Analysis: Mexico's president lines up reform blitz, legacy at stake

By Dave Graham MEXICO CITY (Reuters) - Mexico's Enrique Pena Nieto has only been in charge nine months, but the success of his presidency depends largely on how he steers divisive economic reforms through Congress with the opposition by the end of this year. Pena Nieto is targeting economic growth of some 6 percent a year - up from an average of barely 2 percent since 2000 - via a number of key reforms: opening up the oil industry to foreign investors, boosting tax revenues, fomenting competition in major industries and overhauling a broken education system. To get there, he is pushing for deep changes that were long anathema to his ruling Institutional Revolutionary Party (PRI) and the president is offering political concessions to his opponents in return for their backing. Pena Nieto appears to have enough political support to achieve the main goals of that economic agenda. But the PRI does not have an outright majority in Congress, so it remains to be seen if he will have to dilute his plans to get them approved. "When this administration began, there were two options: maintain the inertia or seek far-reaching change. Today it's clear we've opted for the road of transformation," Pena Nieto said in his first state of the nation address on Monday. Barely 36 hours later, one objective was closer to reality - Congress approved a new education law that imposes tougher teaching standards and scraps antiquated privileges that allowed teachers to pass on posts to their children, or even sell them. Thousands of teachers had blockaded Congress in a bid to thwart the bill but the speed with which lawmakers backed it showed how determined the president is, said Jose Manzur, the PRI's chairman of the lower house's budget committee. Manzur scoffed at the suggestion that Pena Nieto, the former governor of the State of Mexico, might back down on key parts of the proposed reforms to avoid more disruptive confrontations. "Absolutely not," he said. "I was deputy interior minister with Enrique Pena when he was governor of the State of Mexico so I know we're definitely moving forward with everything." Shortly after taking office in December, the 47-year-old Pena Nieto made an agreement with the opposition to push for a range of reforms, including the raft of economic changes that could still spark street protests. That deal has already yielded major bills to open up the oil industry, increase bank lending and weaken the hold billionaire Carlos Slim has on Mexico's telecom sector. But the small print on all these initiatives has not yet been finalized. In return for support in Congress, Pena Nieto has held out the prospect of reforming a political and electoral system shaped by the PRI when it ruled Mexico without interruption between 1929 and 2000. POLITICAL REFORM The conservative National Action Party, or PAN, finally toppled the PRI in the 2000 election, but then struggled to pass far-reaching legislation during its 12 years in power, often due to the resistance of PRI lawmakers. Pena Nieto's reform plans closely resemble what the PAN attempted to enact, and it is willing to help the president. But the PAN has made its support conditional on reforms allowing for the re-election of public officials and for a second-round run-off between the top two candidates in presidential elections. Both of those changes could weaken the PRI's chances in future elections in Mexico, where the president is only allowed to serve a single six-year term and elected politicians cannot seek consecutive periods in office. Jose Trejo, a PAN lawmaker who heads the finance committee in the lower house of Congress, said Pena Nieto would have to pay a political price to get deep reforms through. "And I think he should pay for them," Trejo added. PAN lawmakers have already signaled their readiness to help Pena Nieto's energy reforms, which could give him the two-thirds majority in Congress he needs to change the constitution and allow foreign investment into the oil industry. And Trejo said he was ready to back any fiscal bill that really helped Mexico to improve its weak tax revenues. Pena Nieto is far less likely to secure broad support for his tax and energy bills within the main leftist group in Congress, the Party of the Democratic Revolution (PRD). But he still hopes to take the edge off leftist opposition by agreeing to reform the statutes of Mexico City, the PRD's principal stronghold, which the party wants to have more political and financial autonomy from the central government. The noisiest resistance is poised to come from Andres Manuel Lopez Obrador, a former PRD mayor of the city and twice presidential runner-up who later broke ranks with his party. Lopez Obrador brought much of the capital to a standstill for weeks with protests in a doomed effort to overturn the 2006 presidential election result, and he is vowing to do at least as much to sink the fiscal and energy bills. He plans to launch his campaign on Sunday just as the government unveils the details of its fiscal reform bill, but the left is not the unified force it was six years ago and PRI officials believe his protests will not prevent passage of the reforms. Still, major disruptions risk damaging Pena Nieto's authority at a time of rising skepticism about another of his main pledges: ridding Mexico of violence between drug cartels. Those turf wars claimed some 70,000 lives under the previous government, and while the homicide count has fallen under Pena Nieto, kidnapping and extortion have risen over the past year, national crime statistics show. And an increasing number of Mexicans feel gang violence has risen since he took power, a poll published last week showed. TAX INCREASE TOUGH SELL Rising discontent over law and order makes it tougher for Pena Nieto to sell tax increases for both rich and poor. Most controversial is the part of his plan set to propose broadening the application of value added tax (VAT) to some food and medicines. For years, this was a red line for the PRI, just like opening up the oil industry to private capital was until the party changed its manifesto in March to allow both. If Pena Nieto is serious about raising more tax quickly - the government is targeting an increase equivalent to four percentage points of gross domestic product - then levying VAT on food and medicines is inevitable, said the PAN's Trejo. The PRI insists that even if changes to VAT are carried out, it does not mean that the poor will be worse off. "I'm sure there won't be VAT on a basket of basic foodstuffs or for foods that people who are less well off need," said Alejandra Del Moral, a PRI congresswoman in the lower house finance committee. The government is studying ways of shielding the poor from VAT changes using schemes like its existing anti-poverty program, several PRI lawmakers said. The tax reform plan will be sent to Congress along with the 2014 budget, which is due to pass by November 15. The PRI's Manzur said he expected the tax bill to be approved before then to give the government the budgetary leeway it needed. In tandem with the energy reform, the tax bill also aims to set out how to cut the tax burden on state oil monopoly Pemex, whose payments accounts for about a third of the federal government's revenue. Allies of the president warn that Mexico will be left behind if that overhaul and the other measures fall short. "If the content of the energy ... or fiscal reforms is watered down, there's no great hope for economic change," said Tomas Torres, a senior member of the lower house finance committee from the Green Party, coalition allies of the PRI. (Additional reporting by Anahi Rama and Miguel Angel Gutierrez; Editing by Kieran Murray and Lisa Shumaker)