MEXICO: Back from the brink

Recovery in the US has thrown the economy a lifeline, but the key to a lasting upturn lies with the political opposition

  • By Greg Brosnan
  • 21 Mar 2010
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Just a few months ago, Felipe Calderón, Mexico’s president, was staring into a fiscal abyss. His country was nursing the deepest recession in Latin America, its economy ravaged by the US downturn. And with oil revenues sharply down, a diluted tax reform did not go far enough to stave off downgrades by two ratings agencies.

Calderón can breathe again, however, now that resurgent US automakers have thrown a tentative lifeline to the country’s exporters. Yet until Mexico revamps its creaking economy, it can only hope for mediocre growth rates chained to the economic mood swings of its northern neighbour.

As Mexico’s bloody drug war consumes Calderón’s attention, economic woes erode his popularity, and a formidable opposition positions itself to take over in 2012, the type of far-reaching structural reforms Mexico needs to compete with its emerging market peers look further out of reach than ever.

“The window of opportunity to pursue any reforms is going to dwindle after 2010,” says Shelly Shetty, Fitch’s main Mexico analyst. “The political landscape at the moment does not allow for reaching consensus.”

Last year was dire for Mexico’s economy. Around 80% of Mexico’s exports go to the US. As the world’s largest economy reeled from the worst recession since the Great Depression, it passed the pain south, and Mexican gross domestic product fell an estimated 6.5%.

Faced with a Ps480 billion ($37 billion) revenue gap, Calderón’s conservative government tried to redress the main structural problem dogging Mexico’s economy – its abysmally low fiscal revenue – brokering a deal with the powerful opposition Institutional Revolutionary Party (PRI) that raised the country’s VAT rate from 15% to 16%.

The tax push, even in the watered down form in which the PRI, eager to avoid alienating its mass voter base, backed it, was a bold move – the government was essentially tightening fiscal policy during a recession.

But it didn’t go far enough. Both Fitch and Standard & Poor’s lowered Mexico’s debt rating from two notches inside investment grade, down to one.

Now, true to a pattern that has long tethered Mexico’s economic fortunes to those of its northern neighbour, for better or for worse, the US economy is again coming to the rescue. US auto sales are improving; automakers are ramping up orders from Mexico again and even setting up new production lines.

Mexican industrial output began rising at the end of last year for the first time since 2008, and auto exports more than doubled year-on-year in January. While 2009 fourth quarter GDP was still down 2.3% from a year earlier, it rose 2.03% from the third quarter. The government lifted its 2010 growth estimate from 3% to 3.9%. “We have gone from a situation three to four months ago when market participants were talking about sustainability of debt to GDP levels in Mexico, to a situation now where those views have almost completely disappeared,” says Guillermo Osses, who manages tens of billions of dollars in Mexican assets for Pimco, the world’s largest bond manager.

Economists, however, are less optimistic. The US stimulus package to the automobile industry may have breathed some life into Mexican manufacturing, but with US consumers still timid and out of work in stubbornly high numbers, they cannot yet be relied upon to buoy Mexico’s economy.

Moreover, exports count for only part of Mexico’s GDP. While Mexican retail sales and consumer confidence are beginning to pick up, unemployment is still high, and internal demand remains sluggish, stifled in part by the recent tax hike.

“It’s a story that’s perhaps overly dependent on the US,” says Enrique Alvarez, head of Latin American research for IDEAglobal in New York. “The US shows some signs of bouncing back, and that’s positive for Mexico. However, as far as the domestic dynamic goes, you’re still lacking in various aspects, and that may come back and haunt the economy overall in 2010.”


The only way to fire up Mexico’s internal growth engine, most economists agree, is through radical reform. About 40% of government revenues come from state oil company Pemex, where production has steadily declined in recent years. While vast new reserves are known to lie deep in national waters in the Gulf of Mexico, Pemex lacks the technology to access them, and a constitutional ban dating back to 1938 limits help from foreign investors.

At the same time, the country suffers from one of the lowest tax takes as a percentage of GDP in Latin America. Combined tax and energy reforms would boost oil revenue while making Mexico less dependent on the volatile commodity, reform supporters say.

Calderón has made the pursuit of those reforms central to his presidency, and has vowed to continue pushing them, but his attention is diverted by a bloody fight against warring drug cartels. As his term nears its end, any political capital he had is quickly slipping away.


Claiming an estimated 18,000 lives since Calderón took office in late 2006, the drug war, with its gangland massacres and beheadings, continuously reaches grisly new heights. In the border city of Ciudad Juárez , a dozen killings a day are common, and government successes are soon eclipsed by more gore.

One major victory in December, a deadly hit on drug boss Arturo Beltrán Leyva, quickly turned pyrrhic when gunmen on a revenge mission shot dead the grieving family of a marine hero killed in the operation. In January, the cartels raised the bar again, gunning down 15 people, most of them teenagers, at a Ciudad Juárez high school party. [For an in-depth look at the effects of Mexico’s drug war, see] While many Mexicans object to Calderón’s use of the army to fight the drug war and see no impact on levels of violence, they largely support him for taking on the cartels. Despite the media frenzy surrounding drug violence at home and abroad, however, two out of three major pollsters show Mexicans to be more concerned about the economy.

In this area, their patience with the government is wearing thin more quickly, and getting a tax hike instead of any major fiscal stimulus programme has not helped. Local pollster Mitofsky recently put Calderón’s approval rating at 52%, his lowest ever.

Now, more than at any time during Calderón’s presidency, the key to any reforms lies in the hands of the people Calderón’s National Action Party (PAN) spent years trying to drive from power.


Born from the ashes of Mexico’s 1910 revolution, the PRI ruled Mexico for 70 years until it was ousted from power in 2000 by Calderón’s PAN predecessor Vicente Fox.

But while it lost the presidency, it has never left government. As a mass-based conglomeration of interests deeply rooted in Mexican society, it has continued to dominate politics through its weight in both houses of Congress and its powerful network of state governors.

Thriving on disenchantment with Calderón’s handling of the economy, it gathered nearly half the seats in the lower house of Congress last year in a sweeping mid-term electoral victory. It is ahead in the polls for the 2012 presidential elections, and one of its top cadres, the dashing young governor of populous Mexico State, Enrique Peña Nieto, is an early favourite to succeed Calderón.

Hoping to prevent a similar PRI landslide in state and municipal elections this July, the ruling party is forming electoral alliances in at least two gubernatorial campaigns with its diametrically opposed rival on the left, the Party of the Democratic Revolution (PRD). While such an ungainly alliance is probably not viable for the presidential race itself, it hints at how threatened the PAN feels.

“It’s the same PRI as 30, 40 years ago,” says Roberto Gil, the PAN’s second-in-command in the lower house, warning that the PRI’s real power brokers were not new talents like Peña Nieto, but a clique of unreconstructed state interventionists and cronies who would think nothing of slapping on price controls and having “the government selling bicycles.

“The candidates have young faces, but it’s the same old men making the political decisions,” says Gil.

“We’re at a crossroads. We could go pretty far backwards and de-democratize, or we could continue the course,” says Jeffrey Weldon, a political scientist at Mexico City’s private ITAM university, echoing Gil’s fears.


The PRI leadership is aware that some still see their party as the bogeyman of Mexican politics. “The problem is that the PRI was at one time the bogeyman,” says Gil’s opposite number in the PRI, Jorge Carlos Ramírez. “It was the great transformer, the great party that pushed Mexico’s economy forward. But it was also the party that tolerated corruption, and didn’t do enough to push reforms.

“We have to return to power so we can win back the voters’ confidence and show them that we’ve learned from our mistakes.”

Wall Street was overjoyed when Calderón won the presidency in 2006, beating out charismatic leftist Andrés Manuel López Obrador by a hair. Months of paralyzing street protests by López Obrador as he contested the result soured voters against him, and he has drifted out of the political limelight, although pundits warn against writing the former Mexico City mayor off in 2012, especially if the economy double dips.

It is not clear what economic policy would look like under a PRI government, as its pragmatist militants straddle the political spectrum, and even individual cadres are hard to pigeonhole. Ramírez, for example, sounds protectionist when he talks about revising dropped import tariffs, but his belief that Mexico could risk a higher fiscal deficit for the sake of job creation is hardly radical, being shared by some on Wall Street.

A lot could depend on which of the party’s myriad factions rise to the top, but investors are generally unfazed by the prospect of a PRI presidency, believing its inherent diversity would keep more extremist views in check.

Calderón has said he still wants to push energy reform, but in the heated electoral climate, any proposal breaching the taboo of increased foreign investment in the sector is probably dead on arrival.

Whether fiscal reform still stands a chance is not as simple to predict. Both the PRI and the PAN say they support an overhaul that lowers taxes but widens the tax base. Indeed, there is also a strong argument that the PRI should approve tax reform now, letting the PAN pay the political cost and reaping the benefits itself once in power.

But the devil is in the detail, and most analysts are deeply sceptical that, with the electoral race gaining momentum, Mexico’s two main parties will have the political will to agree.

“We’re more resilient than before, but politicians and policy-makers seem to be happy driving at 40 miles an hour on a highway with an 80 mph speed limit,” says Alonso Cervera, Credit Suisse chief economist for Mexico.

Others are more optimistic, saying the PRI’s agreement last year to raise VAT, albeit by a meagre percentage point, was a rare breakthrough that could hint at further movement.

“The goalposts are shifting,” says Joydeep Mukherjee, team leader for the Latin American sovereign ratings department at Standard & Poor’s. “That doesn’t mean it’s a huge change, but what was off the table before, is not only on the table, but discussed. Next time you go back to debate it, you will have moved it forward.”

The incumbent PAN could well remain in the driving seat to steer that debate into 2012, particularly if the economy vastly improves. No strong PAN candidates have emerged, but, as Mukherjee points out, two years before the 2006 election, López Obrador was way ahead in the polls, and few people had heard of Felipe Calderón.

López Obrador’s electoral defeat splintered Mexico’s left, but Mexico City’s popular leftist mayor Marcelo Ebrard, the cycling enthusiast who is Mexico’s closest thing to a third-way politician, could even sweep up votes if he runs from a social liberal platform, in defence of the capital’s controversial legalization over abortion and gay marriage.

“I’m very confident that two years from today, whatever discussion we have today will sound absurd,” Mukherjee says of premature speculation over candidates.

“So much can happen in a very short time,” says Allyson Benton, an analyst for political risk consultancy Eurasia Group, based at Mexico City’s CIDE university. “A revelation of corruption or anything like that can completely derail a candidate or a party’s chances.

“A lot of people say Peña Nieto will be the candidate for the PRI and the PRI is going to win, but these are people who don’t know Mexican politics.”

  • By Greg Brosnan
  • 21 Mar 2010

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
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1 Citi 315,565.94 1183 8.89%
2 JPMorgan 288,650.70 1316 8.13%
3 Bank of America Merrill Lynch 284,218.69 988 8.01%
4 Goldman Sachs 215,758.12 710 6.08%
5 Barclays 207,555.74 805 5.85%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
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1 HSBC 32,400.29 147 6.76%
2 Deutsche Bank 32,042.83 103 6.69%
3 Bank of America Merrill Lynch 28,820.43 84 6.02%
4 BNP Paribas 25,608.74 143 5.35%
5 Credit Agricole CIB 22,617.86 130 4.72%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
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1 JPMorgan 18,067.92 70 9.12%
2 Morgan Stanley 15,215.44 76 7.68%
3 UBS 14,195.29 55 7.17%
4 Citi 14,014.57 86 7.07%
5 Goldman Sachs 12,113.98 67 6.11%