August 2, 2011 / 2:20 PM / 8 years ago

FACTBOX-Key political risks to watch in Mexico

MEXICO CITY, Aug 2 (Reuters) - Unchecked drug war violence, political gridlock and fears of a U.S. economic slowdown are clouding the outlook for Mexico, Latin America’s second biggest economy, ahead of a presidential vote next year.

DRUGS WAR

Anger is growing about the death toll of more than 40,000 people since President Felipe Calderon launched a war on drug gangs in late 2006, and violence has spun out of control in states along the U.S.-Mexico border. [ID:nN15124805]

Calderon’s conservative National Action Party (PAN) may pay a price for the violence at the presidential election next July 1, particularly in northern Mexico where the party traditionally draws strong support. The PAN was trounced in an election in the central State of Mexico on July 3, suffering its worst result there in a generation. [ID:nN1E762055]

No official candidates have been selected by Mexico’s three main parties for the election, but the field of hopefuls is narrowing and polls continue to show Enrique Pena Nieto, the former PRI governor in the State of Mexico, as front runner.

But analysts say the election is still wide open and one new poll in the daily Reforma newspaper showed Calderon’s approval rating at 63 percent. He can not seek re-election but could help the PAN candidate if he remains popular.

The government says the violence is a sign of chaos among the cartels. It points to the dozens of kingpins it has captured since December 2009. Since then newer, smaller groups have sprung up where established gangs have been weakened.

But many major capos, including Mexico’s most wanted man Joaquin “Shorty” Guzman, the boss of the Sinaloa cartel, are still at large and have infiltrated police, courts and local governments across Mexico.

Business leaders are concerned that attacks are hurting Mexico’s attractiveness for foreign companies and tourists but so far money markets have largely shrugged off the violence.

What to watch:

— Political assassinations or attacks against civilians ahead of the election.

— Companies freezing investment plans.

— More signs that the violence is hurting the PAN.

RECOVERY SLOWS

Mexico is recovering from recession with output stronger at the end of 2010 than it was before the 2008-2009 slump. However, the finance ministry has stopped saying growth this year could top the ten-year high of 5.5 percent rate in 2010.

The recovery eased in the face of a slowdown in the United States, Mexico’s top trading partner. Worries about a potential downgrade to the U.S. credit rating have fanned concerns that Mexico could suffer if the U.S. economy has further setbacks.

The International Monetary Fund approved a $72 billion credit line for Mexico on Jan. 10 as a safety net should investors sour on emerging markets. [ID:nN10182576]

Price pressures are contained and most analysts expect Mexico’s central bank to keep borrowing costs low until early next year. Faster-growing regional peers like Brazil, Chile, Peru and Colombia, have been pushing up interest rates.

Many economists say Mexico’s Congress needs to pass pending reforms such as liberalizing the labor market to bolster growth. [ID:nN1E76J1UU] However, nothing concrete has emerged and parties are increasingly seeking to score points as the presidential election draws closer.

What to watch:

— Signs of an economic slowdown accelerating.

— Congressional agreement on labor market reform.

— Reversal of capital flows.

REFORM

Calderon is still waiting to see if his request for an extra session of Congress to try to pass several pending reforms will bear fruit. The gridlock has dogged Mexico since the PAN defeated the Institutional Revolutionary Party (PRI) in 2000, ending its 71 years of one-party rule.

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

Political inertia, 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.

Calderon pledged to cut the budget deficit by the end of his term. The Senate agreed to trim the deficit next year, but by less than the government had proposed. [ID:nN26177065]

What to watch:

— Revisions to credit outlooks from rating agencies.

— Signs Calderon drops plans for a balanced budget.

— How the main parties fare in a gubernatorial election in Michoacan in November, in which Calderon’s sister, Maria Luisa Calderon, is running for the PAN.

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 by 2016 if the current domestic supply and demand trends persist, a recent study showed. [ID:nN29154903]

State oil monopoly Pemex [PEMX.UL] has spent billions of dollars at its 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.

Insecurity 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 an effort to modernize the energy sector, Pemex says the number of oil fields operated by private companies will jump by the end of 2012 as it unwinds a seven-decade ban on private investment.

It says foreign companies are showing interest in plans to award three oil field operating contracts and on July 29 named a list of companies qualified to bid. [ID:N1E76S1FR]

What to watch:

— Foreign companies’ interest in new contracts.

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

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