Published by Minyanville

The 2012 election campaign has kicked off in Mexico as Finance Minister Ernesto Cordero handed in his resignation in order to seek his party’s nomination for president next year. Former Energy Minister José Antonio Meade took over the post, in what analysts are suggesting should be a seamless transition. The resignation had been expected for some time and many feel that 2012 budget negotiations will now be able to begin in earnest.

Cordero belongs to the governing National Action Party, or PAN. The 43-year-old must convince members to choose him as their presidential candidate and then close the gap on the opposition Institutional Revolutionary Party’s (known as PRI) strong lead.

The PAN’s lack of support at the moment stems from President Felipe Calderón’s war on drugs, which has killed more than 42,000 since he came into power in December 2006, with figures rising year-on-year. The PRI ran Mexico for more than 70 years, ending their reign in 2000. The party’s Enrique Peña Nieto is the man most likely to succeed Calderón in next year’s vote.

The 42-year-old Meade is a trained economist and comes from a well-connected political family. “Meade has a long track record in the ministry,” Carlos Ramirez, an analyst at Eurasia Group, told Reuters. “He is an excellent negotiator, he is well known in the financial community, he has excellent contacts everywhere, particularly in the Central Bank where he is very close to (its governor, Agustín) Carstens, and he has always proven to be an effective policymaker. There will be no learning curve.”

Minutes of the Central Bank’s August meeting, released last week, show that the board unanimously agreed that future events may force is to cut its benchmark rate from 4.5%, but they were split as to whether to make that known to the financial markets and investors. Concern that such a large gap in interest rate with the United States could hurt the domestic economy worries some members of the board, while others put more weight on continued weakness in the peso, which is down more than 6% since the end of July.

The currency is currently at its weakest level in more than a year, above 13 pesos to the US dollar for the first time since last September, thanks to Europe’s ongoing sovereign debt crisis. The problems across the Atlantic are hitting much of Latin America, with Brazil’s real suffering significantly (see European Crisis Hitting Brazil Economy Hard).

Mexico is still keen to step up overseas borrowing next year, after this year’s $3 billion injection—more than any other Latin American nation. Congress is being asked to boost net external debt by $7 billion next year. The country has sold $15 billion worth of bonds outside its local market since 2009, more than double the same figure for the previous three years. During that same period, Brazil cut its sales 12%.

Local Businesses Face Brunt of Drug War Violence

The casino fire in Monterrey at the end of last month refocused attention on the country’s war against drugs, which will no doubt feature heavily in the next year’s election campaigning. Investigations have revealed that extortion was involved. The owner of the casino had received extortion threats, with demands of $50,000 and then $140,000, though refused to pay, according to a federal prosecutor.

While the murder rate has doubled during Calderón’s tenure, many foreign companies are insisting that they are not being hit by the problems. Rather it is smaller and local companies that are suffering threats and violence. The Financial Times cites Nestlé, which claims it has seen “no significant change” in hijackings or theft of goods vehicles in Mexico and it has therefore not felt the need to increase its security budget.

“The reality is that foreign companies have not been affected much by the drugs war,” Adam Thomson writes in the London paper. “It is much harder to extort a large, relatively faceless foreign company with headquarters outside Mexico than it is a local family-owned business ... It is a story heard time and time again. But given how the drugs war seems to dominate headlines about Mexico, it is a story worth repeating.”

Industrial Output Up

August auto production was up 7.7%, compared to the same period in 2010. However, a struggling US market failed to soak up imports which, overall, fell 3.3% in Mexico. The crisis in the US is a worry for Mexico as 80% of its exports head north of the border.

There was good news too for Mexican industrial output, which was up 0.5% in July compared to June, thanks in part to the auto industry. However, analysts expect figures to slow as the US economy drags down growth in Mexico.

AeroMexico saw August traffic up 17%, again from the same period in 2010, thanks primarily to a jump in international bookings, according to the airline. July saw a 32% increase in traffic, compared to the same month in 2010. The airline has also benefited hugely from the demise of rival Mexicana.