FINANCE; Pg. 11

Adriana Arai and Patrick Harrington - Bloomberg News

MEXICO CITY

A week after taking office in December, President Felipe Calderon called three cabinet members and several other advisers to Los Pinos, his official residence, for an urgent meeting.

Under his predecessor, Vicente Fox, a plan to rein in out-of-control spending on pensions for civil servants languished for five years. Calderon was coming off a neck-and-neck election in which his main rival, Andres Manuel Lopez Obrador, had sought to overturn the result by staging mass street protests.

Looking for a quick victory to build confidence, Calderon told his aides he wanted to pass a pension bill within four months, according to two officials who participated in the meeting.

What followed were more than a dozen strategy sessions personally conducted by Calderon, who led the National Action Party, or PAN, to its second consecutive election victory in July 2006. To assess progress, Calderon, who is a lawyer and was a member of Congress, relied on 39 spreadsheets that specified such details as when aides should visit a particular union official or speak publicly about the plan, said Miguel Ángel Yunes, a former legislator who participated in all of the meetings.

Calderon also personally lobbied for the bill - a sharp break from Fox, who styled himself as above the political fray, said Yunes, who heads the Institute of Social Security and Services for State Workers, the agency that is the target of the pension law changes.

''He took charge,'' Yunes said of Calderon.

The strategy worked. On March 28, the Senate voted to cut pension spending by raising the minimum retirement age for civil servants to an average of 59 by 2028 from 49.5 in 2010. The bill also increases workers' contribution to the pension system to 6.125 percent of their salaries by 2012 from 3.5 percent in 2007.

It was the first major piece of economic legislation passed in Mexico since a tax increase in 1995 under Fox, who like Calderon led a minority government. Congress rejected Fox initiatives intended to speed growth and create jobs. Investors are hoping Calderon's pension victory signals that his hands-on, methodical approach will bring change.

Calderon, 44, whose father, Luis Calderon, helped found PAN in 1939, is trying to maintain momentum. Last week, he sent a bill to Congress intended to toughen tax collection and help wean the country off oil revenue, which finances more than a third of federal spending. The proposal aims to increase revenue by about 300 billion pesos, or nearly $28 billion, by 2012, mainly by collecting more taxes from corporations.

Mexico has Latin America's second-lowest tax collection rate, after Guatemala. It must raise revenue from sources other than oil and partner with other companies to drill more crude, Calderon said, because Cantarell, the main field of Petroleos Mexicanos, or Pemex, the state monopoly, is producing less and less oil.

Calderon, a former energy minister under Fox, said crude oil from the Gulf of Mexico buried in waters as deep as 1,500 meters, or 5,000 feet, represented the future of the oil industry. Pemex does not have the technology to drill so deep, and Calderon is seeking the help of companies such as Petrobras, the former Brazilian state oil monopoly, to acquire it.

Mexico's Constitution and laws say the government owns all oil resources. According to Calderon's development plan, issued on May 31, he will offer legislation allowing private companies to profit from certain oil activities that were not specified.

''If he plays his cards right and treads carefully, there certainly is a basis for moving some of the reforms forward,'' said Phillip Blackwood, who manages emerging-market debt at Jyske Invest in Silkeborg, Denmark.

Calderon, who has a master's degree in public administration from the John F. Kennedy School of Government at Harvard, presides over an economy that cannot easily be categorized.

By many measures, Mexico, a country of 105 million people, has never been more prosperous. Gross domestic product grew 4.8 percent in 2006, while record oil prices helped the government create its first budget surplus in 10 years. Inflation dropped to about 4 percent in 2006 from 9 percent at the beginning of Fox's administration in 2000.
The combination of stability, accelerating expansion and low inflation led to a 387 percent rise in Mexico's Bolsa stock index during the five years ended on June 22. Yields on a basket of dollar-denominated Mexican bonds are just 85-hundredths of a percentage point above comparable U.S. debt, near the lowest spread on record, according to JPMorgan Chase.

Yet Calderon began his administration with a warning that the good news might not last unless Mexico became more competitive. Growth fell to 2.6 percent in the first quarter of this year because of slowing U.S. demand for Mexican exports like auto parts. China had already displaced Mexico in 2003 as the biggest U.S. trading partner after Canada. Forty-seven percent of Mexicans live in poverty, according to a 2004 government study.

Passage of a Calderon tax bill will help shore up support for other initiatives, said John Welch, a senior Latin America economist at Lehman Brothers Holdings in New York. ''Momentum is very important,'' Welch said.

The opposition is galvanizing its forces after the pension defeat. ''We were completely unprepared,'' said Manuel Camacho Solis, a member of the Ample Progressive Front, a coalition led by the Party of the Democratic Revolution, or PRD, one of the two main opposition parties. ''Now we're preparing ourselves so that this doesn't happen again.''

The PRD has vowed to block any tax increase that it says hurts the poor and to prevent the sale of Mexico's oil assets.

Calderon won the pension vote by winning the backing of the other main opposition party, the Institutional Revolutionary Party, or PRI, which governed Mexico for decades. Coming off its worst defeat in the 2006 presidential election, PRI is betting it can improve its public image by backing some of Calderon's economic initiatives, said Roberto Madrazo, who was president of PRI during most of Fox's administration and its 2006 presidential candidate.
 
''This is possible because President Calderon is willing to achieve agreements, which we didn't see with President Fox,'' Madrazo said.

The alliance is fragile. In February, less than a month before PRI helped him pass the pension bill, it embarrassed Calderon by rejecting his nominee for the central bank's five-member board.

Calderon cannot count on any votes from PRD, so if PRI resumes a strategy of opposing every government initiative, as it did under Fox, little will be accomplished. ''If they go that way, then even the personal lobbying by Calderon won't make a difference,'' said Federico Estevez, a professor of political science at the Autonomous Institute of Technology of Mexico here.

The president faces an uphill battle on his tax bill in any event. In a bill sent to Congress on Wednesday, Calderon proposed a minimum corporate tax of 19 percent of net revenue by 2009. Though companies are now required to pay 28 percent, many reduce the amount, sometimes to zero, through deductions, Finance Ministry officials say.
Armando Paredes, head of Mexico's Business Coordinating Council, said his group was withholding judgment on the tax change. ''We'll have to see how it affects different sectors,'' he said.
 
The Senate president, Manlio Fabio Beltrones, a PRI leader, said any tax bill would be ''incomplete'' if it did not include a reduction in the heavy taxes paid by Pemex, which amounted to 38 percent of federal revenue in 2006. ''This reform is much more complicated than the new pension-reform law,'' said Jorge Estefan Chidiac, a PRI member who heads the Finance Committee in the lower house of Congress.