PROSPECTS 2005: Mexico faces further political turmoil

Analysis

Although President Vicente Fox's term does not finish until December 2006, the governability problems his government faces will deepen in 2005:

• The administration has repeatedly proved unable to reach substantive agreements with Congress and this is unlikely to change.
• Moreover, political parties will turn their attention to the nomination of presidential candidates, a process that may cause significant political disruption.

Macroeconomic stability, with solid public finances and low inflation, will characterise the year, but GDP growth will be mediocre.

Political deterioration. The political scene is likely to deteriorate further during 2005:

• Fighting over the budget will probably continue until a Supreme Court ruling is issued in March or April (see MEXICO: Budget veto row increases political tensions - December 7, 2004). This will negatively affect the relationship between the government and Congress during the early part of the year.
• Moreover, the nomination of presidential candidates will distract party leaderships. All political parties will probably name their contenders during the final quarter of 2005, but internal squabbles will reach their peak in the preceding months.

Forced reshuffle. The ruling Partido Accion Nacional (PAN) has yet to determine the date when its candidate will be chosen in a primary open only to members. Ministers and other officials that want to enter the contest will have to resign. A cabinet reshuffle should thus be expected, probably during the second quarter of 2005. Fox will lose at least two ministers, but there may be more resignations:

• Interior Minister Santiago Creel is the current favourite to win the nomination.
• Popular Environment and Natural Resources Minister Alberto Cardenas will probably also resign.
• Economy Minister Fernando Canales and Foreign Minister Luis Ernesto Derbez are deciding whether to run, though their chances are low. Moreover, Derbez is seeking to become secretary-general of the Organization of American States (OAS) (see LATIN AMERICA: Rodriguez resignation undermines OAS - October 14, 2004).
• Another important resignation, if he decides to seek the nomination, would be that of Francisco Barrio, PAN leader in the Chamber of Deputies.

Creel's departure will undoubtedly represent a blow to the government. Although he has repeatedly failed in attempts to reach important agreements with the opposition, whoever follows him will have to maintain the links Creel has developed. Potential replacements include Public Function Secretary Martin Huerta and Deputy Interior Minister Felipe Gonzalez.

PAN fight. The fight for the nomination will undoubtedly be acrimonious:

• Three contenders have a good chance of winning: Creel, Cardenas and former Energy Minister Felipe Calderon (see MEXICO: Ministerial resignation stalls reform agenda - June 4, 2004).
• A dark horse would be Guanajuato Governor Juan Carlos Romero Hicks.

Creel is the current favourite, though Cardenas and Calderon are also strong. Losers will rally behind the nominee and there is little risk of serious divisions following the primary.

PRI nomination. The fight for the Partido Revolucionario Institucional (PRI) presidential candidacy will be acrimonious:

• Its leader, Roberto Madrazo, is the current favourite.
• However, several governors and the PRI Senate leader are also seeking the nomination.

Madrazo will have to resign as leader to avoid further accusations that he uses his position as a springboard. The candidate will probably be chosen in a primary open to all citizens, regardless of party affiliation. This will reduce Madrazo's chances: while he is the best-known candidate, he has in the past been accused of corruption. There is a small chance that some of the losing PRI candidates will fragment the party, seeking to join or create another grouping.

The PRI will be less willing to negotiate with the Fox administration in 2005. An ominous signal for the government was the opposition coalition -- headed by the PRI -- which was formed to approve the 2005 budget, and may continue blocking government legislation in the future.

PRD split? The nomination process will also be rancorous in the Partido de la Revolucion Democratica (PRD):

• Mexico City Governor Andres Manuel Lopez Obrador (known as AMLO) remains popular despite corruption scandals (see MEXICO: Legal conflict could damage government - May 27, 2004). He is perceived as the party's only chance of winning the presidency.
• However, party founder, moral leader and perennial presidential candidate, Cuauhtemoc Cardenas, wants to run again.

The clash may damage the PRD, and even cause a split. It will also reduce cooperation with the government (which is already low).

Reduced governability. Party squabbles, added to the reshuffle, will further reduce the government's chances of making progress with its structural reform agenda. The penultimate year of a presidential term has traditionally been one of the most productive in the six-year cycle. This will not be the case for the Fox administration.

Macroeconomic stability. Although structural reforms will not be enacted, the economy should remain stable:

• Respected Finance Minister Francisco Gil is likely to stay for the whole of the administration, and Bank of Mexico (Banxico) governor Guillermo Ortiz will remain in post until the end of 2009.
• After edging up in 2004, inflation should fall in 2005 (see MEXICO: Increasing inflation provokes concern - October 8, 2004). It is likely to end next year between 3.5% and 4.5% (the Banxico target band is 2%- 4%). If below 4% at the end of 2005, it would be the lowest annual inflation level since the late 1960s (it should close 2004 at around 5.4%).
• Government finances should record a small deficit, possibly between 0.1% and 0.5% of GDP, though the precise figure will depend on oil prices.

However, growth will continue to be mediocre, and insufficient to ensure strong job creation:

• While GDP should grow by 4.4% during 2004, it is expected to rise by a lower amount -- between 3.5% and 4.2% -- in 2005.
• Nonetheless, these figures would represent a significant increase from the first three years of the Fox administration (growth averaged 0.8% per year in 2001-03).

Peso volatility. The peso should remain broadly stable:

• The current account deficit is manageable, and should stand at around 1.5% of GDP during 2005. Although FDI levels are unlikely to be impressive, they should be enough to finance the deficit.
• Moreover, remittances should continue to increase from Mexicans working abroad (see MEXICO: Declining investment offset by remittances - December 3, 2003).

However, there may be volatility in the peso-dollar exchange rate, particularly if there is serious party infighting over presidential nominations. This would make inflation higher and -- because of higher domestic interest rates -- reduce growth.