Nov. 5 (Bloomberg) -- Mexican President Felipe Calderon said employment rose for a fifth month in October, signaling the end of the economy’s biggest contraction since the Great Depression.

“Today, we have clear signs of an economic recovery,” Calderon, 47, said at the Bloomberg Economic Forum in Mexico City. “That means the end of the credit contraction and the recession in our country.”

The net number of formal jobs in Latin America’s second- largest economy climbed 80,000 from September, Calderon said. The government expects growth of 3 percent in 2010 following a 10.3 percent contraction in the second quarter, the world’s steepest decline after Russia, as exports and tourism revenue sank and spreading drug violence curbed investment.

The seizure of credit markets a year ago interrupted Mexico’s longest stretch of economic growth in more than a decade. Government dollar bonds posted their biggest decline since January last month as investors speculated the nation’s investment- grade credit rating will be downgraded because of the recession and the government’s difficulty in reining in the budget gap.

The peso, the worst performer among the world’s 16 most- traded currencies in the past year with a drop of 4.5 percent, also has been hurt by “uncertainty” about the nation’s credit rating, central bank Governor Guillermo Ortiz said at the forum.

‘Crucial Moment’

“This is a crucial moment for the government, but also for investors,” Calderon said, adding he has an “ambitious” plan to end structural problems that have held back growth. He reiterated that the economy expanded 2.7 percent in the third quarter from the previous three months.

Mexico’s benchmark Bolsa stock index rose 1 percent to 29,735.34, a third straight day of increases. The peso was little changed at 13.2870 per U.S. dollar compared with 13.2794 yesterday. Yields on Mexico’s 10 percent bond due December 2024 held at 8.3 percent, according to Banco Santander SA.

Finance Minister Agustin Carstens, 51, said in an interview on Bloomberg Television today that he sees a “good chance” Mexico’s economy will grow above 5 percent by 2012. He also said the government doesn’t have much room to cut spending. Tax legislation approved by lawmakers Nov. 1 will provide 136 billion pesos in extra revenue that the government will use for public works projects, he said. Congress has until Nov. 15 to approve the spending portion of the 2010 budget.

Economic Climate

The country faces a “very difficult economic climate” attempting to overcome the effects of the credit crisis, a swine flu outbreak and spreading drug violence, said Christopher Sabatini, the senior policy director at the Council of the Americas in New York.

The global credit crisis lowered demand for Mexican goods that U.S. manufacturers use to make automobiles, car parts, refrigerators, and other goods. Mexican exports, 80 percent of which are sold to the U.S., plummeted 31 percent to $141 billion in the first eight months of this year from a year ago.

“Mexico is not only recovering its exports into the United States but this year, Mexico extended its share of exports into the United States by one percentage point in just a few months,” Calderon said today.

Employment President

Calderon, who campaigned in 2006 as the “president of employment,” saw job losses mount as industrial production, retail sales and consumer confidence fell this year. Even as the number of formal jobs increased, the unemployment rate has climbed and reached a record high 6.41 percent in September.

“In the third quarter, you’ve seen signs of recovery across the board,” Standard & Poor’s analyst Lisa Schineller said in an interview today from New York. “But despite job creation, you had still increasing unemployment.”

A swine-flu outbreak at the end of April slammed the tourism industry, which is the biggest source of foreign currency after oil and remittances, as foreigners canceled trips to Mexico’s beaches and historic sites. The outbreak gutted international tourism spending by 21 percent to $5.75 billion in the first half of 2009.

Violence

Violence related to cartels fighting over drug routes to the U.S. wrests as much as 3 percent from GDP, and has led some companies to reconsider expansion plans, according to Bulltick Capital. The Finance Ministry says the country loses 1 percentage point from its annual growth rate because of the bloodshed.

Soon after taking office Calderon deployed new tactics in the war on drugs, using the army and navy to help police raid farms and arrest dealers. His strategy contrasts with that of former President Vicente Fox, who used an elite federal police unit to target the drug kingpins.

The death toll from drug-related violence this year was 6,250 as of Nov. 1, according to newspaper El Universal. The attorney general’s office has declined to give updated figures in recent months. The office said there were about 6,200 deaths during the whole of 2008, which more than doubled the total from 2007.

“It’s been a tough couple of years for Mexico,” Sabatini said. “The confluence of the swine flu, security and the economic downturn has really been in many ways a perfect storm of bad luck.”

2006 Election

Calderon became president in 2006 after winning the closest election in Mexico’s history. He took 233,831 votes more than his opponent, former Mexico City Mayor Andres Manuel Lopez Obrador, out of 41.6 million cast, the electoral court ruled. Lopez Obrador contested the vote and led nationwide protests against Calderon, forcing him to take the oath of office in a private ceremony.

Calderon sparked hope he would be an effective president by making it a priority to fight the drug cartels and by winning approval for economic legislation. Four months after taking office, Congress passed a bill to rein in spending on pensions for civil servants. The legislation cut the cost of worker pensions by raising the minimum retirement age and contributions to the pension system.

“He came in at a very adverse time in Mexican politics,” Sabatini said. “He won under a cloud of political polarization and doubt and he won by a whisker and he immediately assumed a far bolder leadership than I think most people anticipated.”

Fox

Calderon has fared better than Fox, a former Coca-Cola Co. executive and landowner, in working with Congress, which before the pension bill hadn’t approved a major piece of economic legislation since a tax increase in 1995. Congress rejected Fox’s initiatives aimed at speeding up growth.

“Calderon can cope and solve problems from one day to the next because he’s much more adept of a political animal than Vicente Fox was,” John Bailey, the director of the Mexico Project at Georgetown University’s School of Foreign Service, said in an Oct. 29 interview. “Calderon is really good at sitting down and talking with and dealing with politicians.”

Calderon’s journey to becoming head of state began at home in Morelia, Michoacan, where he was the youngest of five brothers. His father, Luis Calderon Vega, founded the National Action Party, or PAN, which counts the country’s business leaders as its core constituency.

Harvard

A father of three, Calderon has a master’s degree in public administration from Harvard University, along with economics and law degrees from institutes in Mexico. Before entering politics, Calderon worked in civil and labor law at the firm Goodrich, Riquelme and Asociados and at Multibanco Comermex.

He first served in the national legislature in 1991, where he backed a free trade agreement with the U.S. and Canada. In 2003, he was named energy minister for Fox.

Pension Reform

Since the pension bill, Congress has been less willing to accept Calderon’s proposals. Lawmakers watered down legislation to overhaul the tax system in 2007 and the energy industry in 2008.

Calderon’s PAN party lost July’s midterm elections to the Institutional Revolutionary Party, known as the PRI. The defeat, which allowed the PRI to supplant the PAN as the largest party in the lower house of congress, shows Calderon’s political power may be waning and makes it more difficult for him to win approval for legislation, S&P’s Schineller said in a Sept. 22 interview.

The PRI is also a favorite to win the 2012 presidential election. State of Mexico Governor Enrique Pena Nieto, a PRI member, had 49 percent support while his nearest opponent, the PAN’s Santiago Creel, had 18 percent, according to a nationwide survey taken by Mexico City-based pollster Buendia & Laredo. The poll, taken Sept. 23-29, has a margin of error of plus or minus 3.39 percentage points.

There is “a growing urgency about addressing what needs to be done in order to make Mexico not only more competitive, safer and secure, but also assume a larger international role as well,” Tony Garza, a former U.S. ambassador to Mexico who now advises U.S. companies as counsel for White & Case LLP in Mexico City, said in an interview.

Oil Output

Calderon is seeking to widen the tax base after the fastest drop in crude output since 1942 last year led to Mexico’s first budget gap in four years. Output from state- owned oil company Petroleos Mexicanos funds 38 percent of the budget. S&P and Fitch Ratings say they may downgrade Mexico should the government fail to offset the drop in oil production and contain the deficit.

“We are convinced that one of the most important and powerful assets we have is responsible macroeconomic management, to preserve solid economic fundamentals for public finances,” Calderon said today.

Non-oil revenue fell 13 percent in the first nine months of 2009 compared with the same period last year, according to the Finance Ministry.

Deficit

Mexico’s deficit including Pemex debt is forecast to grow to 2.75 percent of gross domestic product next year from 2.1 percent this year, according to figures based on government forecasts from Gabriel Casillas, chief economist at JPMorgan Chase & Co. in Mexico City. Total spending will be 3.5 trillion pesos, including Pemex debt and the government’s debt servicing, according to Casillas. The budget calls for 3.18 trillion pesos in total revenue.

Congress approved on Nov. 1 the income portion of the 2010 budget. The changes included a plan to increase the sales tax to 16 percent from 15 percent instead of adopting the administration’s 2 percent consumption tax proposal, which would have generated more than double the revenue, according to the government.

Carstens said that the government’s decision to liquidate a state power company and lawmakers’ approval off tax increases should help the country maintain its credit rating.

“What has passed in the lower house and in the Senate is a weaker version of what the government proposed initially,” Schineller said today. “There are positives and negatives in what was passed. But again we don’t have the full picture in terms of what we need, on our side. We want to see the final configuration of the budget.”

New Proposals

Calderon plans to send new proposals to lawmakers once the spending portion of the budget is approved by Nov. 15. He said he will seek legislation that would give the antitrust agency more power to fine monopolies and would change rules in a bid to boost competition in the energy, banking and telecommunications industries.

“My government has a goal, and that is to transform our country,” Calderon said. “We want to make Mexico a developed country, a fair country with a competitive economy, one that is able to generate jobs.”

Calderon has had a difficult time reassuring investors in Mexico’s outlook as the peso, bonds and stocks underperformed their peers throughout his presidency.

Currency’s Drop

Mexico’s peso has dropped 21 percent since Calderon took office in December 2006, compared with a 21 percent jump in the Brazilian real and 15 percent rise in the Colombian peso. Mexico’s Bolsa index has advanced 18 percent since December 2006 while the MSCI Latin America Index has jumped 39 percent in the same period.

Credit-default swaps, contracts investors use to protect against non-payment of debt, show Mexico trading as high- yield, or junk -- placing it three levels below the nation’s BBB+ grade from S&P and Fitch -- on concern the tax increases will fail to stave off downgrades.

Annual economic growth in Mexico averaged 2.4 percent over the past eight years, according to the International Monetary Fund. Meanwhile, Brazil, whose economy is growing at the slowest rate among the largest emerging nations including Russia, India and China, posted average growth of 3.7 percent.

For billionaire Carlos Slim’sAmerica Movil SAB, which services more than 70 percent of Mexican wireless subscribers, a recovery will fuel an increase in clients, Chief Financial Officer Carlos Garcia Moreno said in an interview yesterday.

“What you will see in Brazil this year and next year is that subscriber growth will be faster in Brazil than in the rest of the region,” Garcia Moreno said. “The next big surge of growth will come from Mexico.”

To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9@bloomberg.net

Last Updated: November 5, 2009 17:24 EST