March 30, 2012

Latin America Economic Research

Mexico Economic Comment: What to expect from the upcoming general elections

Mexico will hold Presidential and Congressional elections on July 1 The official campaign kick-off took place today The centrist PRI candidate is leading the polls by a wide margin... ... but we expect a much closer race as we move towards the election In contrast to 2006, the proposals of the three major candidates embrace fiscal discipline and low inflation The outcome of this election could spur reform optimism

This year Mexico will hold Presidential and Congressional elections. Mexican citizens will choose the countrys new President on July 1. On that same date, both chambers, the Lower House and the Senate will be fully renewed, while there will also be elections for governorships in seven states, and for municipal heads and local legislators in fifteen states (please see the table below table). The official kick-off of the campaigns took place today (March 30), while June 27 will be the last day for candidates to perform proselytistic activities and -as it is aforementioned-, the elections will take place on Sunday July 1.
Elections in July 1, 2012
Federal President Senate Representatives Local Congress Campeche Colima Nuevo Len Quertaro San Luis Potos Sonora State of Mxico
Source: IFE *Election for State Governor will be conducted on August 19.

State governorship and local Congress Chiapas* Federal District Guanajuato Jalisco Morelos Tabasco Yucatn

We highlight that re-election for President is strictly forbidden in Mexico and there is no consecutive re-election for legislators and other positions at the state level. It is also worth noting that Mexico has a one-round voting system, and with the exception of certain legislators, the results are judged in absolute terms (i.e. no electoral vote). Voting in Mexico is not compulsory, and voting is a right for Mexican citizens to exercise either within Mexicos territory -in an assigned district quite close to their registered address-, or abroad, if nationals living off-shore pre-register. The Federal elections (President and Federal Legislators) are organized by the Federal Electoral Institute (IFE), with an important participation of the general population, and are enforced by the Federal Electoral Tribunal (TRIFE). On the other hand, local electoral institutes at the state level are responsible for conducting state governorship,
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municipal heads, and local legislators elections. The newly-elected Legislators will take up office on September 1, while the new President will begin the 2012-2018 cycle on December 1. The poll results. In terms of the overall standing, the centrist PRI candidate, Enrique PeaNieto, is leading the polls with 39% of the voters' preferences, followed by Josefina VzquezMota, from the right-wing and incumbent PAN, with 24%, and the left-wing PRD's candidate, Andrs-Manuel Lpez-Obrador (AMLO), with 18% (please see the chart below). It is worth noting that pollsters are reporting two different results in the voters' preferences. The direct result, in which firms such as Consulta Mitofsky -a leading pollster-, present the actual percentages of the surveyed individuals that answered for whom they will vote for, as well as the percentage of undecided individuals.
Presidential election: voter intention poll
% of total 45 40 35 30 25 20 15 10 Nov 10 Feb 11 May 11 Aug 11 Nov 11 Feb 12
Source: Consulta Mitofsky

PRI Undecided

39

PAN

24 19 18

PRD

On the other hand, the majority of pollsters present the so-called "net preferences" in which they assume that the undecided citizens will vote in the same proportion as the ones that explicitly expressed their preferences. In our view, the undecided are a quite relevant group because they could make a difference in the final result, as they represent a large share of the overall preferences. In this context, we believe that assuming the undecided will follow the pattern of the decided ones could be somewhat misleading. As a result, we present both results for Consulta Mitofsky's polls -which recognizes the undecided individuals (chart above)-, as well as the "net preference" results for other pollsters, for comparison purposes (please see the table below).
Political surveys ahead of this year's Presidential election
Pollster Net preferences Average Min. Max. Standard Deviation Consulta Mitofsky Exclsior Reforma Milenio El Universal Ipsos Grupo Frmula Covarrubias y Asociados PRI Enrique Pea-Nieto 45.0 36.0 50.5 5.7 48.0 47.0 45.0 49.3 50.5 36.0 36.4 48.0 PAN Josefina Vzquez-Mota 28.1 24.0 32.0 2.6 28.9 30.0 32.0 29.7 28.1 24.0 25.4 27.0 PRD AMLO 21.3 17.8 24.0 1.9 22.7 22.0 22.0 20.7 20.1 21.0 17.8 24.0 0.7 0.0 1.3 0.4 0.4 1.0 1.0 0.3 1.3 0.0 0.7 1.0 Other

Source: Cosulta Mitofsky. Note: All polls were conducted in March 2012.

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Who is who in the Presidential race. PRI's Pea-Nieto is the former Governor of the State of Mexico -which accounts for 13.5% of the country's population and for 9.4% of Mexico's GDP-, has a Law degree from Universidad Panamericana, and an MBA from ITESM. On the other hand, Vzquez-Mota has been head of the Ministries of Social Development and Education, as well as a Federal Representative. She obtained a BA in Economics from Universidad Iberoamericana. It is worth noting that Vzquez-Mota is the first woman to become PAN's Presidential candidate and, as a result, the first woman running for President in a major political party in Mexico. AMLO holds an undergraduate degree in Political Science from UNAM and was formerly Mexico City's Mayor. Mexico City is responsible for 17.3% of Mexico's GDP and holds 7.9% of the nation's population. We note that this is AMLO's second attempt to win the Presidency, as he participated in 2006 election, in which he lost to President Caldern by a close margin (less than 0.6% of the votes casted, according to official results). Legislators will be voted too. There are currently 500 Representatives and 128 Senators. The current composition of both chambers is depicted in the table below. In both chambers there is a certain number of Legislators that are elected by direct votes. However, 200 (out of the 500) Representatives -also called "Plurinominales"-, and 64 Senators (out of 128) -also called "Primera Minora" and "Representacin proporcional"-, are elected indirectly reflecting the share the political parties achieved in the overall votes that were casted, regardless if these parties won or not. These "plurinominales" and "primera minora" are selected by the party leaders. The rationale behind these legislators is to allow political parties that do not necessarily win the political position by direct votes have proper representation in legislative processes. In our view, while this was relevant in the early stages of Mexico's revamped democracy in the early nineties (recall that the PRI ruled the country for more than seven decades and did not lose an election until year 2000), in the absence of re-election, the incentives for legislators are aligned to do whatever the "plurinominales" or "primera minora" say, instead of what their constituents claim for. This, in addition to the lack of working majority in both chambers, has been the main underlying reasons why we believe structural reforms have remained stuck.
Composition of Mexicos legislative power
# of Senators Senate Ruling party PAN (right wing) PRI (centrist) PRD (left wing) Green party (PVEM) Movimiento Ciudadano (left wing) PT (left wing) No political affiliation Lower House PRI (centrist) Ruling party PAN (right wing) PRD (left wing) Green party (PVEM) PT (left wing) PANAL Movimiento Ciudadano (left wing) No political affiliation
Source: Mexican Senate and Lower House website.

% 100 39.1 25.0 18.0 6.3 3.9 3.9 3.9 % 100 47.8 28.4 13.8 4.6 2.6 1.4 1.2 0.2

128 50 32 23 8 5 5 5 # of Representatives 500 239 142 69 23 13 7 6 1

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There are two ways to assess how Congressional elections will probably turn out to be at the end. One is to see how is the political map in terms of governorships and the population that is governed (please see the table below). The other and simpler one is to just check the polls. The evaluation of the countrys political map is of particular importance given the power that state governors exert, in which political operators at the state level are able to persuade a large amount of people to go to fill out the ballots and vote for the party these operators tell them to. Unfortunately, having a large share of poor population allows these operators to either exchange votes in an indirect way for basic goods, or sometimes in a more direct fashion. A painful example in which there has been extensive newspaper documentation, is the use of camera-integrated cell phones in which operators literally (and illegally) buy votes, paying a certain amount of money to people willing to show in their phone screens that they voted for what the operators wanted. This is clearly illegal but it is difficult to prove, while incentives for people to do it are aligned more to receive a cash payment, rather than to seek for the authorities to make a formal accusation.
Mexico's political, demographic, and economic composition
Ruling Party Country Mxico Distrito Federal Veracruz Jalisco Puebla Guanajuato Chiapas Nuevo Len Michoacn Oaxaca Chihuahua Guerrero Tamaulipas Baja California Sinaloa Coahuila Hidalgo Sonora San Luis Potos Tabasco Yucatn Quertaro Morelos Durango Zacatecas Quintana Roo Aguascalientes Tlaxcala Nayarit Campeche Colima Baja California Sur
Source: INEGI and IFE

% of population 100 13.5 7.9 6.8 6.5 5.1 4.9 4.3 4.1 3.9 3.4 3.0 3.0 2.9 2.8 2.5 2.4 2.4 2.4 2.3 2.0 1.7 1.6 1.6 1.5 1.3 1.2 1.1 1.0 1.0 0.7 0.6 0.6

% of GDP 100 9.4 17.3 4.7 6.3 3.4 3.9 1.8 7.5 2.4 1.6 3.0 1.5 3.1 2.7 2.1 3.1 1.6 2.6 1.9 3.7 1.4 1.9 1.1 1.3 0.9 1.4 1.1 0.5 0.6 5.2 0.6 0.6

-PRI PRD PRI PAN PAN/PRD PAN PRD PRI PRI PAN/PRD PRI PRD PRI PAN PAN/PRD PRI PRI PAN PRI PRI PRI PRI PAN PRI PRI PRI PRI PRI PRI PRI PRI PAN

As a result, the number of states and the population governed are a quite relevant aspect to take into account not only to project the probable political composition in Congress, but also to assess the power of a party in the Presidential election. It is worth noting that the latter was not
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necessarily true in the 2006 election as even though the PRI governed an important share of the population at that time, they lost the Presidential election and actually became the third political force. It is our take that this had to do with the lack of closeness between the Presidential candidate and the state governors, something that we believe nobody would argue that PeaNieto enjoys these days. Another way to evaluate the political composition in the lower house is just to take a look to the poll results. In this context, the voters preferences are also led by the PRI-Green Party coalition, with 33%, followed by the PAN, with 22%, and The PRD-PTMC (Movimiento Ciudadano) coalition, with 18% (please see the chart below).
Representatives - Voters' intentions poll results
% of total

40 35 30 25 20 15 10
Oct-11 Nov-11

PAN

PRI/GP

PRD/PT/MC 33

22

18

Dec-11

Jan-12

Feb-12

Mar-12

Source: Consulta Mitofsky

Keeping a healthy macroeconomic stance is part of the candidates' proposals. In contrast to 2006 elections, in which PRD's AMLO had a quite radical economic agenda that did not necessarily incorporate a prudent fiscal and monetary policy stance, the proposals of the current three major candidates embrace fiscal discipline and low inflation. As a result, we believe that regardless of who wins the election, Mexico's next President will have a market-friendly approach. In this context, even though the PAN has not officially released their economic program yet (the PRI and the PRD have already done so), we do not observe many differences in the parties' general macroeconomic approach of boosting growth, but achieving this in an environment of fiscal prudence, as well as low and stable inflation. A fact that reflects consensus on a prudent fiscal story is the approval of the budget in the past few years that has gone smoothly despite the fact that government has not have majority in congress. On the other hand, we believe Mexican politicians have noticed the extreme problems that European countries have fallen into due to their large deficit-, and debt-to-GDP ratios. Same objectives different approach. While the PAN and the PRI approaches are quite similar, with the reforms that have been in a political gridlock for years (e.g. fiscal, labor market and energy reforms), the PRD acknowledges that approving reforms is so tough that they are going for changes on regulation that do not require congressional approval. On the other hand, the PRD might also be taking into consideration that even if they win the Presidential election, it is not likely that they could achieve a majority in Congress, at least judging by Mexico's current political map. Once we have the PAN's official economic platform, we will soon publish a research note with an in-depth assessment of the reforms and economic proposals of the three major candidates, as well as the likelihood of being enacted. But so far, our general perception is that the PRI is calling for a full fiscal reform, an energy reform based on more infrastructure and more openness to private sector investments in the natural and shale gas industry, as well as a social security reform, while the PAN will seek for the reforms that have not been able to approve in the past 11 years (fiscal, energy, labor, security, and political
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reforms, among others), and as it is was aforementioned, the PRD will go for government savings and administrative changes -with no necessary approval of Congress-, that could also boost growth. Even though economic proposals will be very important for the general population as well as for investors, we consider that security issues will also play an important role. In this context, we believe that even though the three major candidates have criticized the current security strategy, all agree that what President Caldern started in terms of the combat against organized crime -drug lords included-, must continue, and security as well as judiciary institutions need to be strengthened. Going forward, we believe that it is highly likely that the PRD and the PAN will increase their share in the polls and the gap with respect to the PRI will narrow, leading to a tighter election. On the PRD side, this could be due to the fact that AMLO was able to unify all the left-wing parties that were completely fragmented last year, and that he has moderated his discourse significantly, compared to the 2006 election. Separately, the PAN could also grow in the voters' preferences because she was chosen to be the party's candidate less than a month ago, so there is room to grow in the polls, as people gets to know her better and the proposals she has. Moreover, having a woman running for President in Mexico will be a novelty, more so leading the incumbent party's political effort, and this could also help, as it has happened in the recent past in other Latin American countries. All in all, if the candidate that wins also achieves majority in both chambers -as the current poll results suggest-, this will spur reform optimism. On the other hand, this will support our view that the Mexican peso will probably strengthen vis--vis the US dollar towards year-end (J.P.Morgan: 12.00).
Gabriel Casillas (AC) (52-55) 5540-9558 gabriel.casillas@jpmorgan.com Banco J.P.Morgan, S.A., Institucin de Banca Mltiple, J.P.Morgan Grupo Financiero Iker Cabiedes (52-55) 5540-9339 iker.x.cabiedes@jpmorgan.com Banco J.P.Morgan, S.A., Institucin de Banca Mltiple, J.P.Morgan Grupo Financiero
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The research analyst(s) denoted by an AC in this report individually certifies, with respect to each security or issuer that the research analyst covers in this research, that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important disclosures related to this research are available on J.P. Morgan's website https://mm.jpmorgan.com/disclosures/company.
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