Mexico

Richer, more confident, but still looking to the US

When Felipe Calderón, Mexico’s president, sits down this Christmas to eat stuffed turkey and “romeritos”, a typical festive dish made with herbs, dried prawns, potatoes and chilli, the chances are that he will feel a certain degree of accomplishment after his first year in office.

Within the space of nine months, he has managed to contain the threat from Andrés Manuel López Obrador, the left-wing candidate in last year’s closely-fought and controversial election.

Just as surprisingly, perhaps, he and his administration have pushed through three significant reforms. The first, to the public sector’s pension system, came as a bolt from the blue.

The other two, to the tax regime and to the electoral laws, were slower and more complicated. But they confirmed Mr Calderón’s ability to negotiate with Congress – something lacking during the previous administration of Vicente Fox.

Indeed, there is perhaps no clearer proof of how much more relaxed Mr Calderón feels than the fact that for the first time since he came to power last December, he is planning to take a few days off over the Christmas period. How confident should Mr Calderón feel as he faces his second year in power?

On the surface, there are plenty of reasons for optimism. Beyond the success in reaching deals with Congress, public finances have rarely been in better shape. Thanks to policies put in place by Ernesto Zedillo, who presided over the country during and after the tequila crisis at the end of 1994, the budget is balanced.

In 2000, it was still running a budget deficit equivalent to 1.1 per cent of gross domestic product. Net public debt, meanwhile, has fallen consistently and is now just 23 per cent of GDP. Moreover, much of the external debt was swapped for peso-denominated debt during Mr Fox’s administration.

This year, net external debt accounts for roughly 7 per cent of GDP compared with 24 per cent in 1995. “It has all become boring,” says Damian Fraser of UBS in Mexico City. “But that is fine. We love boring.”

Even inflation, which has started to creep up again after it dipped below that of the US for the first time in 2005, still appears to be under control.

Consensus forecasts from the private sector suggest it will finish the year at about 3.85 per cent.

That may be close to the roof of the central bank’s inflation target of 2 per cent to 4 per cent. But it is a long way from the double-digit inflation Mexico had to live with until the end of the 1990s.

Even with Mexico’s more-than-disappointing overall growth over the past few years, this relatively new-found economic stability has helped push the number of families earning between 9,000 and 20,000 pesos a month from just 5m in the 1990s to more than 12m, according to Ernesto Cervera at GEA, a consultancy in Mexico City.

As Guillermo Ortiz, governor of the central bank, told the FT in a recent interview: “Economic stability has made a difference.”

Another positive element is that the government has launched an aggressive infrastructure project next year. Last month, Agustín Carstens, the finance minister, confirmed that the government intends to boost infrastructure spending from about 3.2 per cent of GDP this year to about 5 per cent in 2008.

In practice, says Alejandro Hope, an analyst with GEA, that will mean about $40bn for roads and an additional $7bn for development of about five ports.

“For the first time in many years we might actually run a counter-cyclical fiscal policy,” he says.

Yet to conclude from all this that Mr Calderón’s second year in power is going to be considerably easier than the first would be a big mistake. Mexico’s economic fortunes still depend heavily on those of the US.

More than 70 per cent of the country’s exports go to its northern neighbour and any weakening in US industrial production inevitably spells problems for Mexico.

The problem for Mr Calderón is that economists’ forecasts for the US economy are far from pretty. In fact, they are growing uglier by the day.

In a recent interview with the FT, Mr Carstens said he remained confident Mexico would come out relatively unscathed from events north of the border.

But many economists disagree. Rogelio Ramírez de la O, who last year was tipped to be finance minister had Mr Lopez Obrador won the election, believes Mexico is highly vulnerable.

He calculates, for example, that about 30 per cent of the country’s GDP depends directly on the US through a mixture of exports, remittance flows of about $23bn a year from migrant workers living in the US, and tourism. Moreover, he already sees signs that the economy is starting to suffer.

Just one of many indicators, he argues, is that year-on-year growth in the manufacturing sector has fallen to 8.1 per cent this year from about 17 per cent last year.

“The main reason we haven’t seen a more serious deterioration yet is that the game is only just beginning,” he says.

Another potentially dark cloud is Mr Calderón’s apparent dwindling appetite for addressing the problem of competition – or the lack of it. Mexico’s corporate landscape is dominated by large and powerful companies that, in many cases, have established a stranglehold over strategic sectors of the economy.

Enrique Quintana, an influential columnist with Reforma, one of Mexico’s daily newspapers, is particularly disillusioned – even though he recognises the difficulties involved.

“The issue of monopolies has disappeared from presidential speeches altogether,” he says.

“The risk is that if the government thinks about the political cost of everything it would stop doing what needs doing.”

On the reform side, there could be cause to damp enthusiasm, too.

While most analysts agree that Mr Calderón has delivered far more than anybody expected this year, they also say that the next big reform – that of energy – will prove considerably harder than those that went before.

With oil production falling and Pemex, the country’s state oil company, desperately short of funds for exploration, nobody doubts the need for reform.

However, in Congress there is no consensus on the issue of energy.

Besides, Mr Calderón will need the backing of the Institutional Revolutionary Party (PRI), the third-largest force in Congress, to make any headway.

That could prove difficult given the party’s string of election results this year and its growing confidence to demand ever greater concessions in return for legislative support.

What will all this mean for Mexico? According to Mr Fraser at UBS, it probably needs a gradualist approach in which the government manages to further its reform agenda but, a little like this year’s tax reform, falls a long way short of what it would have liked. If that turns out to be true, it will doubtless rule out the huge transformations many economists consider necessary to improve significantly Mexico’s competitive edge and put it on a secure path to becoming a truly developed nation.

But most, in the country and outside, would also agree that even this less ambitious route would be a significant advance on the six previous years.