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Mexico’s Pena Nieto can count many victories, but energy battle looms

President Enrique Pena Nieto has chalked up major victories in his first year in office, but the next few weeks will mark a crucial period that may define his presidency and the destiny of Mexico for decades to come.

Since he took office a year ago, Pena Nieto has made little, if any, headway in cutting back the runaway drug-related violence that’s racked Mexico for much of the past decade. But he’s shed his once-all-powerful party’s authoritarian image and ushered through a raft of major proposals to reshape society in a headlong push to modernize Mexico.

As Pena Nieto enters his second year in office Sunday, political observers say Mexico has never seen a president attempt to change government in such significant ways so fast. Pena Nieto’s government has seized control of the schools from the once-powerful teachers’ union, set in motion the dissolution of monopolies, revised tax and labor codes, and moved in principle to relax his party’s grip on the political system.

Still awaiting action in the country’s Congress by the Dec. 15 end of the session, however, is a proposal to open the energy sector to foreign investment, a change that jangles the core of nationalist identity dating to Mexico’s modern formation and has already sparked a wave of protests.

“People speak of the energy reform as the mother of all reforms,” said Julio Madrazo, a political analyst and magazine columnist. “It is the reform that will be Pena Nieto’s legacy.”

“The overall impact of the energy reform could literally transform the country and the economy,” said Benito Berber, senior Latin America strategist based in New York for Nomura Securities.

In a research note, Berber said the passage of the energy proposals would have an immediate effect on manufacturing, electrical generation, the petrochemical sector and other sectors of Latin America’s second largest economy.

Attracting foreign investment to the ailing energy sector, a pillar of the Mexican economy, is considered crucial to ramping up sluggish growth of about 1 percent this year. Growth may hit only 2.5 percent next year. Experts blame the slowdown on uncertainty over the reforms and on slow government spending.

Pena Nieto, in a nod to those who fretted last year over the return to power of his Institutional Revolutionary Party, or PRI by its Spanish initials, has touted in recent days the now-crumbling political consensus that allowed him to move fast.

“Mexico today has a climate of greater democracy, of greater political participation, but also for the benefit of Mexico, of greater agreement and more consensus,” Pena Nieto told the visiting Israeli president Wednesday.

Even the most ardent critics of the PRI, which ruled without interruption for seven decades in the last century before sitting out of power for 12 years until last December, acknowledge a new era for the party. Among them is Peruvian Nobel laureate novelist Mario Vargas Llosa, who 23 years ago labeled the PRI’s lock on power in Mexico “the perfect dictatorship,” an epithet that stuck.

Vargas Llosa said this week that he’d revised his views.

“I wouldn’t have voted for the PRI, but the PRI that has taken power, it has to be recognized, is not the same PRI as before. This PRI operates within democratic rules,” Vargas Llosa told the newspaper Reforma this week. “It is proposing reforms that strike me as quite sensible.”

A day after taking office last year, Pena Nieto announced an alliance with the two main opposition parties, the National Action Party, or PAN, the center-right group that had held the presidency for the previous 12 years, and the Party for the Democratic Revolution, or PRD, a leftist group. The alliance, known as the Pact for Mexico, committed the three parties to set aside partisan interests for national unity and to support 95 reform proposals.

The alliance held for a year, but it broke apart this week when the PRD announced that it was bolting because the government hadn’t listened to its view that the state oil giant, Petroleos Mexicanos, should be given greater autonomy rather than bringing in foreign energy investors.

While the PRI could pass the energy reform with the support of just the PAN, the apparent dissolution of the Pact for Mexico might portend a period of turmoil.

“If the energy reforms go as deep as has been suggested, the left and the PRD will be united against them,” said Gerardo Esquivel, a Harvard-trained economist at the Colegio de Mexico, a small university of the social sciences.

PRD supporters are likely to intensify the marches and rallies by teachers and other groups affected by previous reforms, which have snarled streets in the capital.

Esquivel said further social unrest might frighten potential investors even if the energy sector were opened up, especially if the political left proceeded with a plan to demand a national referendum in 2015 on the issue.

“You might end up with all the costs of the reform and none of the benefits,” he said. “Investors will be reluctant to come into Mexico if they think it will one day be overturned.”

How Pena Nieto, who has five years remaining in his term, might deal with growing social unrest is unknown. He relies on a tight clique of Cabinet members and aides and in the presidential residence, known as Los Pinos.

“Pena Nieto has had to centralize power in Los Pinos, and in the hands of very few advisers,” said Madrazo, the analyst.

The president also may face new challenges on the security front, which has been a major shortcoming of his government. Crime has fallen off newspaper front pages, but violence continues to afflict many corners of Mexico.

“While there has been a slight reduction in the homicide rate, violence remains rampant in parts of the country, and kidnapping and extortion are at record-high levels,” said a statement this week from two analysts at the Washington Office on Latin America, a U.S.-based left-leaning research and advocacy group. The analysts, Maureen Meyer and Clay Boggs, called Pena Nieto’s pledges to increase respect for human rights “little more than lip service.”

Pena Nieto has kept much of former President Felipe Calderon’s security strategy intact, including the deployment of the army and navy to fight crime gangs.

He’s also radically scaled back aspects of his campaign platform on security, most notably a plan to create a 50,000-strong National Gendarmerie as a backbone of the fight against organized crime.

The latest revision calls for the gendarmerie to be a 5,000-member unit under the federal police. It won’t be operational until mid-2014.