Security Lapses Overshadow Reform Successes

The disappearance and presumed murder of 43 college students in the state of Guerrero, allegedly facilitated by police and state officials working with organized crime gangs, has become almost the singular focus of public attention over the last several weeks. The scandal has confirmed the worst suspicions of the population regarding the rot of corruption within the political system, and cast a very dark cloud over the administration of President Enrique Peña Nieto, which was slow in getting involved in the investigation, and has become a main target of the outrage that is evident in the violent and destructive character of protest demonstrations that have included calls for the president’s resignation.

In terms of politics, most of the immediate damage has been incurred by the center-left PRD, which controlled the state government in Guerrero, and is also the party of the mayor who has been directly implicated in the scandal. However, Peña Nieto’s PRI is certain to take a beating, as well. In the course of the search for the missing students, authorities discovered other mass graves that served to confirm the federal administration’s failure to neutralize the deadly power of organized criminal gangs and drug cartels.

Although Peña Nieto’s hold on power is not in jeopardy, the upheaval will create a distraction from efforts to liberalize investment and trade rules in the near term, and bodes ill for the administration’s effectiveness over the medium term. Poll results published in early December put the president’s approval rating at just 39%, the lowest mark for a sitting president since 1996. If the president’s slumping support translates into significant losses for the governing PRI at the mid-term congressional elections in July 2015, which, at present, appears to be a very real possibility, he may struggle to accomplish much over the second half of his six-year term.

There is also a danger that one of Peña Nieto’s key legislative successes could face a setback. The PRD has conducted a signature drive in support of a referendum to repeal the landmark energy-sector reforms approved last year. Organizers contend that they have collected more than enough signatures to force the vote, but that claim will require official verification. Regardless of the outcome of the process, the near-term uncertainty will complicate the government’s efforts to attract foreign investors, an objective already made more challenging by the fall in global prices for oil.

                            Forecast Summary

SUMMARY OF 18-MONTH FORECAST


REGIMES & PROBABILITIES
*Divided Government 45% PRI
30%
PRI-PAN
25%
RISK FACTORS CURRENT  
Turmoil Moderate SLIGHTLY MORE SLIGHTLY MORE SLIGHTLY MORE
Investment
Equity Moderate Same SLIGHTLY LESS SLIGHTLY LESS
Operations Moderate SLIGHTLY MORE Same SLIGHTLY LESS
Taxation Moderate Same SLIGHTLY LESS SLIGHTLY LESS
Repatriation Low Same Same Same
Exchange Low SLIGHTLY MORE Same Same
Trade
Tariffs Moderate SLIGHTLY LESS SLIGHTLY LESS SLIGHTLY LESS
Other Barriers High Same Same SLIGHTLY LESS
Payment Delays Low Same Same Same
Economic Policy
Expansion Moderate SLIGHTLY MORE SLIGHTLY MORE Same
Labor Costs Low Same Same Same
Foreign Debt Moderate SLIGHTLY MORE SLIGHTLY MORE SLIGHTLY MORE

SUMMARY OF FIVE-YEAR FORECAST


REGIMES & PROBABILITIES
*Divided Government 40% PRI
35%
PRI-PAN
25%
RISK FACTORS BASE  
Turmoil Moderate Same Same SLIGHTLY LESS
Restrictions
   Investment Moderate Same SLIGHTLY LESS SLIGHTLY LESS
   Trade Moderate Same SLIGHTLY LESS SLIGHTLY LESS
Economic Problems
   Domestic Moderate SLIGHTLY LESS LESS SLIGHTLY LESS
   International High SLIGHTLY LESS LESS SLIGHTLY LESS
   * When present, indicates forecast of a new regime

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