NEWS ANALYSIS : Mexico Shows Foreign Investors a Smooth Shift of Power : Trade: Some U.S. investors say the new administration may even push for the sale of national energy and rail companies.

While the cameras focused on the familiar faces of Cuban President Fidel Castro and U.S. Vice President Al Gore at Mexico’s presidential inauguration this week, a lower-profile group of foreign dignitaries watched the event from miles away on closed circuit television.

About 200 U.S. investors--bankers, portfolio managers and heads of major corporations--were invited to the inauguration as guests of a government eager to assure them that their investments are secure and that the transition between an administration they have come to trust and President Ernesto Zedillo’s new team will be smooth.

And despite some grumbling about their remote vantage point, investors here for the ceremony--as well as those staying behind in the United States--said they are favorably impressed by what they see of Zedillo’s economic policy.

Indeed, well-connected investors expect him to deepen the free-market reforms of his predecessor, privatizing the railroads, electricity distribution and even part or all of Pemex, the national oil company, an almost-sacred symbol of nationalism.

Zedillo hasn’t addressed such questions publicly, and it remains to be seen how easily such politically powerful entities as Pemex, the National Railroad and the Federal Electric Commissions could be turned over to the private sector. All would require constitutional amendments and approval by two-thirds of the Mexican Congress.

But it would be consistent with the thinking of the country’s new president, whose inauguration speech on Thursday promised economic growth without inflation and pledged to keep a close rein on government spending.

“Sustained growth requires an environment of economic and financial stability that guarantees certainty and confidence for saving, planning, investing and working productively,” Zedillo said. “This demands clear rules and fair treatment for everyone.”

Endorsement by the foreign investment community is crucial to a nation whose economic development program hinges on continued flows of foreign capital. Yet the investors’ presence remains a delicate issue in sovereignty-conscious Mexico, where many citizens are still surprised, 11 months after the North American Free Trade Agreement took effect, to find their country in a trade pact with the United States and Canada.

Sovereignty may become even more of an issue as the new administration sells the few government-owned companies that remain from the hundreds auctioned off during the past eight years. Officially, those industries still under government control are termed strategic; in reality, most of have remained in government hands due to their political importance.

Investors and senior government officials said privately that they expect the railroads, electricity and oil will be sold during this administration. All three fall under the purview of Zedillo’s most controversial cabinet appointee, Ignacio Pichardo, who has been accused by the former assistant attorney general of using his position as chairman of the ruling party to obstruct a high-profile murder investigation.

“I believe we are going to see the oil and gas industry moving toward privatization,” said Jack Krol, vice chairman of chemical giant DuPont Co., owner of oil company Conoco. “They have been thinking about it now for two or three years. It’s now a matter of how, rather than ‘Are we going to do it?’ ”

The previous administration of President Carlos Salinas failed to find buyers for several petrochemical plants, partly because they were put on the block during a cyclical downturn in the international industry. Krol said he expects the Zedillo goverment to sell off entire divisions of Petroleos Mexicanos, the national oil monopoly.

“They must have the scale to be competitive globally,” he said. “There is a big difference in the way people are thinking today.”

Krol added that DuPont would be an interested bidder for numerous Pemex assets, including petrochemical, natural gas, oil exploration and production, and refining.

Investors’ main worry in Mexico isn’t Zedillo’s economic policies but whether the 42-year-old Yale-educated economist will be able to restore the political and social stability that they had taken for granted in Mexico until this year’s dual political assassinations and a wave of kidnapings.

For example, nervousness over the threat of new violence next week in the southern state of Chiapas was blamed for Friday’s steep 53.86-point drop in the Mexican stock market.

Still, investors seemed reassured by the familiar faces in economic posts. Finance Minister Jaime Serra Puche and Commerce Minister Herminio Blanco were their nation’s chief NAFTA negotiators and spent weeks promoting the agreement to U.S. investors and business people. Foreign Minister Jose Angel Gurria is well known to bankers for his key role in solving this country’s debt crisis in the 1980s.

“We think this is an excellent cabinet,” said Geoffrey Dennis, head of Latin American Research at Bear Stearns. “It is chock full of good, reform-minded young technocrats. We expect no significant change in policy. He has put his marker firmly in the sand.”

Dennis said he also was encouraged by Zedillo’s inauguration speech promises of continuing to balance the federal budget and to fight inflation, now about 7% a year, down from 159% six years ago.

Zedillo told the Mexican Congress, “We will not destroy the stability that the people have achieved with such sacrifice.”

Meanwhile, an eight-page special advertising section titled “The Mexican Investor” appeared in major U.S. newspapers on inauguration day, featuring an interview with Zedillo and touting economic opportunities in this country.

Though the foreign investors who traveled here for the inauguration were disappointed to be watching it from a room at the National Anthropology Museum, near their hotel, most understood about security concerns and the limited seating in the Legislative Palace, where the ceremony was held.

And Friday’s private meeting with Zedillo must have soothed their egos.