MEXICO CITY: Mexico's new president, Enrique Pena Nieto, has vowed to push through wide-reaching fiscal and energy reforms this year to boost economic growth, while seeking to forge peace after years of extreme drug-related violence.
Following are the main political risks to watch in Mexico.
REFORMS
After taking over from his conservative predecessor, Felipe Calderon, on Dec. 1, Pena Nieto proposed a balanced budget for 2013 and has outlined plans to spur more competition in key industries and ramp up infrastructure spending.
Seeking to bolster cross-party support for his agenda, he signed an accord with the main parties in Congress, where his centrist Institutional Revolutionary Party, or PRI, fell short of an outright majority in July elections.
The pact did not mention the two most ambitious reform plans Pena Nieto has promised - a shake-up of the tax regime to boost government revenues, and opening up state-owned oil giant Pemex to more private investment.
The two reforms are a key test of his ambition and authority, but he has not said what shape they will take beyond "strategic" tie-ups with private firms in the oil industry.
The PRI created Pemex in 1938 and has long been wary of making major changes, so any reform could face opposition on the left of the party and be watered down.
The planned tax reform is also tricky because it could involve applying value-added tax to food and medicine for the first time. That could risk opposition inside the PRI since it would hit the poor, who make up roughly half of the population.
Prior to taking office, Pena Nieto helped steer a reform of the labor market proposed by Calderon through Congress, though not before the PRI gutted the bill of measures aimed at bringing more transparency to allied labor unions.
Lawmakers in the lower house of Congress last month approved an education reform bill that was part of the political pact and seeks to rein in the powerful teachers' union.
The PRI can muster a narrow majority in the lower house with the aid of allies, but it lacks votes in the Senate. Initial cooperation with Calderon's National Action Party, or PAN, could set the tone for the legislative agenda.
Finance Minister Luis Videgaray will be a key negotiator in the push for tax and energy reforms.
Officials say a PRI party congress expected around the end of February could be crucial in determining how far party leaders are prepared to push those reforms.
Pena Nieto faces pressure to get results before state elections in July, meaning he may have to reach accords before the next session of Congress finishes at the end of April.
What to watch:
How quickly Pena Nieto pushes Pemex and fiscal reform.
How the PRI reacts to his plans.
What concessions the PAN seeks in return for its support.
DRUG WAR
Pena Nieto has vowed to reduce the criminal violence that has soared since Calderon launched an assault on drug cartels when he took office six years ago.
Calderon's campaign triggered turf wars across the country, resulting in more than 60,000 deaths and subjecting Mexicans to sickening acts of violence.
Critics speculate the pragmatic PRI might seek to make deals with drug cartels, but Pena Nieto has ruled out any negotiations or a truce. Instead, he has pledged to create a new police force and increase spending on security.
Public pressure is growing to end the killing. In badly hit areas, people speak openly of the need to consider making some kind of deal with the gangs.
A survey by polling firm GCE published in late November showed a slight majority of Mexicans saying it would be better to negotiate with the cartels than continue fight in Reuters
Mexican media said around 1,000 people were killed during Pena Nieto's first month in office. The level of violence is off its peak but the bloodshed has also crept nearer to Mexico City and other areas that had previously been less affected.
The US government is particularly concerned about an attack on two CIA operatives in August. They were shot and wounded by Mexican federal police suspected of working with cartel members.
However, Calderon's campaign did bring some victories, including the capture and deaths of several drug bosses in the second half of 2012.
Financial markets have not been spooked by the decapitations and daytime shootouts, but worries about the impact on investment and tourism persist.
What to watch:
How public opinion changes in the next few months.Any changes in cross-border strategy to fight drug gangs.
ECONOMY
The economy is expected to slow to around 3.5 percent in 2013 from around 3.9 percent in 2012, when it comfortably outperformed main regional rival Brazil for a second straight year.
Mexican manufactured exports rose in November on strong auto sales to top trade partner the United States, while higher imports signaled healthy domestic demand.
Meanwhile, a relatively trim public deficit and solid growth has attracted record flows from global investors to Mexico.
Total portfolio investment in Mexico by foreigners reached $24 billion in the third quarter, as flows into local bonds and stocks hit an all-time high. The money may keep pouring if the new administration pushes forward on energy and tax reforms.
Analysts are widely betting on solid returns from Mexican stocks in 2013 after they outperformed Brazilian peers last year. Many also see the peso currency as undervalued.
The peso has recovered from a slump in November and a stronger currency could help tame inflation, which has slowed in recent months after hitting a 2-1/2 year high in September.
The central bank has recently backed away from a threat to raise interest rates and analysts expect the benchmark rate will stay at 4.5 percent into 2014. It has been held steady since 2009 after it was cut during a deep recession.
What to watch:
Strength of demand in the United States.
Signs of a further slowdown in the economy.
OIL WORRIES
State oil firm Pemex has stabilized oil output after a sharp decline at its largest fields between 2004 and 2009. The government has said oil output will stagnate at some 2.8 million barrels per day (bpd) for the next 14 years without significant new investment in the sector.
The world's No. 7 oil producer imports about 40 percent of its gasoline and risks becoming a net oil importer if it fails to improve production trends.
Calderon was unable to win support for a major reform of Pemex, but he took the first steps toward opening the state-run industry to more private investment.
Pena Nieto is seen as having a better chance of passing less ambitious reforms that would allow a more modest rise in private investment via new contracting programs in refining and petrochemicals.
Mexico is set in July to auction a third round of service contracts for aging, geologically complex fields. Oil majors are waiting for a fourth round of potentially lucrative deepwater projects in the Gulf of Mexico.
Pena Nieto and the PAN say Pemex reforms must go further and have pointed to the success of Brazil's state-owned Petrobras as a model. Petrobras trades shares on the stock exchange and has managed to boost efficiency and returns.
Pemex is hoping Pena Nieto's election could lead to more autonomy and lighten its tax burden. The company posted strong profits in the third quarter.
Center>Copyright Reuters, 2013
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