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Taming Teachers’ Union Bolsters Pena Nieto Swaps: Mexico Credit

President Enrique Pena Nieto’s bid to reform Mexico’s education system is the latest sign he has the political clout to overhaul oil and tax policies, helping send the country’s bond risk to a three-month low.

The cost of protecting Mexican debt against default for five years has fallen 50 basis points, or 0.50 percentage point, since Pena Nieto’s election on July 1 to 89.6 basis points annually. It is now at its lowest cost since Sept. 18. Rated BBB by Standard & Poor’s, Mexico is cheaper to insure against non-payment than higher-rated issuers such as Ireland and Slovakia.

Signs that Pena Nieto will wrest power from the teachers’ union and secure the two-thirds congressional majority needed to pass the education bill are adding to speculation he’ll succeed in boosting tax collection and private investment in the state-owned energy industry. Since taking office Dec. 1, Pena Nieto has also presented the first balanced budget since 2009.

The education bill “reflects that there’s political will and a real capacity by Pena Nieto to negotiate with other parties to carry out reforms,” Alejandro Padilla, a deputy director for fixed income at Grupo Financiero Banorte SAB, said in a telephone interview from Mexico City. “Conditions are improving step by step to give us a much more positive market view going forward.”

Education Minister Emilio Chuayffet said yesterday that the constitutional amendment, presented Dec. 10 by Pena Nieto and praised by leaders of the main opposition parties, responds to a “justified public outcry for better education, ending practices that have diminished it.” An official at the ministry said Chuayffet wasn’t available to comment further.

Education Reform

The teachers’ union said Dec. 11 it agreed with many of the proposals in Pena Nieto’s bill. Juan Diaz de la Torre, the union’s executive secretary-general, didn’t respond to a request seeking further comment.

Pena Nieto’s proposal would create an independent institute to evaluate schools and foster competition for jobs and promotions based on performance. Mexico’s education system ranks last out of 34 countries for enrollment rates of high school-age students, behind Chile, Argentina and Brazil, according to a 2011 study by the Paris-based Organization for Economic Cooperation and Development.

Mexico has also spent more of its public budget on education than all 33 countries in a separate OECD tally.

Early Successes

The legislation is the latest in a string of early successes for Pena Nieto that includes the Dec. 13 passage of the revenue portion of the balanced budget and a deal among the three parties to present tax and oil industry overhauls next year, measures aimed at bolstering economic growth. Pena Nieto’s Institutional Revolutionary Party and the party of predecessor Felipe Calderon also worked together last month to pass a labor-law reform that eases rules for hiring and firing workers.

“Today, there’s more chance reforms will pass than before,” Alejandro Martinez, a fixed-income strategist at HSBC Holdings Plc, said in a telephone interview from Mexico City. “The revenue budget passed very quickly and it appears the education reform will have a similar fate. This hasn’t been seen in Mexico in a long time.”

Martinez predicts Mexico’s credit-default swaps will drop 9 basis points to a record low in the second quarter of next year.

The cost of protecting Mexican debt fell 4.4 basis points at 12:52 p.m. in Mexico City, according to data compiled by Bloomberg. The credit-default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.

Enrique Alvarez, the head of Latin America fixed-income research at IdeaGlobal, says reforming the country’s oil industry will prove to be difficult because of long-standing opposition from within Pena Nieto’s own party.

‘Honeymoon Period’

“It’s a honeymoon period,” Alvarez said in a telephone interview from New York. “Where the real challenges remain are more than anything in the energy sector and there it’s going to be much more difficult to see real progress.”

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries decreased seven basis points to 149 basis points, according to JPMorgan Chase & Co.

Elba Esther Gordillo has led the 1.2-million strong teachers’ union, known as the National Education Workers Union, for more than two decades. She held top positions in Pena Nieto’s PRI before relations soured in 2003, when she backed tax increases presented by then-President Vicente Fox.

She was removed as party congressional leader in the lower house and replaced by Chuayffet, who this month was tapped by Pena Nieto as education minister and is a top proponent of the school system overhaul.

‘Confront Directly’

Pena Nieto is going further than some investors had expected in achieving his pledges, including taking on the teachers’ union, according to Roberto Sanchez Dahl, who helps manage $1.5 billion in emerging-market debt as vice president of Federated Investment Management Co.

“A year ago I wouldn’t have imagined that the PRI” would propose these reforms, Sanchez Dahl said in a telephone interview from Pittsburgh. “No one was willing to confront directly or indirectly the head of the union and even though it’s one of the core support bases for the PRI he’s somehow doing it.”

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