* The FSLN has consolidated firm control over government, armed forces, and mass organizations. The size, discipline and morale of regular army and militia units are impressive. Their newly acquired transport and communications equipment would make them serious contenders in any regional conflict.

* Other political and diplomatic factors also deserve our attention. The FSLN and, in general, the Nicaraguan process continue to enjoy broad international support. During their first year in government the Sandinista government has gained influence and legitimacy in international forums notably in the OAS, the UN and the non-aligned movement. The Nicaraguan government and the FSLN have opened diplomatic and party relations in most Soviet bloc countries.

The Nicaraguan leadership remains divided on how to respond in the event of a direct US military intervention in El Salvador or in Guatemala. A moderate wing favors emphasis on diplomatic actions, extending humanitarian support for refugees and opposition forces but avoiding a military engagement that would severely hurt the prospects for economic recovery. The hard liners on the other hand favor full support for the guerrilla forces and, if needed, direct participation of Nicaraguan forces in regional operations.

MEXICO

US policy makers have failed to give adequate consideration to the potential impact of Mexico's policy towards the conflict in El Salvador. Yet Mexico's continuing economic growth, its oil wealth and its internal political stability have sharply increased its prestige, capabilities and willingness to influence developments in the Caribbean basin and Central America.

Analysts in Washington project a continuation of Mexico's rhetorical posturing and downplay recent changes. But current intelligence suggests that Mexico is unusually determined to promote the emergence of stable, progressive and representative governments in Central America capable of asserting their independence from the US and willing to develop friendly and cooperative relations with their powerful northern neighbor. There are two principal reasons for this affirmative policy:

1. Mexico sees with growing concern and displeasure Venezuelan and US involvement in security matters close to its own oil fields.

2. PRI analysts have concluded that the process in El Salvador is irreversible. In their view the best way to influence developments there is to establish early friendly relations with opposition forces and provide political and economic support for the new regime.

The PRI would like to limit the domestic impact of the Central American process