Outlook for Mexico in 2010

The year 2010 will be a highly challenging one for Mexico. Dynamics in four broad areas will outline the prospects and challenges ahead.

The country’s economic performance will be marked by a slow recovery with continued high levels of unemployment and inflation pressures during the first quarter of 2010. The underlying risks remain a faster than expected declining oil production and a slow recovery of the US economy. The absence of meaningful, far reaching structural reforms that could improve economic performance and public finances will accentuate speculation over the country’s long-term prospects.

Carstens Proposed to Lead Banxico; Cordero Goes to Hacienda; Changes Do Not Improve the Status Quo; Political Appointments Prevail at Hacienda and Sedesol

President Calderon has finally sent a recommendation to the Senate, proposing Finance Minister Agustin Carstens to become Banxico’s Chairman. Current Minister of Social Development, Ernesto Cordero will replace Agustin Carstens at the Ministry of Finance (Hacienda). Cordero will be replaced by Heriberto Felix, who was serving as Deputy Secretary at the Ministry of Economy. The […]

Drug Violence: Reaching a New Pinnacle

Although the media has steadily turned its attention away from the country’s high levels of drug violence, recent developments show the situation has experienced a further deterioration in relation to the already bloody first half of this year, and more so in relation to the previous year. According to statistics from newspaper Milenio, this October […]

Latin American CDS: Fully Recovered, What are the Risks?

Editors Note: The Following RGE premium content, “Latin American CDS: Fully Recovered, What are the Risks?” is available to paid clients. Bertrand Delgado, Elisa Parisi-Capone and Alejandro Rivera, take a close look at Latin America’s 5 year CDS fundamental and counterparty risk dynamics.  They examine the extent to which counterparty risks explain the sharp movement […]

The End of Luz y Fuerza: Recap, Analysis, and Ramifications

Event

On the night of October 11th, the federal police surrounded the headquarters and power plants of Luz y Fuerza del Centro (LFC), the decentralized supplier of electricity. The move was part of a takeover plan ahead of the Oct 12th announcement regarding the elimination of the state-owned electricity company.

The reason for a surprise takeover by federal police was to prevent any resentful workers from barricading inside the building in an effort to resist the decision. More importantly, it prevented unionized workers from interrupting service, as they had often recurred to this threat in order to negotiate their yearly salary increases. The takeover was strategically planned to catch LFC workers unprepared as they celebrated Mexico’s soccer victory over El Salvador, which granted the national team its pass to the 2010 World Cup in South Africa.

Subsequently, President Calderon published a decree in the official journal listing the considerations behind the decision to close down LFC. The Executive’s decree provided a summary of the company’s economic inefficiencies, managerial discrepancies, and failure of the union to abide by the series of agreements signed with the government to improve its competitiveness. The latter constituted the legal case against Luz y Fuerza:

“The Law of State-Enterprises establishes a cause for extinction of a decentralized agency created by the federal government, if this agency stops fulfilling the goals for which it was created, or its functioning is no longer viable from the point of view of the national economy and the public interest.”

In conclusion, the decree stated the effects of the global financial crisis have left the Mexican government with few options to avoid a further deterioration of public finances, and it was imperative for the government to make the right decisions to ensure an efficient use of public resources.

Needless to say, the decision to close down LFC was repudiated by the Sindicato Mexicano de Electricistas (SME), the company’s union. Martin Esparza, the union’s de facto leader, immediately began organizing a resistance movement while exploring other alternatives to challenge the Executive’s decision and exert pressure on the government of Felipe Calderon.

On October 13th, the Ministry of Energy confirmed it would be the Federal Electricity Commission (CFE), also a state-owned enterprise (SOE), that will take over the operations of Luz y Fuerza in Mexico City and other serviceable zones.

Significance

The closing down of Luz y Fuerza is no doubt one of the boldest if not most difficult political decisions taken by President Calderon during his term. Successive administrations have failed to reform LFC, given the threat of a frontal clash with its powerful union and the political and economic ramifications.

For more than two decades, LFC was Mexico’s worst performing state-owned company. While the CFE has become a world-class electricity company, LFC increasingly deteriorated. In spite of this, LFC was able to maintain one of the most advantageous collective contracts, given the constant danger of a clash with the union and the possibility of interrupted service.

Regardless of any political benefits for President Calderon, the decision opens a battle front of social discontent which could instigate political instability.

Early Timing

Although there were rumors about the closing down of LFC a few weeks before it actually happened, these had been dismissed by the union’s leadership as a government strategy to induce fear among the SME, as it was believed the government of Felipe Calderon would not dare to take such action given its background of yielding to unions. As such, the decision to take over the headquarters was received as a big surprise nationwide.

Background

Desertion, Low Morale, and Readiness: Assessing the Mexican Army’s Involvement in the War Against the Cartels and its Impact on Capabilities for Traditional Responses

The Mexican army’s increasing role in the war against drug cartels has prompted concerns about a potential overstretching of its deployed troops and the impact this could have on morale as well as the army’s capabilities for traditional responses, including natural disaster relief and stationary deployments for guarding strategic facilities and infrastructure such as oil […]

On the Links to a Recovery in Latin America

The business cycle of four of the largest Latin American countries is synchronized. The output gaps of Brazil, Chile, Colombia and Peru all peak before the crisis at the end of the century, go into a trough during the rise in risk aversion and the crisis of accounting practices crisis in 2002 and peak again […]

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