DOLLAR & SENSE

Elections in Mexico, paving the way for new institutions?
By Francisco Suárez, Head of Equity Research at Actinver
• Photos by Jesús de Avila • July 2009

This is the chance for a very young democracy (basically slightly over ten years old) and the citizens that could nurture it to begin work on the foundations of the new institutions that Mexico needs. To not do so could ultimately leave the country shy of its potential rates of growth, dependent solely on US recovery, and incapable of competing effectively for scarce capital. Although the current composition will remain intact until 2012, 500 members of the Lower House will be replaced in 2009. Yes local elections could prove very important, but the main issue at stake is the country’s capabilities to actually transform itself through an active participation.

The major challenges in the 2009 elections: lack of voter participation and higher-than-average null votes, reflective of the overall sentiment towards politicians. Mid-term elections are always a challenge since participation is historically low. Also, some social movements promoting null votes as a protest to all political parties are gaining ground among voters.

Is an election rally (like the impressive rally that took place in India) a real possibility? Not likely. The only way in which the market could rally is if the leftists parties Partido de la Revolción Democrática (PRD) and Partido el Trabajo (PT) and Covergencia reduces their aggregate share (which is expected to happen), and if the PAN obtains control over the lower house and wins most of the six disputed governorships (which is very unlikely), as these conditions are the ‘easy way’ for structural reforms. The Partido Revolucionario Institucional (PRI), an uncertain ally of the PAN, is expected to be the real winner of the process as it will be able to capitalize on the PRD’s internal divisions, and is relatively more united compared to the last election that took place in 2006. Instead of an election rally, a credit rating downgrade could follow, but we expect that Mexico’s credit ratings will remain well in the Investment Grade category (it would require a downgrade of three notches, something we completely rule-out), and the possible negative effects are already, in our view, discounted in the markets.

So, as for investments in Mexico, the basic scenario is to trade on the US recovery. Valuations are not expensive although the bargains are running out. As for debt, we like well-reckoned names with good credit rating, many companies are expected to have credit ratings above the sovereign if a downgrade to Mexico occurs. Already, some names are above the credit rating of Mexico. We bet for spread compression on those names and we don’t think we should invest much on poor credit quality. Yields are more attractive and compensate for the mentioned risks. Moreover, if Mexico is about to start building a society following similar moves in Brazil, and India, well, that creates a great opportunity. After all, the Mexican peso still trades at 13.20-13.50 per US Dollar.

Basic statistics for the July 5, 2009 elections

• Mexicans allowed to vote (18 years or older) who have their ID’s ready for the upcoming elections: 77.482 million.
• Women eligible to vote: 52%
• First time voters: 3%
• Individuals who have voted two or three times in their lives: 26%
• Voters in their 30’s: 25%
• Voters in their 40’s: 19%
• Voters in their 50’s: 12%
• Voters in their 60’s or older: 15%
• 59% of Mexicans voted in the disputed 2006 Federal elections
• In the 2003 mid-term elections only 42% of Mexicans voted.
• Regions where PAN voters have more weight: In the North, Northwest and part of Central Mexico
• Regions where PRI voters have more weight: the South, the East and Northeast.
• Regions where PRD voters have more weight: Mexico City (DF), parts of the metro area of Mexico City, and the South.
• In addition, a total of 552 municipalities, 434 members of local congresses, and six governorships will be also contested  Email to a friend

Current composition of the Mexican Lower House

Current composition of the Mexican Senate

Francisco Suárez Savin
E-mail: fsuarez@actinver.com.mx

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• Francisco Suarez is the Head of Equity Research at Actinver. Before joining Actinver in September 2008, he rated financial institutions at Standard & Poor’s for four years and prior to that was an equity analyst at Banorte for eight years.

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