MEXICO CITY (Reuters) - The fanfare accompanying Mexican President Enrique Pena Nieto's first months in office is increasingly being drowned out by discord in Congress that could undo his plans to raise more tax revenue and open up state oil giant Pemex to outside investment.
A pact that Pena Nieto painstakingly built with opposition leaders to strengthen his hand in Congress risks falling apart over accusations his ruling Institutional Revolutionary Party, or PRI, has been using dirty tricks to buy votes in the first major round of state elections since July's presidential vote.
Taking office in December after fighting off claims that his own campaign team bought votes, Pena Nieto has won much praise for his efforts to re-energize Mexico's economy.
A telecommunications bill passed by Congress on Tuesday aims to bring more competition to industries dominated by phone tycoon Carlos Slim and the No. 1 broadcaster, Televisa.
Pena Nieto's government has also pushed through a law aimed at improving the education system and arrested teachers' union boss Elba Esther Gordillo on corruption charges. A former PRI stalwart, Gordillo was seen as a persistent obstacle to change.
Lacking an outright majority in Congress, Pena Nieto mapped out an informal legislative program with the opposition under the "Pact for Mexico," an agreement that has served as a workshop for the parties' proposals to modernize the economy.
If his reforms succeed, Pena Nieto insists Mexico's growth can reach 6 percent per annum. Investors have been encouraged by the pact's achievements, piling into Mexican stocks and bonds and recently pushing the peso currency to a 19-month high.
But last week, months of political goodwill evaporated amid angry recriminations when opposition leaders accused the government of trying to use public money to help the PRI in local elections in the Gulf state of Veracruz this July.
When videos were leaked showing PRI officials advocating the use of Social Development Ministry funds to corral votes in Veracruz, the conservative National Action Party, or PAN, and the leftist Party of the Democratic Revolution (PRD) were livid.
"The one that's been irresponsible, that hasn't kept its word, that has put the Pact for Mexico at risk and shown it's still the same old party it always was, is the PRI," said the PAN's lower house leader, Luis Alberto Villarreal.
For Pena Nieto, the row is an unwelcome backdrop for the visit of U.S. President Barack Obama to Mexico on Thursday, when the leaders will discuss security issues and how to step up cooperation between their closely intertwined economies.
Ruling for 71 uninterrupted years, the PRI had become a byword for corruption by the time it was finally voted out of power in 2000. When Pena Nieto recaptured the presidency for the party last year, he swore things would be different this time.
But as the parties jockey for position before the local elections in Veracruz and 13 other states on July 7, finger-pointing about PRI corruption is again widespread.
Until the PRI has punished those behind the Veracruz scandal and ensured the elections are protected against abuses, all discussions within the pact over energy and fiscal reform are off, PRD chairman Jesus Zambrano told Reuters.
Though he was confident the pact could overcome the current furor, Zambrano foresaw trouble ahead if it did not. "It would make building consensus enormously difficult," he said.
Defusing tensions between the PRI and its rivals is a big enough challenge for Pena Nieto. But he must do so at a time when there are major splits inside the opposition parties - in particular the PAN - his natural allies on economic reform.
Without support from at least the PAN, Pena Nieto's ruling coalition of PRI and the Green Party is unlikely to muster the two-thirds majority in Congress needed to enact a constitutional change he wants to make Pemex more attractive to investors.
The PRD is opposed to changing the constitution to open up the oil industry and is highly skeptical about imposing a value-added tax on food and medicine, a measure the PRI is considering to improve Mexico's weak tax revenues.
Meanwhile, both the PAN and the PRD are pressuring Pena Nieto's Social Development Minister Rosario Robles to step down over the Veracruz revelations. To date, they have not made her departure a condition of their support for the pact.
The parties were incensed when Pena Nieto last month backed Robles publicly, withdrawing their support for a banking bill negotiated under the pact, and putting that reform on ice.
"It's up to all the political players to carry on working for the reforms our country needs," Pena Nieto said at the time.
The opposition says, however, that the PRI has yet to atone for Veracruz. Robles quickly dismissed seven officials over the affair and has denied any wrongdoing, but the PAN and the PRD have said 57 people were involved and want more heads to roll.
The government has repeatedly stressed that the pact is intact, but opposition lawmakers chafing under the fetters of the agreement have jumped at the chance to attack the president.
Senator Luis Fernando Salazar of the PAN said Pena Nieto's response to the Veracruz affair showed that he saw the pact "as nothing more than an instrument for keeping the opposition quiet."
Even among the ranks of the ruling coalition, doubts have grown about how much longer the government can defend the pact.
"It was very close to breaking," said PRI congressman Brasil Acosta, noting the media attention the pact has generated had turned it into a very public forum for lawmakers to air grievances, making it harder and harder to defuse spats.
Another lawmaker in the ruling coalition, who declined to be named, said the pact would last till the end of 2013 "at best."
Pena Nieto used the accord to push through the education and telecommunications reforms with overwhelming support from the PRI, PAN and PRD. But that spirit of cooperation has given way to warnings that the pact risks neutering the opposition.
There is no suggestion Pena Nieto was personally involved in the PRI's election planning for Veracruz, but preserving the pact is exacting a mounting price in Congress, which must still agree on laws to implement the telecoms and education bills.
Mindful of the risks, Pena Nieto front-loaded his major reforms, pledging to sign off the reorganization of Pemex and his plan to broaden the tax base by the end of the first year.
Ulises Beltran, head of polling firm BGC, said in the end Pena Nieto's hopes of passing far-reaching energy and tax reforms were almost certain to depend on the PAN.
How helpful the PAN is may hinge on who wins the only state governorship up for grabs in July: Baja California. In 1989, it was the first state the PAN ever captured and it still holds it.
Losing Baja California would be a crushing blow to the PAN, which is still licking its wounds after giving up the presidency to Pena Nieto and finishing a distant third in last year's vote.
Anxious to avoid defeat, the PAN is running on a joint gubernatorial ticket with the PRD in Baja California and has already said the PRI will try to buy the election.
The only problem, said pollster Beltran, is that after 24 years under the PAN, the state is ready for a change.
"And if (the PAN) ends up losing in Baja California, they're going to claim there was fraud without a doubt," he said.
Additional reporting by Miguel Angel Gutierrez.; Editing by Kieran Murray and Christopher Wilson