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.

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A Divided Mexico
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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.

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Mexico,s North/South Gap
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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.

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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.

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Comment
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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.



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