Identifier
Created
Classification
Origin
06MEXICO3962
2006-07-18 18:13:00
CONFIDENTIAL
Embassy Mexico
Cable title:  

MEXICO'S ECONOMIC ACHIEVEMENTS AND CHALLENGES - A

Tags:  ECON EFIN ENRG MX PGOV PINR PREL 
pdf how-to read a cable
VZCZCXRO2385
RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #3962/01 1991813
ZNY CCCCC ZZH
R 181813Z JUL 06
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 2199
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
C O N F I D E N T I A L SECTION 01 OF 03 MEXICO 003962 

SIPDIS

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: DECL: 07/18/2016
TAGS: ECON EFIN ENRG MX PGOV PINR PREL
SUBJECT: MEXICO'S ECONOMIC ACHIEVEMENTS AND CHALLENGES - A
BANK OF MEXICO'S VIEW


Classified By: Economic Minister Counselor Vladimir Sambaiew
for reasons 1.4 (b) and (d)

C O N F I D E N T I A L SECTION 01 OF 03 MEXICO 003962

SIPDIS

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: DECL: 07/18/2016
TAGS: ECON EFIN ENRG MX PGOV PINR PREL
SUBJECT: MEXICO'S ECONOMIC ACHIEVEMENTS AND CHALLENGES - A
BANK OF MEXICO'S VIEW


Classified By: Economic Minister Counselor Vladimir Sambaiew
for reasons 1.4 (b) and (d)


1. (C) Introduction and Summary. Mexico,s Central Bank
Deputy Governor Jose Julian Sidaoui provided a snapshot of
the country,s economic situation following the July
elections. He said that the surprisingly favorable reaction
of Mexican markets, despite political uncertainty, is mainly
the result of the current GOM,s ability to maintain fiscal
prudence and to make financial stability a priority. Sidaoui
stressed that investment in Mexico and overall popular access
to credit is increasing because of Bank policies introduced
over the last ten years. At the same time, the lack of
structural reforms in Mexico is hindering the nation,s
competitiveness and hampering competition with China. End
summary.

--------------
Market Reactions
--------------


2. (C) Emincouns and econoffs paid an introductory call on
Central Bank Deputy Governor Jose Julian Sidaoui on July 12.
Sidaoui opened the meeting noting that for the first time in
30 years the Mexican stock market received capital inflows
the day before presidential elections. He noted that the
volatility the week after the elections was more the result
of external factors such as the close association between the
Mexican and U.S. markets, and Federal Reserve Bank statements
on inflationary risks and the possibility of interest rate
hikes.


3. (C) Sidaoui highlighted that investor confidence increased
as a Calderon victory became more likely and generated a
market rally. At the same time, he said that experts believe
that this rally does not reflect Mexican stock market
fundamentals and the market could correct itself in the short
term. Sidaoui expects some continued volatility over the

coming period.


4. (C) On the positive side, Sidaoui added that a 20-year
fixed credit market in Mexico is starting to develop. As
markets calmed after the July elections, he said that the
yield curve in Mexico flattened but not as much as in the
U.S. The reason for this, he said, is the significant
long-term interest rate differential between the current U.S.
5.23 percent and Mexico,s 9.49 percent. On a more general
note, Sidaoui said that as overall liquidity in the world
decreases, the 20-year yield curve becomes steeper.

--------------
Outlook on Structural Reforms
--------------


5. (C) Like other analysts, Sidaoui emphasized that Mexico,s
economic growth is hampered by the lack of structural
reforms. Although various reforms are needed, he said that
fiscal reform appears to be the most important. Currently,
oil revenues fund 40 percent of the federal budget. In
addition, Mexico,s weak tax system, especially at the State
level, means 95 percent of State expenditures are funded
through the federal budget. The results, he said, are
State-level permanent expenditures with non-permanent sources
of revenue. He used the example of States hiring many
full-time permanent employees paid for by petroleum revenues
that may well decrease in the future.


6. (C) Pension reform will also be an important priority.
Pension liabilities for state employees such as social health
institutes, public universities, and municipal employees
among others, place significant pressure on public finances,
he said.


7. (C) Conversely, Sidaoui highlighted the positive role of
private pension funds (Afores). Ten years after being
created, they now represent 15 percent of national assets.
Additionally, the federal government took a step forward by
including these contingent liabilities in GOM books.


8. (C) Sidaoui explained that the passage of structural
reforms is likely to encounter obstacles as the National
Action Party (PAN) did not win a majority in Congress.
Although the Institutional Revolutionary Party (PRI) is
likely to be the most willing party to work with the PAN, its

MEXICO 00003962 002 OF 003


support remains uncertain. The PAN will need to build
effective alliances with other parties to form a
Congressional majority and be able to pass Mexico,s needed
reforms.

--------------
Mexico,s Sound Economy
--------------


9. (SBU) Sidaoui pointed to low inflation rates and the
introduction of a beneficial credit system providing fixed
interest rates in pesos as triggers for an increase in
consumption and for keeping demand up. The Mexican middle
class reaps the most benefits, he said, as they are able to
obtain flexible loans and mortgages. Sixty-five percent of
automobiles and 90 percent of houses sold in Mexico are now
purchased through credit, he said. This is a situation
vastly different from ten years ago when credit for the
middle class was largely unavailable.


10. (C) According to Sidaoui, as a result of a good credit
system, a strong fixed investment in machinery and equipment
is growing, which is reflected in the recent 20 percent
increase in Mexican capital goods imports. Additionally,
investment in construction and the public works sector is
also strengthening. This year,s first trimester registered
an increase of 8.3 percent in this sector compared to the
same period last year.


11. (C) Various sectors of the economy are growing thanks to
macroeconomic stability reflected in solid financial
leadership, stable exchange rate, and low inflation. Sidaoui
stated that growth in the agricultural sector was mainly due
to NAFTA, and despite some volatility in this sector, there
is an upward trend as the first trimester of 2006 registered
a 2.6 percent increase in this sector compared to last year.
The services sector is registering a growth rate of 5.4
percent for the first trimester of this year, compared to the
same period last year. The recent boom in the automobile
sector generated an increase in the industrial sector of 7
percent for the first trimester of 2006, compared to the same
period last year.

--------------
Economic Challenges
--------------


12. (C) On the negative side, Sidaoui pointed to Mexico,s
lack of competitiveness and declining productivity as key
factors hampering economic growth. Its inability to compete
with China is generating considerable concern among some
industries as the labor force is lagging behind in
technology. According to Sidaoui, the industrial production
index in Mexico is positively correlated with the
non-high-tech manufacturing index in the U.S. He saw this
link as a reflection of the cost of globalization for Mexico
given the lack of structural reforms.


13. (C) Another concern, Sidaoui said, is that employment is
growing, yet mainly as a result of low-quality employment
represented primarily in creation of temporary rather than
permanent jobs. In the first five months of this year,
temporary employment grew by 20.8 percent compared to the
same period last year, whereas permanent employment grew only
by 2.2 percent.

--------------
Comment
--------------


14. (C) Virtually all analysts agree that the positive
reaction of Mexican markets, despite political ambiguity, is
a result of the GOM and Bank of Mexico,s combined ability to
maintain macroeconomic stability and a low inflation rate.
The implementation of a widespread credit system has indeed
aided the country,s middle class and is increasing
consumption. However, without tackling needed economic
reforms, Mexico is likely to continue losing competitiveness
and productivity, especially in the important higher
technology sectors. End Comment.



Visit Mexico City's Classified Web Site at

MEXICO 00003962 003 OF 003


http://www.state.sgov.gov/p/wha/mexicocity

GARZA