January 30, 2013 6:04 pm

Mexico: Aztec tiger

The country has emerged from Brazil’s shadow to become the darling of investors
Mexican presidential candidate for the Institutional Revolutionary Party (PRI), Enrique Pena Nieto, waves to supporters during a rally in Atlacomulco, Mexico State on June 17, 2012. Incoming president Enrique Pena Nieto will inherit two Mexicos when he takes office on December 1, 2012: One basking in economic growth and another mired in a bloody drug war that has left 60,000 dead©AFP

Heart throb:  Peña Nieto has set investors’ hearts racing with his pledge to take on dominant businesses and introduce greater competition

High street stores do not come much more Mexican than Sanborns. With its rather disjointed collection of chocolates, jewellery and magazines and its cafeterias staffed by waitresses in folkloric skirts, the retail chain has long been a symbol of homespun tradition.

But even with its chaotic charm and staid looks, Sanborns, owned by Carlos Slim, the world’s richest man, is now also becoming a symbol of Mexico’s new-found economic dynamism.

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This month, Mr Slim confirmed that he would list Sanborns on the stock market to raise about $800m. The idea, he said, was to take advantage of high stock valuations and use the money to cater to the increasing prosperity of the country’s middle classes.

Sanborns’ plans to list come as the country is becoming the latest darling of international investors, emerging from the shadow of Brazil, whose economy has lost its lustre. Mexico’s economy expanded almost 4 per cent last year, about double the average annual growth rate this century.

This month, Larry Fink, who heads BlackRock, the world’s largest asset-management company, called Mexico an “incredible growth story”. Lisa Schineller of Standard & Poor’s, the rating agency, says the country’s BBB sovereign debt rating could be poised for an upgrade if Mexico enacts critical structural reforms.

Foreign investors have poured money in. During the first nine months of 2012, they funnelled $57bn into Mexican stocks and bonds – more than five times the amount they invested in Brazil during the same period. Little wonder the country’s IPC stock market index hit a record high this year.

It is all a far cry from the gloom that hung over the country a few years ago when some US commentators, unimpressed by low growth and alarmed by drugs-related violence, began to suggest that Mexico could become a failed state. So what has happened to turn Mexico’s prospects around? And is the optimism in the centrist Institutional Revolutionary party (PRI) justified? After all, the last time that there was so much excitement about Mexico’s economic prospects, during the 1988-94 PRI administration of Carlos Salinas, the country ended up in the throes of the so-called tequila crisis with its sharp devaluation and swingeing recession.

The most recent answer to the first question is Enrique Peña Nieto. Ever since the 46-year-old former state governor won July’s presidential election for the PRI, investors have seen him as the best chance to free up the congressional gridlock that has blocked the structural reforms that many analysts believe could transform Mexico’s often sluggish economy into an Aztec tiger.

International interest in Mexico has so far focused on the country’s prowess as a production base from where companies can export to the US. But Mr Peña Nieto’s reforms are intended to cultivate a healthier environment for far broader investment throughout the domestic economy. He is seeking to introduce more competition in telecommunications and energy while taking steps to shake up the notoriously inefficient tax and educational systems.

Much of the hope that he may be able to push through his reforms rests on the PRI itself, which ruled Mexico for 71 consecutive years under a quasi democracy until losing the presidency in 2000. During that period, many Mexicans associated the PRI with corruption and vote-rigging as the party used its octopus-like reach to smother the democratic process and retain power. At the same time, however, many saw the party as the only political force with sufficient depth of human capital and experience to govern effectively.

The new face of a revitalised party

Twelve years ago, as the tall and ruggedly handsome figure of Vicente Fox led his conservative National Action party to power for the first time, many people thought that the Institutional Revolutionary party (PRI) would wither and die.

The centrist party that had dominated politics in 20th century Mexico through a mix of paternalism and sometimes heavy vote-rigging, so the thinking went, would prove incapable of adapting to the country’s new democratic phase. Its close association with corruption in the eyes of many voters would ensure that it never returned to power.

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It is far harder to say that of either the leftwing Democratic Revolution party (PRD), which has never held the presidency, or the conservative National Action party (PAN), which, during the past two administrations of Vicente Fox and Felipe Calderón, promoted structural reform but ultimately lacked the political nous to work with a divided congress. As Luis Rubio of the Centre of Research for Development, a think-tank, says: “The real problem of Mexico is that for years we haven’t had a president who could get things done.”

On the campaign trail and now as president, the clean-cut and business- friendly Mr Peña Nieto has worked hard to distance himself from the PRI’s poor historical relationship with democracy and transparency, in particular under Mr Salinas, even though Mr Salinas has the ear of the new administration. Mr Peña Nieto has tried to associate himself with his party’s reputation for efficiency and effective governance.

Some of that is just a question of form. At a recent meet-and-greet breakfast of papaya and pumpkin-flower omelettes, José Antonio Meade, Mexico’s foreign secretary, briefed foreign reporters on the country’s trade plans. But a more subtle message was on offer. Flanked by sharply dressed assistant-secretaries, and with a presidential spokesperson on hand to ensure that everyone remained “on message”, the meeting oozed old-style PRI professionalism and slickness – worlds away from the improvisation that characterised the past two PAN administrations.

The image of efficiency has travelled quickly. When Mr Peña Nieto met Barack Obama in November, the US president expressed confidence that he would develop a close relationship with the Mexican leader, who “has an outstanding reputation for wanting to get things done”.

. . .

Politically, Mr Peña Nieto has promoted the idea of an inclusive government. One obvious example is Mr Meade himself, who was finance minister under the previous centre-right government. Another is the appointment of Rosario Robles, a former leader of the leftwing PRD, as social development minister, an important post in a country where almost half the population lives in poverty. That contrasts with Mr Calderón’s cabinet, which lacked figures from across the political spectrum.

Shortly after Mr Peña Nieto extended these olive branches to the opposition, and barely 24 hours after his swearing-in ceremony on December 1, he produced the Pact for Mexico, a document of 95 reform proposals signed by the leaders of the main political parties. Some observers saw the pact as just another piece of paper. “There have been dozens of these things over the years,” argues Carlos Elizondo, a professor at Mexico City’s Cide, a higher education institution. “And none of them have ever amounted to anything.”

But Duncan Wood, who heads the Mexico Institute at the Wilson Center, believes that the pact, for all its vague wording on some issues, shows Mr Peña Nieto’s determination to overcome the political gridlock that has prevented reforms from taking place. “It is a political statement,” says Mr Wood. “And it fits with the PRI tradition of trying to build consensus.”

In that same spirit, Mr Peña Nieto this month became the first Mexican president in two decades to go to the nation’s senate and have lunch with a group of legislators.

Of course, economic factors have also helped. Adroit economic management has produced record low inflation and interest rates. It has resulted in record high international reserves and modest levels of public debt. And Mexico is now competing effectively with China for market share of US imports, with high transport costs and increasing wages in Asia making Mexico a more attractive manufacturing-for-export base.

But what has investors’ hearts racing is Mr Peña Nieto’s apparent determination to accelerate the resulting growth by taking on Mexico’s vested interests. This pits him against powerful union bosses, such as Elba Esther Gordillo, the formidable head of the influential teachers’ union. Critics claim she has an impressive collection of properties, including a luxury villa near San Diego. In December, Mr Peña Nieto proposed shaking up the system, curtailing union power significantly. Congress whistled it through.

Vested interests also extend to powerful businesses, such as Mr Slim’s, which dominate important sectors, making it harder for competitors. Among other things, Mr Peña Nieto’s Pact proposes to introduce more competition into telecommunications while weakening the grip of Televisa and Azteca, the private sector broadcasters, by creating two new television networks.

For all the initial success, Mr Peña Nieto has his work cut out. Even with the pact, Mexico’s new president has to push through tax and energy reforms, perhaps as early as this year. That is no simple task. Legislators have spent years debating the need for a tax overhaul but to little avail.

More recently, they have started looking at the highly protected energy sector, which is controlled by Pemex, the state oil company and an icon of historical pride. Mexico has long been a top-10 oil producer and about a third of the government’s income comes from oil. But the absence of new discoveries and ageing wells has led to a 24 per cent fall in production since 2004. It has even been predicted that Mexico could become a net importer of oil if the government does not allow the private sector to play a bigger role soon.

In a recent interview with the Financial Times, Mr Peña Nieto acknowledged the difficulties that these issues could throw up. “Clearly, there are ideological and party positions over certain issues ... it’s not about achieving unanimity but achieving a majority.”

. . .

Critically, there remains the drugs war, which has claimed about 70,000 lives in the past six years. The new president wants to prioritise Mexicans’ safety over the killing or capture of high-profile capos. In a move that he believes will achieve this result, he has placed public security, until recently a separate ministry, under the interior ministry.

Still, the administration is also trying to discourage media coverage of the violence by scrapping the practice, common during Mr Calderón’s administration, of holding press conferences to parade captured traffickers. As one government adviser told the FT recently: “Why would we draw attention to any of this? It’s not in our interests.”

But any such cosmetic approach is likely to count for little while the killings remain so widespread. Experts admit that there are no quick fixes. As Mr Wood of the Wilson Center says: “If the levels of violence do not come down, it is going to be a big problem for the government.”

The challenges are immense. But the progress in congress and the signs of greater cross-party co-operation suggest that Mr Peña Nieto and his team may just possess the political skill needed to pick the political lock. As Mr Rubio says: “The professionals are back. Now we have to see if they get things done.”

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