MEXICAN STOCK MARKET ECONOMIST MUSES ON INTERNAL

UNCLAS MEXICO 003904 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 MX PGOV PINR PREL SUBJECT: MEXICAN STOCK MARKET ECONOMIST MUSES ON INTERNAL MEXICAN DIVISIONS Sensitive but Unclassified, entire text. ¶1. (SBU) Introduction and Summary. After a week of political uncertainty and speculation over the market,s reaction to Mexican political events, Econoff met with the deputy director of the Mexican Stock Exchange, Alejandro Reynoso. He confirmed previous common views that market volatility was not only associated with political jitters, but also with external factors such as global liquidity and increasing interest rates in the U.S and other developed countries. Reynoso noted that, despite lingering political uncertainty, investors remain confident that Mexican institutions will resolve electoral disputes in favor of National Action Party (PAN) candidate Felipe Calderon. Reynoso is not concerned about capital flight in the near-term from domestic investors or others. Still, he believes the presidential elections highlighted not only social and economic divisions in Mexico, but also an important North/South divide. End Summary. -------------- A Divided Mexico -------------- ¶2. (SBU) According to Reynoso, this year,s presidential election portrayed the reality of a country separated between the south, including Mexico City, which supported the Party of the Democratic Revolution (PRD) candidate Andres Manuel Lopez Obrador, and the north, which supported PAN candidate Felipe Calderon. Additionally, the new elected mayor of Mexico City is Marcelo Ebrard, of the PRD, potentially complicating things for Calderon, if he is confirmed by the electoral tribunal (TEPJF),as he will be governing in a city that is ruled by the opposition. ¶3. (SBU) Reynoso said Calderon is likely to face political obstacles derived mainly from the close results of the elections. The country is experiencing political uncertainty and discontent from Lopez Obrador,s supporters. Calderon,s ability to overcome these impediments will determine whether or not his adversaries and those that did not vote for him will accept his leadership role for the next six years. -------------- Mexico,s North/South Gap -------------- ¶4. (SBU) Reynoso believes that the South, with about 90 percent of the country,s energy resources, has a basic &competitive advantage8 over the North. Most of the major oil fields are located in southern Mexico, and the two main ports of the country, Veracruz on the Gulf of Mexico and Manzanillo on the Pacific, are also in the South. That said, southern states and municipalities are largely controlled by the PRD. ¶5. (SBU) While northern Mexico lacks natural resources, it is the most industrialized region. At the same time, Reynoso noted that the great majority of larger northern businesses are foreign-owned. Moreover, due to the lack of needed economic reforms in Mexico, these industries (with the exception of the automobile industry) are losing competitiveness globally and would not be able to function without the energy generated in the South. (Comment: This last point needs more analysis, but we report it here as stated. End Comment). ¶6. (SBU) Reynoso,s overall conclusion is that future foreign direct investment to Mexico will most likely continue to focus on the North, and that the southern states will lag behind in technology, employment, and living conditions. Still, the South will have large energy resources and will be mainly dominated by PRD state and local governments whose commitment to broad economic reform remains uncertain. According to Reynoso, it is also unclear if foreign investors would be willing to risk major investments (energy, etc) in areas controlled by PRD governors. As a consequence, Reynoso believes the economic gap between the North and the South will widen over time. -------------- The Future of Mexico,s Needed Reforms -------------- ¶7. (SBU) In sum, Reynoso believes that Calderon (if confirmed by the TEPJF) will face a divided country. Despite Calderon,s efforts to call for political alliances, he expects that the PRD will be reluctant to join any political alliance with the PAN. Reynoso expects it will be difficult for Calderon to negotiate the passage of any of Mexico,s needed reforms with a divided Congress. -------------- Comment -------------- ¶8. (SBU) For the moment, Reynoso represents the pessimistic extreme. He fails to note that if the PAN is able to secure the support of minor parties and a portion of the PRI legislative faction, then, PAN will in fact have a governing majority. We report his views to give a fuller flavor of the types of observations that can be heard in the economic and political debate here in Mexico. End Comment. Visit Mexico City's Classified Web Site at http://www.state.sgov.gov/p/wha/mexicocity GARZA