HispanicVista Columnists

By Ramon Ruiz
Special to the Miami Herald Mexico Edition
January 26, 2006

The drama of April 2005 was overwhelming. It seemed the whole world was holding its breath as thousands of protesters across Mexico amassed on the twenty fourth of April. The crowds were diverse. Lower- and middle-class citizens stood shoulder to shoulder protesting the government´s legal challenge against Mexico City Mayor Andrés Manuel López Obrador.

The financial markets were jittery. Institutional Mexico was under attack. López Obrador´s already strong lead in presidential polls grew even stronger as he maintained his position and finally overcame the ridiculous efforts of the federal government to legally disqualify him from the presidential race.

There was great relief that the country had withstood the constitutional crisis. Financial markets reacted instantly with enthusiasm and a certain degree of abandon as investors aggressively stepped back into the market.

Certainly global conditions could not have been better during the past year with high commodity prices, coupled with a tamed inflation and low interest rates. Mexico in particular benefited from its petroleum reserves. Emerging markets from every region of the world experienced strong performances during 2005. But investors, scanning the globe for investments, also pay equal attention to another, all important factor - stable political environments.

Could the markets be trying to tell us something about Mexico - that they may, in fact, be learning to cope with the prospect of a López Obrador presidency. Why not? López Obrador, who represents the Democratic Revolution Party (PRD), has breakfasted, lunched and dined with scores of economists, important foreign investors, and political analysts with the consensus being that he is someone that they can play ball with. López Obrador it seems has become quite adept at addressing several audiences.

As a Mexican presidential aspirant speaking to Mexican audiences, López Obrador hammers away, constantly, about the urgent need to attend to the dreadful level of poverty in Mexico. Additionally, he has publicly declared that he is in favor of slowing down efforts to open the economy to foreign investors, such as his firm stance against allowing Pemex to receive outside investments - a hallmark of his nationalism. Historically, in reaction to this type of rhetoric, Wall Street issues raises the yellow flag and issues sell recommendations and country downgrades in a knee jerk fashion.

But that has not been the case during the past year. Instead, brokerage houses both on Reforma and Wall Street have enthusiastically pushed Mexican equity prices to all-time highs. The bond market, whose analysts and traders measure value in terms of risk, both micro and macro, have blessed Mexican bonds. The yield on Mexico´s 9 percent local currency bond due in December 2007 has dropped almost a percentage point during 2005, trading at about 7.75 percent. In other words, investors have been willing to purchase Mexican debt paying lower interest rates with the principle maturing one year after the president elect assumes office in December 2006. This demonstrates a clear statement of confidence by the markets.

When it first became clear that López Obrador was officially targeting the presidency of Mexico, an initial wave of deep skepticism by foreign investors hit the market. There was confusion, accompanied by direct comparisons to Venezuelan leader Hugo Chávez . "It´s like a dark cloud hovering in the distance" noted a Wall Street trader at the time.

KEEPING THE STATUS QUO

That dark cloud, the early Wall Street perception of López Obrador, has given way to an image of a stranger in one´s bed. What is it within all the "scary rhetoric" of López Obrador that gives at least some comfort to the financial markets? To begin with, the López Obrador campaign language does not contemplate reversing the government´s current course. Economic benchmarks, such as keeping the fiscal deficit in check, are expected to be respected. The banking sector, which is thoroughly in the hands of foreign investors, is here to stay. Suffice to say that the private sector of Mexico is well positioned, in terms of capital and management.

It is the public sector that needs urgent attention, and as Felipe Calderón´s campaign intensifies, he, as the National Action Party (PAN) candidate, will most certainly emerge as a market favorite in respect to his conservative business positions. But a great gap will remain between López Obrador and the rest of the presidential hopefuls. This gap is based on who is best able to tackle the critical issues.

In a country where roughly 35 million citizens live off a little over 2 dollars per day and another 35 million live off a little over 7 dollars a day, the question that increasingly concerns the "Mexico specialists" in financial circles is how to tackle the challenge of upward mobility.

Mexican social and political institutions, as they stand today, have proven ineffectual in attacking this daunting concern. López Obrador clearly sticks out as a man of the people, and just spent about six years tackling budgetary and welfare issues as mayor of Mexico City.

He cut millions of dollars in bureaucratic waste, introduced public work projects and initiated welfare programs on behalf of citizens living off almost zero income. While much respect must be paid to the harm that a fiery populist with a crash and burn attitude can exact on today´s carefully crafted economic policy in Mexico, there is growing belief that Wall Street has finally arrived at the conclusion that business as usual will not enhance Mexico´s valuations in the long term. A strong dose of medicine is needed to attend to the "other" Mexico - those Mexicans that cannot afford to shop at Walmex, or buy a phone from Telmex, or a bag of cement from Cemex.

It remains to be seen which candidate will provide the right cure in the future.

Article at: http://www2.eluniversal.com.mx/pls/impreso/web_columnas_sup.detalle?var=28157