By Catherine Bremer
MEXICO CITY (Reuters) - A worse-than-expected congressional election defeat for Mexico's ruling conservatives has left President Felipe Calderon's economic reform agenda firmly in the hands of the opposition.
Voters tired of a recession and crime wave handed victory at Sunday's mid-term vote to the Institutional Revolutionary Party, or PRI, which has flourished in opposition since it was ousted in 2000 from seven decades of one-party rule.
Calderon's National Action Party, or PAN, moved Mexico into a new era of democracy with the victory over the PRI nine years ago but it has failed to create the jobs it promised, leaving millions to cross the U.S. border illegally in search of work.
Mexicans have praised Calderon's war on drug gangs, but are worried by a surge in brutal cartel murders and kidnappings, and Calderon's defeat now risks leaving him a lame duck.
A determined former lawyer, Calderon wants economic reforms like tax and energy overhauls to be part of his legacy.
Bumped down to second place in Congress, his party will only achieve a tax reform seen crucial for Mexico's credit ratings if the PRI backs it.
The PRI has left behind its authoritarian past, and some investors hope it will end its old habit of stalling reforms as it eyes 2012 presidential elections and will instead favor laws to dynamize the sputtering economy.
PRI leader Beatriz Paredes said on Monday the party has a "very clear" agenda of the need for deep economic changes and solutions to the economic crisis.
Her comments helped pare overnight losses in the peso, and Barclays Capital analysts called them "encouraging".
Other analysts took the remarks with a pinch of salt, noting the party must avoid irking its old-school support base. Its intentions regarding a tax reform may not become fully clear until a proposal is voted on in September.
"The PRI is clearly a front-runner to win in 2012, so they have an incentive to make sure the economy is in good shape," said Damian Fraser, head of Latin American research at UBS.
"(But) the big uncertainty over what the PRI is going to do remains an uncertainty and I don't think will be clarified over the next few weeks -- I don't think it will be clarified until the day of the vote on any specific legislation," he said.
RATINGS AGENCIES WAIT-AND-SEE
Mexico is a top U.S. trading partner, supplying it with everything from oil and cars to avocados and strawberries.
The U.S. downturn has battered Mexico more than other Latin American countries, and unemployed youths are an easy target for drug gang scouts, seeking new recruits to replace the hundreds killed each month in cartel turf wars.
Mexico's economy is due to shrink more than 6 percent this year and oil output, long a pillar of public finances, is falling fast, exposing the country's paltry tax take.
Calderon, whose plans to widen Mexico's tax base are now in the PRI's hands, called on Congress to put rivalry behind it and focus on ways to spur economic growth and competitiveness.
"The countries Mexico competes with are working on a daily basis to make their labor markets more dynamic, improve their regulatory framework, increase fiscal efficiency and strengthen competitiveness. Mexico cannot be left behind," he said.
The PRI's more than 8 percentage point win could mean it takes some 240 of the 500 seats in the lower house, close to an absolute majority, versus the PAN's 138, according to Roy Campos of the Consulta Mitofsky polling firm.
The PRI could even garner an absolute majority in the lower house if it teams up with the Greens.
However the balance of power looks, a fiscal overhaul that Mexico's central bank has called "really urgent" will be difficult to pass in the next three years, analysts say.
"Clearly, the big risk coming from these results is that Calderon becomes a lame duck," wrote Win Thin, senior currency strategist at Brown Brothers Harriman, in a research note.
Rating agencies that have threatened to downgrade Mexico's sovereign debt, raising borrowing costs, unless it hikes its tax take, said the election has not changed their views.
"At this point we don't foresee going back to stable anytime soon," Fitch senior country analyst Shelly Shetty told Reuters. Standard and Poor's said it wants to see the PAN's proposals and the PRI's counter measures before making further judgments.
By the time Mexican voters return to the polls in 2012, the economy should have rebounded and the focus will be squarely back on Calderon's army-led drug war. Washington has praised the crackdown but Mexicans say drug gang slayings are worse than ever and street crime and kidnappings are rampant.
"We weren't as bad with the PRI as we are now. Poverty and crime have increased," said student Pamela Gonzalez, 25.
MEXICO CITY (Reuters) - A worse-than-expected congressional election defeat for Mexico's ruling conservatives has left President Felipe Calderon's economic reform agenda firmly in the hands of the opposition.
Voters tired of a recession and crime wave handed victory at Sunday's mid-term vote to the Institutional Revolutionary Party, or PRI, which has flourished in opposition since it was ousted in 2000 from seven decades of one-party rule.
Calderon's National Action Party, or PAN, moved Mexico into a new era of democracy with the victory over the PRI nine years ago but it has failed to create the jobs it promised, leaving millions to cross the U.S. border illegally in search of work.
Mexicans have praised Calderon's war on drug gangs, but are worried by a surge in brutal cartel murders and kidnappings, and Calderon's defeat now risks leaving him a lame duck.
A determined former lawyer, Calderon wants economic reforms like tax and energy overhauls to be part of his legacy.
Bumped down to second place in Congress, his party will only achieve a tax reform seen crucial for Mexico's credit ratings if the PRI backs it.
The PRI has left behind its authoritarian past, and some investors hope it will end its old habit of stalling reforms as it eyes 2012 presidential elections and will instead favor laws to dynamize the sputtering economy.
PRI leader Beatriz Paredes said on Monday the party has a "very clear" agenda of the need for deep economic changes and solutions to the economic crisis.
Her comments helped pare overnight losses in the peso, and Barclays Capital analysts called them "encouraging".
Other analysts took the remarks with a pinch of salt, noting the party must avoid irking its old-school support base. Its intentions regarding a tax reform may not become fully clear until a proposal is voted on in September.
"The PRI is clearly a front-runner to win in 2012, so they have an incentive to make sure the economy is in good shape," said Damian Fraser, head of Latin American research at UBS.
"(But) the big uncertainty over what the PRI is going to do remains an uncertainty and I don't think will be clarified over the next few weeks -- I don't think it will be clarified until the day of the vote on any specific legislation," he said.
RATINGS AGENCIES WAIT-AND-SEE
Mexico is a top U.S. trading partner, supplying it with everything from oil and cars to avocados and strawberries.
The U.S. downturn has battered Mexico more than other Latin American countries, and unemployed youths are an easy target for drug gang scouts, seeking new recruits to replace the hundreds killed each month in cartel turf wars.
Mexico's economy is due to shrink more than 6 percent this year and oil output, long a pillar of public finances, is falling fast, exposing the country's paltry tax take.
Calderon, whose plans to widen Mexico's tax base are now in the PRI's hands, called on Congress to put rivalry behind it and focus on ways to spur economic growth and competitiveness.
"The countries Mexico competes with are working on a daily basis to make their labor markets more dynamic, improve their regulatory framework, increase fiscal efficiency and strengthen competitiveness. Mexico cannot be left behind," he said.
The PRI's more than 8 percentage point win could mean it takes some 240 of the 500 seats in the lower house, close to an absolute majority, versus the PAN's 138, according to Roy Campos of the Consulta Mitofsky polling firm.
The PRI could even garner an absolute majority in the lower house if it teams up with the Greens.
However the balance of power looks, a fiscal overhaul that Mexico's central bank has called "really urgent" will be difficult to pass in the next three years, analysts say.
"Clearly, the big risk coming from these results is that Calderon becomes a lame duck," wrote Win Thin, senior currency strategist at Brown Brothers Harriman, in a research note.
Rating agencies that have threatened to downgrade Mexico's sovereign debt, raising borrowing costs, unless it hikes its tax take, said the election has not changed their views.
"At this point we don't foresee going back to stable anytime soon," Fitch senior country analyst Shelly Shetty told Reuters. Standard and Poor's said it wants to see the PAN's proposals and the PRI's counter measures before making further judgments.
By the time Mexican voters return to the polls in 2012, the economy should have rebounded and the focus will be squarely back on Calderon's army-led drug war. Washington has praised the crackdown but Mexicans say drug gang slayings are worse than ever and street crime and kidnappings are rampant.
"We weren't as bad with the PRI as we are now. Poverty and crime have increased," said student Pamela Gonzalez, 25.
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