President Calderon boosts foreign investment and makes steady progress amidst Mexico's challenges.
BY JOACHIM BAMRUD
At a time when reforms in Brazil have stagnated and several Latin American countries are following populist policies hostile to investors, Mexico is making slow, but certain, progress. Reforms on taxes and pensions have passed this year and next year will likely see telecom and energy reforms. Calderon has also announced a $250 billion, five-year infrastructure plan aimed at improving Mexico's ports, airports and oil and gas sector.
The reforms are a welcome relief for foreign and local investors who were frustrated by the impasse during the previous six years and are helping boost Mexico's image as an investor-friendly country.
The man behind it all? Felipe Calderon, the 45-year old, Harvard-educated economist and lawyer who assumed Mexico's presidency a year ago. "President Felipe Calderon is a very capable and politically astute leader," says Susan Kaufman Purcell, director of the Center for Hemispheric Policy at the University of Miami.
Peter Hakim, president of the Inter-American Dialogue, agrees. "Calderon looks like he has found a formula for governing Mexico—moving forward gradually and consistently, issue by issue, by making necessary concessions to the PRI to get their support in Congress," he says. "Calderon has had a good first year."
Walter Molano, chief of research at BCP Securities, also credits Calderon for the reforms and its image compared with other countries. "The Mexican economy is on a solid track, and it has none of the excesses that are evident in the other parts of the region," he wrote in an analysis last week.
The political stability that Calderon has enjoyed in this first year, thanks to the decisions he has taken, has created a safer country, and thus a more attractive prospect for current and prospective investors, argues Nicolás Mariscal, Chairman of Grupo Marhnos in Mexico. "This will be a major factor in coming years, as Mexico strives to build an economy not completely dependent on the United States," he told the Inter-American Dialogue's daily Latin America Avisor last month.
Foreign direct investment was expected to reach $23 billion in 2007, Mexican officials predict. That represents an increase of 21.7 percent from 2006. The investment has helped create more than 900,000 jobs this year, Deputy Economy Minister Carlos Arce told Bloomberg earlier this month.
Manufacturing was the principal destination, accounting for 51.1 percent of all FDI during teh first nine months this year. Other key sectors include services (31.4 percent), retail (5.7 percent) and transport and communications (2.8 percent), according to the Mexican Economy Ministry. U.S. companies accounted for 50.4 percent of the investment, followed by the Netherlands (12.6 percent), Spain (9.8 percent) and France (9.3 percent), the ministry announced.
Next year, FDI may fall due to the slowdown of the U.S. economy, Arce predicts. However, not all sectors should see a decline. Investment in the mining sector, for example, is expected to grow by 37.5 percent next year to $2.2 billion, according to Mexico's Mining Chamber (Camimex).
Investments are expected to grow further thanks to the ambitious infrastructure plan announced in July. It aims to boost local and foreign investment in transport, communications, water and energy and has created a stir among foreign infrastructure companies, bankers and consultants.
The growing investment has come as a welcome relief to an otherwise sluggish economy. The economy will likely grow by 2.9 percent this year, the IMF predicts. That's a slowdown from last year's rate of 4.8 percent. Others are more optimistic. The United Nations Economic Commission for Latin America and the Caribbean (ECLAC) predicts the economy will grow by 3.3 percent this year, it said last week.
Next year may not be much better or even worse, experts say. The IMF had predicted a 3.0 percent GDP expansion for 2008 before the latest sub prime crisis in the United States and may have to revise down its forecast. Credit Suisse recently revised down its 2008 GDP forecast from 3.4 percent to 2.5 percent. Again ECLAC is more bullish, predicting another 3.3 percent expansion.
The U.S. slowdown comes just as Mexico's production of oil - its key revenue earner - is falling. "Increasing energy costs, coupled with significant reductions in its oil production and the slowdown of the U.S. economy....would bear a negative impact upon Mexico’s growth rate," says Beatrice Rangel, managing director and president, AMLA Consulting.
However, Mexico this time round is in better shape than it previously was to withstand U.S. slowdowns, Mexican officials and independent economists say. "Despite this change in forecast we maintain our view that the Mexican economy is in a better position to withstand a U.S. slowdown than it was earlier in the decade," Credit Suisse Alonso Cervera says in an analysis.
The last time round, Mexico's banking sector was relatively weak, Finance Minister Agustin Carstens points out. This time round, that's not the case, according to a new Fitch report. "Overall, Fitch expects that the major Mexican banks will continue recording sound earnings, as the domestic operating environment will likely remain benign," Alejandro Garcia, director of Fitch's Financial Institutions Group, said in a statement last month. "'Fitch expects that loan growth will remain solid for a number of reasons, namely the low level of private sector loans to GDP, stable interest rates and strong internal demand, among others."
Another key factor that will help this time round is the tax reform, which will likely allow the government to increase its tax take by as much as 2 percent of GDP by 2012, Bear Stearns points out. Currently, taxes account for 11 percent of GDP.
DOUBLING GDP GROWTH
The pension reform will also help. The passage of the two reforms contributed to Mexico's recent sovereign rating upgrade, Joydeep Mukherji, director of Latin American Sovereign Ratings at Standard & Poor's, told the Latin America Avisor.
If Calderon succeeds in implementing other reforms he could double Mexico's GDP growth rate, says Peter Rösler, deputy general manager, Ibero-Amerika Verein, a Hamburg-based organization that includes major German companies doing business in Latin America. "Mexico should be able to compensate any possible negative external effects by advancing structural reforms in...energy, transport, services [and] labor legislation," he says.
However, should reforms stall further, both the country and the business community might have to face another year of relatively low growth and scant business opportunities, he warns.
Hakim agrees. "Mexico [needs] to address its serious long term challenges — like turning the country into an efficient energy producer rather than seeing its oil exports decline over time, like substantially improving its mediocre or worse educational system, like thoroughly revamping its fiscal management, and like ending monopoly power in crucial industries," he says.
SECURITY AND POLITICS
Another key challenge area is security, where Calderon has made progress. He has started an all-out war against drug traffickers. He is also trying to reform the Mexican legal system. The lower house of Mexico's congress last week approved the government's new bill, but the Senate amended it and a final vote is now not expected until February, according to The Los Angeles Times.
Despite the hurdles, there is much optimism that Calderon will be able to succeed in bringing about the necessary actions.
Although he assumed office in one of the most controversial elections in Mexican history - barely defeating Andres Manuel Lopez Obrador from the leftist PRD party, Calderon has since been able to forge alliances with the previous ruling party PRI and increasingly moderates in the PRD.
"Some recent developments indicate that the more moderate wing of the PRD is gaining strength over the Lopez Obrador wing of the party," Purcell says. "Since the moderates are more willing to negotiate and work with the other parties, this increases the chances of reaching compromises on needed legislation."
Politics in Mexico may be more fluid than they now appear, Hakim adds. "A series of small, but important, political successes may produce growing political support for Calderon and his program, and overtime he may be successful in assembling an effective coalition to take on the powerbrokers that now stand in the way of deeper reforms and end up accomplishing a more ambitious set of changes," he says.
Despite his young age, Calderon knew plenty about Mexico's political system before becoming president. After serving three years as a member of the city council of Mexico City in 1991, he served another three as a federal congressman. In 2000, he returned to congress and served as the chief whip for the PAN party there, helping him gain experience in building alliances to get the necessary votes. His efforts there earned him a NAFTA Congressional Leadership Award in 2000 by the Mexico-US Chamber of Commerce.
After serving as general director of the National Bank of Public Works and Services (BANOBRAS) — a banking institution in charge of granting financing to states and city councils, as well as promoting investment in infrastructure projects — he became energy secretary in September 2003. During his two years there he promoted the modernization of state-owned companies as president of the Board of Directors of PEMEX, the Federal Commission of Electricity (CFE) and the electricity company Luz y Fuerza del Centro (LyFC).
The story of Felipe Calderon is the story of a leader who has been underestimated time and time again. First, he ran as a candidate for the nomination of his party, PAN, against the favorite of Mexico's then-president Vicente Fox. And won. Then he ran against leftist Lopez Obrador, who had been leading all polls for more than a year. And won. Then he presented the opposition-controlled congress — which had basically paralized much of Fox' presidency the prior six years — reforms aimed at improving the tax code and pensions. And got them passed.
So, it is perhaps fitting that Mexico enters the new year with increased optimism despite the many challenges.
For helping to boost investor confidence in Mexico and achieving significant success in his first year as president, Felipe Calderon has been selected by Latin Business Chronicle as Leader of the Year.
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