere with major fiscal and energy reforms that Pena Nieto aims to pass later this year. They are central planks of the government's plan to boost annual economic growth to 6 percent.

"An instrument like this (pact) is not immune to eventual tensions and political differences," Pena Nieto said in an address on Tuesday. "The government will actively contribute to ensuring conditions for dialogue and agreement that we have managed to create together these past months."

In a statement early on Tuesday, Pena Nieto's office said public activities relating to the Pact for Mexico had been suspended temporarily "to open a space for frank dialogue that allows disagreements to be overcome and strengthen the pact."

Soon afterward, senior officials in the main opposition groups, the conservative National Action Party (PAN) and the leftist Party of the Democratic Revolution (PRD), indicated the impasse over the banking initiative could be resolved.

On Tuesday evening, Interior Minister Miguel Angel Osorio Chong said on Twitter the leaders of the three main political parties had agreed to meet with the government on Wednesday.

"What the PAN and the PRD are doing is using their power to blackmail," said political analyst Fernando Dworak. "The opposition is trying to limit the PRI's influence in local elections in exchange for staying at the table on reforms."

Dworak did not expect the pact to break and saw Tuesday's move as an effort to safeguard the telecoms bill, which the PRI says should be signed off by Congress by the end of the month.

PACT WORRY

The PAN said its leader, Gustavo Madero, would not attend the banking reform presentation after accusing the PRI of using drives to enroll voters in social programs to try to buy votes in Veracruz. The PRD has swung behind the PAN in the scandal.

Veracruz is one of Mexico's most populous states and one of 14 that are to hold elections on July 7. The PAN also has warned the PRI about intervening in a gubernatorial election due at the same time in the PAN stronghold of Baja California.

Social Development Minister Rosario Robles, a former member of the PRD, has come under fire because of the dispute, which arose after recordings came to light showing officials suggesting welfare programs could be used to help the PRI in Veracruz.

Robles subsequently dismissed seven officials. Opposition lawmakers have called for her head and were angered when Pena Nieto backed her publicly last week.

"The response of President Enrique Pena Nieto ... constitutes carte blanche for election miscreants. These hurt and contradict the contents and aim of the Pact for Mexico," PRD Chairman Jesus Zambrano said in a statement late on Monday.

Since Pena Nieto unveiled the Pact for Mexico days after taking office in December, it has formed the foundation of his government's main reform efforts, including a shake-up of the education system and the telecommunications bill.

BILL TO PROCEED

Investor optimism about the prospects for reform in Mexico have helped strengthen the peso currency to its highest level in more than a 1-1/2 years in the last few weeks.

"If (Pena Nieto) maneuvers out of this situation, the Pact for Mexico would be strengthened. Under this scenario the potential for a rally in rates and FX might actually accelerate," Benito Berber, a fixed income strategist with New York-based Nomura Securities, said in a research note.

"For now we think only one thing is certain, some cracks in the pact have appeared," Berber said.

The Mexican peso brushed off the dispute on Tuesday, and traders and analysts said many investors who piled into bets on assets due to reform optimism were expecting bumps in the ride. Still, further political complications could hurt the currency.

"Much of the (peso's gains) have been due to favorable expectations (on the reforms). If the expectations change, it will change the market trend," said Alfredo Puig, a trader at brokerage Vector in Monterrey.

Still, Finance Minister Luis Videgaray said in a radio interview on Tuesday that the financial reform bill should be introduced "in the next few days."

Jesus Ortega, former chairman of the PRD and a member of the pact's presiding board, told Reuters the reform would proceed once the inter-party disputes are settled.

"It's not about the (new) law," he said.

Marco Antonio Adame, a PAN member of the board called the president's announcement "a positive signal."

(Additional reporting by Miguel Gutierrez, Michael O'Boyle and Ana Isabel Martinez; Editing by Simon Gardner, Andrew Hay and Mohammad Zargham)

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