Ramping up Reform Effort

Although the PRI regained the presidency at elections held in July 2012, the party fell short of winning a majority in either legislative chamber, and its members are far from united in their support for reforms that the new president, Enrique Peña Nieto, claims will deliver average annual real GDP growth of 6%.  Peña Nieto used the five-month period between his election victory and his inauguration in early December to bolster his position in the Congress, and both the center-right PAN and the left-leaning PRD have signed on to his Pact for Mexico, a wide-ranging program that includes education and tax reforms, as well as plans to expand opportunities for foreign investors in the energy sector.

Even before taking office, Peña Nieto played a key role in securing congressional approval of controversial reforms of Mexico’s 40-year-old labor code.  However, key provisions were stripped from the legislation by lawmakers from the PRI and the PRD with close ties to organized labor, resulting in a diluted measure that critics contend will accomplish less than promised.  It remains to be seen whether Peña Nieto can avoid that same pitfall with future reforms.

The government’s plan for battling an epidemic of deadly crime is a particularly high stakes initiative, as success or failure on that front will go a long way toward determining whether the president can rely on the cooperation of the PAN and the PRD beyond his initial honeymoon period.  Serious setbacks on the security front that produce a decline in the president’s popular support would likely be accompanied by the adoption of a more adversarial posture by the non-PRI parties in the Congress.

Any chance that the reform program will produce the promised results hinges on the president’s ability to win backing for reform of the energy sector.  State-owned Pemex lacks the technology, expertise, and financial resources to reverse the slide in oil production, but the state’s monopoly control of the oil industry, enshrined in the constitution since 1938, limits the role that foreign oil companies can play in achieving a solution.

The president has been moving very carefully as he navigates that political minefield, and it appears that he is hoping to rack up a few reform successes before tackling the issue head on.  A recent explosion triggered by a gas leak at the Pemex headquarters that killed nearly three dozen people has put the oil company’s accountability and competence under a spotlight, but the obstacles to meaningful reform will nevertheless be significant.

Forecast Summary

SUMMARY OF 18-MONTH FORECAST

REGIMES & PROBABILITIES PRI
55%
PRI-PAN
25%
Divided Government 20%
RISK FACTORS CURRENT
Turmoil Moderate SLIGHTLY MORE SLIGHTLY MORE SLIGHTLY MORE
Investment
  Equity Moderate Same SLIGHTLY LESS Same
Operations Moderate Same SLIGHTLY LESS SLIGHTLY MORE
Taxation Moderate Same Same Same
  Repatriation Low Same Same Same
Exchange Low SLIGHTLY MORE Same SLIGHTLY MORE
Trade
Tariffs Moderate SLIGHTLY LESS SLIGHTLY LESS SLIGHTLY LESS
Other Barriers High Same SLIGHTLY LESS Same
Payment Delays Low Same Same Same
Economic Policy
Expansion Moderate SLIGHTLY MORE Same SLIGHTLY MORE
Labor Costs Low Same Same Same
Foreign Debt Moderate SLIGHTLY MORE SLIGHTLY MORE SLIGHTLY MORE

SUMMARY OF FIVE-YEAR FORECAST

REGIMES & PROBABILITIES PRI
50%
Divided Government 40% PRI-PAN
10%
RISK FACTORS BASE
Turmoil Moderate Same MORE Same
Restrictions
Investment Moderate Same Same SLIGHTLY LESS
Trade Moderate SLIGHTLY LESS Same SLIGHTLY LESS
Economic Problems
Domestic Moderate Same Same SLIGHTLY LESS
International High SLIGHTLY LESS SLIGHTLY MORE LESS
* When present, indicates forecast of a new regime

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