HACIENDA'S (MEXICAN TREASURY) NEW BUDGET AND

UNCLAS SECTION 01 OF 02 MEXICO 003840

SIPDIS

SENSITIVE
SIPDIS

FOR WHA/MEX, WHA/EPC,EB/IED
TREASURY FOR IA MEXICO DESK:JASPER HOEK
COMMERCE FOR ITA/MAC/NAFTA:ANDREW RUDMAN
ENERGY FOR KDEUTSCH AND SLADISWAN

E.O. 12958: N/A
TAGS: ECON EFIN ENRG PGOV PINR PREL MX
SUBJECT: HACIENDA'S (MEXICAN TREASURY) NEW BUDGET AND
FISCAL RESPONSIBILITY LAW


Sensitive but Unclassified, entire text.


1. (SBU) Introduction and Summary: The Fox administration
continues to take protective measures to shield the Mexican
economy from profligate spending. Hacienda's (Treasury)
Budget and Fiscal Responsibility Law, which entered into
force this April is an example of a cautionary move to
ensure that a balanced budget is proposed each year.
Econoff met with the director of the Hacienda Office of
Relations with Investors who confirmed speculation that the
passage of the law was a preventive action to counter
overspending by the next administration. End summary.

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Guarantees the Proposal of a Balanced Budget
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2. (SBU) The main objective of this new law is to reduce
the uncertainty created by the budget process each fiscal
year and to provide enough time to both the Mexican Chamber
of Deputies and the Senate to make a decision consistent
with national priorities. The limits established under the
new law intend to ensure that a balanced budget is proposed
and maintained every year, preventing deficit spending by
the new administration.


3. (SBU) Under the new law, only in exceptional cases
could the administration propose a budget deficit; however,
a clear justification, a through action plan and a deadline
as to when such deficit would be cleared would have to
accompany the proposal. Yet, even after the submission of
all these assurances, nothing guarantees that either house
would approve a deficit spending proposal. Furthermore,
Congress would likely reject any spending proposal creating
a deficit greater than 3 percent of GDP.

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Schedule and Deadlines for the Executive and Legislative
Branches
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4. (SBU) The new law promotes the proposal of a balanced
budget through an organized scheme in order to reduce time
spent on arguments and negotiations between the Legislative
and Executive branches. The President will submit the
macroeconomic scenarios for the principal economic
variables such as inflation rate, interest rates, economic
growth, and the price of the Mexican oil basket, by April
1, as well as the proposed budget on September 8. After
the proposed budget is sent to the Lower house, the
Deputies will have until October 20 to approve the budget's
earning section and sent it to the Senators who will have
until October 31 to approve it. Congress must approve the
budget's expenditure section by November 15, just as it is
now; however, the Executive branch has a maximum of 20 days
to sign the budget after Congressional approval.


5. (SBU) This year the law will extend the time limit to
allow the President elect and his administration to
participate in the budgetary process. The new
administration will have until December 15 to submit its
proposed budget, and both houses will have until December
31 to approve it. However, eighty percent of the next
fiscal year's proposed budget expenditures for
infrastructure and assistance projects have already been
programmed. Hence, the new administration will only have a
20 percent budgetary margin.

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Determining the Price of Mexican Crude Oil
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6. (SBU) In order to establish the price of oil, the new
law creates a mechanism that guarantees that estimates will
be based on technical criteria rather than political
considerations. The estimates will be based on the average
price of Mexican crude oil for the last ten years and the
forecasted market price for the next four years. This
mechanism will preclude spending time on negotiations, as
Congress will have to approve the set price by Hacienda for
Mexican crude oil.


7. (SBU) Additionally, the law promotes the establishment

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of transparent rules for the distribution of excess oil
revenues. Three new stabilization funds will be created:
the stabilization of earnings for federal entities fund,
the stabilization for infrastructure investment in PEMEX
fund, and the continuation of the stabilization of
oil-earnings fund. All of these funds will allow federal
entities, PEMEX and the federal government to set aside
resources as a safeguard for those years when oil-revenues
are less than expected.

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Comment
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8. (SBU) The approval of this legislation is a favorable
sign that lends greater credibility to the GOM budgetary
process. Furthermore, establishing a mechanism that sets
the price of Mexican crude oil based on historical market
trends and forecasting is an important change, especially
given the fact that the elected president will not have an
absolute majority in Congress, thereby prolonging
negotiations on key issues. Setting the crude oil budget
price on non-political basis is an important advance. End
comment.


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