Outlook for Mexico in 2010

The year 2010 will be a highly challenging one for Mexico. Dynamics in four broad areas will outline the prospects and challenges ahead.

The country’s economic performance will be marked by a slow recovery with continued high levels of unemployment and inflation pressures during the first quarter of 2010. The underlying risks remain a faster than expected declining oil production and a slow recovery of the US economy. The absence of meaningful, far reaching structural reforms that could improve economic performance and public finances will accentuate speculation over the country’s long-term prospects.

Despite the continuance of strikes against the country’s most powerful drug cartels, we foresee the security situation deteriorating in 2010 with higher levels of violence, increased brutality, and more frequent confrontations between drug cartels and local authorities. Developments in the last quarter of 2009 provide a sample of the upcoming violence. There is a latent possibility that the conflict between drug cartels and the federal government will take upon greater dimensions with more emblematic killings of public officials and other acts of terrorism as a means of retaliation for arrests and confiscations. The lack of progress in the dismantling of the cartels’ financial structures, as well as the lack of efficient coordination between the country’s security agencies, will continue delaying progress against organized crime.

With limited time to pass key reform initiatives and an opposition-dominated Congress, progress in the legislative agenda is likely to be slow. After wasting precious time during the first half of his term to introduce legislation, President Calderon appears to have suddenly realized that the short window of opportunity to pass key reforms is now fading away. Hence, the Executive has called on the political class to embrace an ambitious reform agenda.

Clearly, advancing long overdue reforms that could improve the country’s business climate and render a more efficient allocation of resources is still the most urgent issue. However, the introduction of a broad-based initiative of political reform by President Calderon in December seems to have changed the order of priorities. Given its dimensions, such a reform is likely to occupy the bulk of the spring Congressional session—at the expense of other more urgent reforms that could help the country’s economic recovery.

Although party leaders have recently called for a comprehensive fiscal reform that increases non-oil revenue and decentralizes tax collection, its discussion (scheduled for the second half of the year along with the discussion of the 2011 federal budget) is likely to end up in legislation that falls short of its main objectives.

Because of these considerations, we do not foresee a second generation of energy-related reforms—or other structural reforms—happening in 2010. Instead, we believe Congress will continue with its now established piecemeal approach to reform.

At the same time, regardless of the outlook for new reforms, it is important to note that the implementation of recent reforms and projects in the areas of energy, education, infrastructure, and the judicial system remains stalled or in some cases has utterly failed (i.e. the education reform). Progress in these areas will be difficult to achieve as attention is focused on other contingent issues.

Political and intra-party dynamics will be increasingly dominated by electoral considerations. There will be a series of highly charged political campaigns during the first half of this year. Elections to renew 12 governorships, 15 state legislatures, and 1,533 mayorships will take place between May 16th and July 4th. Ahead of the races, the PRI is poised to make further gains at the expense of the PAN and the PRD. Given the PAN’s poor prospects and lack of options, it is likely that the party will once again confront the PRI over the latter’s corrupt past in hopes of differentiating itself. This strategy could potentially polarize the political environment and negatively affect deals in Congress between both parties.

Similarly, as the year advances, the 2012 Presidential elections will become the driving force behind the political strategies of each party. This factor will inevitably incite antagonism within and among political parties.

An increasingly frail PRD is likely to continue being marginalized in Congress. The party’s weakness will de facto thrust the political system into a bi-partisan mode—also pushing smaller parties into competition as they try to fill the void left by the leftist party.

A confluence of adverse developments—notably in the electoral arena—could further strip President Calderon of the political capital required to advance his agenda. In either scenario, we foresee the Executive being forced to grant increased concessions to the PRI in exchange for the party’s support in Congress, but also to maintain political stability.

Finally, as a commemorative year of Mexico’s independence and revolutionary movements, there will be insistent calls from different sectors for the government to take bolder steps to correct the country’s acute social imbalances. The latter is likely to permeate the rhetoric of the political class.