The good, the bad and the ugly: corporate profits, Pemex and politics.

As we have noted in this column during the past months, "the bad" would eventually catch up with "the good" within the various spheres of Mexican capital markets. The bane of the markets has been the inaction of elected government in reforming the rule of law as it applies to commerce and civil rights.

It is clear that emerging market investors have chosen to ignore "the bad and the ugly" during these past euphoric months of fantastic market performance. Though to accord investors with some measure of respect, it has been excusable to ignore the sad corporate condition of Pemex ... especially in light of astronomically high oil prices, which have greatly benefited the current account these past months.

However, with recent significant management changes within the company's top levels--and a general reassessment by both investors and from within Pemex itself--an oft-repeated revelation that Mexico's great economic legacy is mismanaged and severely indebted (the most heavily indebted major petroleum operation in the world with US$45 billion in debt) is once again hitting the front pages.

The "ugly"--simmering ever since Fox's election euphoria faded, it has recently exploded with the threatened prosecution of Mexico City Mayor Andres Manuel Lopez Obrador--is the state of Mexican politics and the irresponsible effect this has in contributing to the vacuum of much-needed political reform in Mexico.

Corporate profits, in conjunction with sound government economic management, have represented "the good" within Mexican capital markets.

Looking ahead, market sources point toward another strong operating performance in first quarter 2005. Investors, clearly seduced by a healthy corporate environment, have also been reassured by positive macro growth signals such as consumer data, which provided strong impetus for historic highs on the Bolsa in 2004 and into 2005.

The bond market, perhaps the most effective gauge of investors' appetite for Mexican assets, has recently suffered an upward adjustment of interest rates. Until now, a notable explanation for this selling pressure would have been strong currency fluctuations and ensuing inflation fears. But now, it seems, a very different seller is in the hunt for sizable bids. These newcomers have adjusted their concerns toward Mexico's embarrassing political arena.

"What took you long?" one may ask of sophisticated institutional investors. The signposts have been clearly marked for some time.

Learn From The Past

Political commentators, reacting to the persecution (oops, I mean prosecution) of Lopez Obrador, have made great mention of Article 38 of the Mexican Constitution. "An instrument of the PRI," which, according to many, has been used to mollify the mayor's presidential aspirations. Though this example may be a bit obscure for many international investors' radar systems, it does represent high school-level knowledge of Mexico's delicate political structure.

In balance, though, there is much to be appreciated in the "Mexican model." Investors have generally been correct in highlighting Mexico as an investment grade-like vehicle. Growth prospects for 2005 remain strong. And recently, there have been upward revisions of Mexico's expected 2005 economic performance by financial institutions, most notably the IMF.

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My advice to market players is to go back to the history books. A simple exercise comparing past sexenio market valuations with present levels would certainly cause some investors to sweat.

While Mexico's economy is positively incomparable to its past, its current political crisis is clearly comparable to past election-cycle markets, suggesting that--as noted in this column in the past--a lack of significant legal and political reform will certainly impose a ceiling on market valuations. INDEX 31/03/'05 NOMINAL REAL (1)

Index Monthly Accrued Monthly STOCK MARKET IPC 12,676.90 -8.1% -1.9% -8.5% INMEX 738.71 -8.1% -1.4% -8.5% MUTUAL FUNDS Equity 3,466.82 -5.7% -1.5% -6.1% Debt for Individuals 4,342.61 0.4% 1.2% -0.1% Debt for Corporations 1,723.98 0.6% 1.7% 0.1% ECONOMIC ACTIVITY Industrial 4,713.00 -6.7% -5.4% -7.1% Retail 16,272.26 -6.3% 0.2% -6.7% Non-Financial Services 11,440.09 -6.3% 0.1% -6.7% Insurance and Banks 8,325.54 4.4% 22.4% 4.0% Broker Firms 466.98 0.0% 0.0% -0.4% Financial Groups 570.43 -2.5% 5.0% -2.9% SECTOR Mining 16,992.51 -7.4% 1.8% -7.8% Industrials 4,028.74 -8.2% -3.1% -8.5% Construction 21,432.43 -7.9% 0.4% -8.3% Retail 20,279.94 -4.2% 1.2% -4.6% Communications & Transportation 53,737.47 -9.9% -4.6% -10.3% Services 1,894.94 -6.1% 2.0% -6.5% Holding Companies 4,200.55 -5.3% -4.5% -5.7% INDEX REAL (1) DOLLARS (2)

Accrued Monthly Accrued STOCK MARKET IPC -2.6% -9.7% -2.1% INMEX -2.2% -9.7% -1.7% MUTUAL FUNDS Equity -2.2% -7.3% -1.7% Debt for Individuals 0.4% -1.4% 0.9% Debt for Corporations 0.9% -1.2% 1.4% ECONOMIC ACTIVITY Industrial -6.1% -8.3% -5.6% Retail 0.6% -7.9% -0.1% Non-Financial Services 0.6% -7.9% -0.1% Insurance and Banks 21.5% 2.6% 22.1% Broker Firms -0.8% -1.8% -0.3% Financial Groups 4.2% -4.2% 4.7% SECTOR Mining 1.1% -9.0% 1.6% Industrials -3.9% -9.8% -3.4% Construction -0.4% -9.6% 0.1% Retail 0.4% -5.9% 0.9% Communications & Transportation -5.3% -11.5% -4.9% Services 1.2% -7.8% 1.7% Holding Companies -5.3% -7.0% -4.8%

Ramon Ruiz (rruiz@vintagepartners.com) is a managing partner of Vintage Partners.