FACTBOX-Risks to watch in Latin America in 2010

July 1 (Reuters) - Brazil's election race is key in 2010 as the regional powerhouse chooses a successor to President Luiz Inacio Lula da Silva, though the winner is unlikely to depart from his market-friendly policies.

Mexico's drug war continues to worry its neighbors and investors alike while Colombia's new president-elect is vowing to stick with with President Alvaro Uribe's security and pro-business policies. In Peru, mining conflicts could become a headache for President Alan Garcia.

The region's third-largest economy Argentina is still shaking off the fallout from its massive debt default and OPEC member Venezuela is mired in recession with legislative elections scheduled for September.

BRAZIL'S ELECTION RACE

President Luiz Inacio Lula da Silva's former chief of staff, Dilma Rousseff, is the ruling Workers' Party candidate to succeed him in October's election and most analysts make her the favorite because she can count on support from popular Lula and will be helped by the rebounding economy. She now leads her main rival, Jose Serra, from the centrist opposition PSDB party. Serra, a former Sao Paulo state governor, has been seen as slow to get his campaign going and switched his pick for running mate for the election after a bitter dispute among his political allies. [ID:nN30265196]

Neither of the main contenders is expected to break with the mostly market-friendly policies in place for the past decade: a free-floating currency, inflation control, and fiscal discipline. Some investors prefer Serra for his party's centrist stance and his managerial experience. Both agree on the need to overhaul Brazil's complicated tax system to encourage investment but have not provided many details.

What to watch:

-- More of Serra's concrete policy proposals

-- How candidates will approach structural reforms.

MEXICO'S DRUG WAR, ECONOMIC RECOVERY

President Felipe Calderon's campaign against drug traffickers has seen successes but turf wars have spun out of control and more than 25,000 people have been killed in drug-related violence since he came to power in late 2006.

Suspected hitmen killed a candidate in Tamaulipas state in June, in the worst political intimidation so far by smuggling gangs. [ID:nN28512369]. The attack hit Mexico's peso and analysts warn an escalation in political killings could trigger a sell-off. Some foreign companies are already reconsidering investment plans in Mexico [ID:nN16238458]

Renewed exports to the United States are helping Mexico's recovery, but consumption is still tepid. Sluggish economic reforms and a declining oil output are also risks to Mexico's debt ratings. [ID:nN24121258] Investors want Mexico to pass more reforms to boost its low tax take, relax labor laws and allow more foreign investment in the state-run oil sector.

What to watch:

-- More political killings, company reactions.

-- A shift in the central bank's growth outlook.

-- Falling oil output data, new offshore finds.

COLOMBIA UNDER SANTOS

Former defense minister Juan Manuel Santos won a June run-off election by a landslide to succeed President Alvaro Uribe and will take office in August with a strong mandate and a solid position in the Congress. [ID:nN25168604] The new government is promising to keep up Uribe's tough line with the FARC guerrillas and his pro-business approach. But Santos faces serious challenges, including how to manage a fiscal deficit, one of the region's highest unemployment rates and an oil and mining investment boom which could drive up the peso. Those are among the barriers holding back Colombia from an investment grade credit rating.

Violence from the country's long war is down sharply, but FARC guerrillas are still a force, and new emerging militias are an increasing threat. As the country's economy recovers, Santos will also have to manage tricky relations with Andean neighbors Venezuela and Ecuador. [ID:nN28641218] A trade dispute with Venezuela is hampering an economic rebound.

What to watch:

- Fiscal reforms from the new government

- More strikes against FARC rebels

- Diplomatic blow-ups with Ecuador, Venezuela

PERU'S SOCIAL CONFLICT

Workers in Peru's mining industry have walked off the job at some mines this year and have threatened to hold a nationwide strike to pressure President Alan Garcia to sign bills to improve benefits. They have also blamed companies for underreporting profits to cut profit-sharing payments owed to workers. [ID:nN31214134] Social conflicts over natural resources are likely to trouble Garcia as a third of Peruvians live in poverty and many have been left out of a commodities boom that fueled the past decade of growth. [ID:nN23113586]. Peru's ombudsman's office says more than 100 communities have mobilized to stop big mining or petroleum projects, and has blamed the government for failing to effectively mediate conflicts. [ID:nN19447160]. Hundreds of millions of dollars in capital spending have been delayed.

Garcia's push to lure foreign investors to build new mines in Peru has angered environmental and indigenous groups, which are becoming increasingly assertive. Deadly clashes broke out several times last year and there is little evidence that tensions will ease as the economy regains steam. [ID:nN03112316] [ID:nN07121122]

What to watch for:

-- Nationwide strikes halting mineral exports.

-- Violence forcing Garcia to lose support in Congress.

-- Tax fraud probes hurting mining sector credibility.

ARGENTINA'S DEBT MANAGEMENT

Argentina has begun clearing damage from its massive 2002 default and to lure investors back as President Cristina Fernandez pushes for economic growth before next year's presidential vote. She faces heavy debt obligations but will likely keep spending before the vote even as inflation runs at more than 20 percent. [ID:nN14105436]. She won a battle to use central bank reserves to pay debt and the government has finished a restructuring on a large part of $18 billion in defaulted debt in an attempt to regain access to international markets. But Argentina's plan to issue a new global bond has struggled due to world market volatility. Lawsuits from "holdout" creditors after the default have also held Argentina back from capital markets. [ID:nN13268404]

Fernandez lost control of both houses of Congress in last year's mid-term election. But the opposition has failed so far to form a united front against the government. Fernandez's approval ratings hovered around 20 percent after last year's electoral defeat, but an economic recovery has lifted her popularity by as much as 10 percentage points in recent months, pollsters say. [ID:nN04144810] Signs of a sustained rebound in popularity would boost former President Nestor Kirchner's chances of returning to the presidency in the 2011 election.

What to watch:

-- Movement on new debt sale.

-- Court's approach to lawsuits by bondholders.

-- Any sudden price surges, strikes over wages.

-- A recovery in presidential popularity.

VENEZUELA'S RECESSION

Venezuela's oil-reliant economy is likely to stay in recession for a second year while inflation remains one of the highest in the world. The socialist government of President Hugo Chavez has taken over currency trading in an attempt to further control the bolivar and inflationary pressures will likely continue. [ID:nN18157031] Chavez has lashed out at the private sector which he blames for speculation, and has already nationalized large parts of the economy from oil to telecommunications. [ID:nN26225239]

But the country's fiscal fortunes depend mainly on oil prices and output from the OPEC nation. Production is already under pressure from an aging infrastructure. A bidding round brought billions in investment but new output will take time to come online. Chavez faces legislative elections in September where the opposition is expected to dent his majority after his popularity was hurt by the recession and by electricity and water rationing. Still, he remains the country's most popular leader and could turn up the rhetoric against opponents in the lead up to the election. Another factor will be Venezuela's volatile relations with neighboring Colombia, where Chavez has already clashed with president-elect Juan Manuel Santos. Chavez has moved to ease constant tensions with Washington though, sending his oil minister to a U.S. summit in April. That could change as elections approach. [ID:nN15237215]

What to watch:

-- A sharp drop in oil prices, dips in production

-- More nationalizations in sectors such as food, mining

-- Increasing rhetoric before legislative elections

(Reporting by Kevin Gray, Patrick Rucker, Stuart Grudgings, Frank Jack Daniel, Terry Wade and Patrick Markey; Editing by Patrick Markey and Frances Kerry)