Identifier
Created
Classification
Origin
06MEXICO6424
2006-11-09 19:47:00
UNCLASSIFIED
Embassy Mexico
Cable title:  

ECONOMIC TRANSITION NOTES, NOVEMBER 1-8, 2006

Tags:  ECON EFIN ELAB ENRG ETRD PREL MX 
pdf how-to read a cable
VZCZCXRO5098
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #6424/01 3131947
ZNR UUUUU ZZH
P 091947Z NOV 06
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 4152
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEHNSC/NSC WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUEHC/DEPT OF LABOR WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
UNCLAS SECTION 01 OF 05 MEXICO 006424 

SIPDIS

SIPDIS

STATE FOR A/S SHANNON
STATE FOR WHA/MEX, WHA/EPSC, EB/ESC
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/ARUDMAN
USDOC FOR ITS/TD/ENERGY DIVISION
TREASURY FOR IA (ALICE FAIBISHENKO)
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND SLADISLAW
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA)
NSC FOR DAN FISK, CYNTHIA PENDLETON

E.O. 12958: N/A
TAGS: ECON EFIN ELAB ENRG ETRD PREL MX
SUBJECT: ECONOMIC TRANSITION NOTES, NOVEMBER 1-8, 2006

REF: A. MEXICO 6313


B. MEXICO 6362

C. MEXICO 5810

D. MEXICO 5343

E. MEXICO 6217

-------
Summary
-------

UNCLAS SECTION 01 OF 05 MEXICO 006424

SIPDIS

SIPDIS

STATE FOR A/S SHANNON
STATE FOR WHA/MEX, WHA/EPSC, EB/ESC
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/ARUDMAN
USDOC FOR ITS/TD/ENERGY DIVISION
TREASURY FOR IA (ALICE FAIBISHENKO)
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND SLADISLAW
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA)
NSC FOR DAN FISK, CYNTHIA PENDLETON

E.O. 12958: N/A
TAGS: ECON EFIN ELAB ENRG ETRD PREL MX
SUBJECT: ECONOMIC TRANSITION NOTES, NOVEMBER 1-8, 2006

REF: A. MEXICO 6313


B. MEXICO 6362

C. MEXICO 5810

D. MEXICO 5343

E. MEXICO 6217

--------------
Summary
--------------


1. (U) Mexico's markets were unaffected by the November 6
bombings. Market expectations are close to government
economic predictions, including that the recent inflation
spike is temporary and that the government will have its
first budget surplus since 1996. The stock market boasted a
record gain on November 1, but analysts are waiting to see
whether it can remain at this high-level. The government
expects to deliver its 2007 budget by December 1, while
states are concerned over announced plans to cut their share
of federal revenue. The Fox Administration has taken
additional steps to improve competitiveness by further
cutting tariffs and preparing to issue a new decree for the
maquiladora sector. President-elect Felipe Calderon and
others continued public calls for reform including in the
fiscal system, pensions, infrastructure, energy, and
increasing competition in the finance and telecommunications
sectors. The telecommunications regulator came under public
criticism for its recent changes in cell phone charges and
convergence. Declining oil production forced PEMEX to cut
supplies to the United States. Meanwhile, PEMEX has launched
a public tender for natural gas exploration. Speculation
continues about who will be on Calderon's economic team. END
SUMMARY.

Markets Not Affected by Bombings


2. (U) Markets were not notably affected by the explosion of
three bombs in Mexico City shortly after midnight on November
6 (Ref A). The peso lost ground in early trading on November

6, but regained most of its losses during the day. During
the week ending November 7, the peso depreciated by 0.88% and
the benchmark stock index gained 2.3%.

Quarterly Report on Inflation


3. (U) On October 31, the Bank of Mexico (BOM) published its
report on inflation for the third quarter of 2006. The report
highlighted the positive performance of domestic consumption
and investment as well as manufacturing and crude oil
exports. Inflation -- which was 4.09% during the 12-month
period ending in September -- has risen in recent months due
to shortages of sugar, unfavorable climate conditions that
affected tomato harvests, and higher tortilla prices. The
BOM said that the price spike is temporary and forecast that
inflation will be around 4.0% at yearend. During this
quarter, long-term interest rates fell and the yield curve
flattened as domestic political uncertainty lessened and
premium risk rates in international markets declined.

Mexico To Post First Budget Surplus since 1996


4. (U) The Finance Secretariat has announced that President
Fox plans to hand over an economy growing at its fastest pace
in six years, with the first budget surplus since 1996, after
record oil prices boosted revenue. The government's surplus
is forecast to be 0.2% to 0.3% of GDP because of additional
revenue from oil exports and greater-than-expected tax
collection. (Note: this measure of the budget balance
excludes significant off-budget borrowing. End Note.)

Quarterly Report on Public Finances


5. (U) According to the Finance Ministry's quarterly report
on public finance, the Finance Ministry expects the economy

MEXICO 00006424 002 OF 005


to grow 4.3% during the third quarter. The report also says
that 835,592 jobs were created in the formal sector during
the first nine months of the year. Direct banking credit to
the private sector rose at a real rate of 30% in August.
Housing credit grew 82.3%, consumer credit rose 45.4%, and
lending to businesses increased 11.4% in real terms. The
budget surplus during January to September was 32.4% higher
in real terms than in the same period in 2005. Government
revenues increased 14% due to higher tax collection and
revenues from petroleum. Oil-related revenues accounted for
36.6% of total revenues during the first nine months of the
year. Total net public debt (the BRHBPS) was 35.5% of GDP,
with internal debt representing 24.5% of GDP and external
debt representing 11.0% of GDP.

Market Expectations Fairly Close to These GOM Forecasts


6. (U) According to a market expectations survey conducted
by the BOM in October, real GDP growth will be 4.54% in 2006
and 3.57% in 2007, while consumer price inflation will be
3.97% in 2006 and 3.47% in 2007. At year end, the 28-day
CETES are expected to be 7.1%, and the exchange rate 10.99
pesos to the dollar. The survey also showed that analysts
expect a budget surplus of 0.4% of GDP. Foreign direct
investment is expected to fall to USD 16.13 billion in 2006
and USD 15.89 billion in 2007.

Bolsa Breaks 23,000 Mark, Continues To Set New Records

7. (U) On November 1, the Bolsa index rose 676.86, or 3%, to
23,046.95, the biggest gain since July 19. Traders predicted
that the market will now be looking to test whether the index
can stay above 23,000. The Bolsa had fallen 4.4% from an
Oct. 25 record on reports the U.S. economy grew less than
forecast in the third quarter. The rally had the
characteristics of a "technical rebound," in which investors
buy after shares fall below levels determined by mathematical
models of price movements. The market also reacted to
Calderon's public comment that the Mexican Stock Market will
have an important role in the country's growth through
long-term financing for infrastructure projects, including
the energy sector. Calderon had also promised to maintain the
economic stability and the growth of financial markets.
Fitch Releases Post-Electoral Update on Mexico

8. (U) On November 7, Fitch Ratings published a special
report on Mexico that details some of the challenges
confronting President-elect Calderon. The report says that
Calderon will have to unite the country behind him, secure
governability by marginalizing the civil resistance movement
led by former presidential candidate Andres Manuel Lopez
Obrador, and build alliances on economic reforms. Fitch is
moderately optimistic that Calderon will be able to mobilize
Congress in his favor, as his party did well in the election
and the PRI performed poorly -- giving him flexibility to
strike deals with other political parties. Fitch says that
Calderon's main economic challenges include: maintaining the
economic recovery; dealing with the prospect of falling crude
oil prices and possibly falling oil production during the
next six months; and addressing fiscal challenges stemming
from the government's dependence on oil revenues.
Unease Over Cuts in Federal Transfers to States


9. (U) On October 27, the Finance Secretariat announced it
would cut funding to the program that allocates federal funds
to state governments by 21%, the Program of Support for the
Strengthening of Federal Entities (PAFEF). The Finance
Secretariat also decided that PAFEF funds are to only be used

SIPDIS
for infrastructure projects, debt relief, pensions,
modernization of the tax system, and expansion of the
taxpayer base. This decision caused uneasiness among several
governors and PRI deputies. Legislators allege that the
total cut to states will be almost USD 2.5 million. The
Finance Ministry justified the measure by saying it will
create a reserve for the Mexican Social Security Institute
(IMSS),but governors say that the decision was made to give

MEXICO 00006424 003 OF 005


priority to programs from the Executive at the expense of
those promoted by Congress. (Comment: Mexico's constitution
leaves states with minimal sources of revenue other than
their federal allocation. End Comment.)

2007 Budget Will be Delivered on Time


10. (U) The Fox administration is working closely with the
transition team to deliver the 2007 Budget to Congress on
time. Guillermo Bernal, Chief of the Budgetary Policies
Unit, told the press that it was very possible the budget
will be ready to be sent to Congress by December 1. The
budget is expected to be similar to last year's. Economic
transition team leader Agustin Carstens met in private with
legislators of all political parties (including PRD) about
the 2007 budget. Carstens warned about the expected fall in
revenues due to lower energy prices, and noted pension
problems, and the need for strengthening public finances to
depend less on crude oil revenues. According to the
legislators, Carstens' priority for next year's budget will
be to combat poverty.

Maquila Decree Aims to Increase Mexican Competitiveness


11. (U) The new Maquila Decree, to be effective November 13,
aims to encourage investment and increase Mexico's
competitiveness in the global economy. Among other changes,
the decree simplifies administrative procedures and lays the
groundwork for the export of services under the Maquila
program (See Ref B).

More Tariff Reductions


12. (U) Under Secretary of Industry and Commerce Rocio Ruiz
announced that the Secretariat for the Economy had negotiated
with the textile industry to reduce 48 tariffs on textiles,
both for artificial and natural fibers. This reduction will
include inputs that are still produced in Mexico. On
average, tariffs will be reduced from 9% to zero. These
reductions were in addition to broader tariff cuts enacted in
September 2006 (Ref E).

Calderon Promises to be an Ally for Competitiveness


13. (U) During the conference "Investment and Technology"
organized by the Mexican Trade Export Council (COMCE),
Calderon told businessmen his government will be an ally for
the Mexican export and business sectors in the effort to
improve competitiveness and increase market share in order to
generate more and better paid jobs. Calderon said that
companies established in Mexico need to compete with equal
fiscal, financial, and energy conditions as in other
countries. He acknowledged that financial costs in Mexico
were very high, and that businesses in Mexico need more
access to financing at competitive prices.

Finance Secretary Calls for Structural Reforms


14. (U) This week, Finance Secretary Francisco Gil Diaz
publicly warned that a slowdown in the U.S. economy and the
decline of crude oil prices will have a negative impact on
the Mexican economy. With this in mind, he called for
implementation of structural reforms (fiscal, education,
labor, energy, pension, and telecommunications) to improve
Mexico's international competitiveness. He noted that
economic stability is not enough to reduce widespread
poverty. Gil Diaz added that the pension system puts
significant pressure on public finances.

Improving Pension Funds in the Long Term?


15. (U) Adolfo Albo Chief Economist of the BBVA Bancomer's
bank announced that the bank is performing a study on the
Mexican pensions system to be published in January 2007.

MEXICO 00006424 004 OF 005


In order to resolve the pensions system's current problems,
Albo said that there should be a National Pensions System,
which includes all of the existing public systems (Pemex,
CFE, universities, IMSS, ISSSTE, etc.) BBVA has elaborated
five proposals to improve the system, including an increase
in obligatory contributions from 6.5 to 9% of the worker's
salary.

Proposals To Improve Competitiveness in the Financial Sector


16. (U) Experts from the IMF and the World Bank made several
recommendations to improve the financial sector's
competitiveness. Their proposals include providing more
autonomy to the Banking and Securities National Commission,
inspecting foreign banks more closely, constantly monitoring
operations of development banks and sofoles (non-bank banks),
and establishing a plan for mortgage sofoles. They also
recommended promoting more competition in yields paid to
customers of private pension funds. They said that
authorities should more closely monitor risks associated with
consumer credit and mortgages.

Mexico's Public Accountants Urge Fiscal Reform


17. (U) During the Mexican Public Accountant Institute's
annual convention, Jorge Chavez Presa, a former economic
advisor to Roberto Madrazo, said that special regimes,
differentiated taxes, high fiscal concentration, pervasive
tax evasion, and insufficient incentives for states to
collect taxes are the most important challenges to address in
a fiscal reform. He said that special regimes generate
losses equivalent to 5% of GDP. Another significant problem
is that the federal government collects 98.7% of taxes, while
the states and municipalities only collect 1.3%. Chavez
added that Mexico also needs to simplify the tax system and
expand the taxpayer base.

PEMEX Cancelled Shipments to the U.S.


18. (U) As reported Ref C, as a result of the declining
production from the Cantarell field, Mexican Gulf Coast crude
deliveries were short 86,000 B/D during the third quarter of

2006. Crude oil production during that period averaged 3.24
million barrels per day, 1% less than during the same period
of 2005. For 2007 and 2008, PEMEX estimates are even lower:
1.68 million barrels and 1.43 million barrels daily.

New Contracts to Extract Natural Gas


19. (U) According to press reports, PEMEX has launched a
public tender to explore and exploit natural gas reserves on
a fee-for-service basis. The expected investment is USD 1
billion. Repsol, Petrobras, Techint, Grupo R, and Diavaz
will participate in the tender. These companies will present
their technical offers in January 2007, and the decision will
be made almost immediately. The fields are located in
Coahuila, Tamaulipas, and Nuevo Leon. PEMEX publicly claims
that natural gas production will increase by 300 million
cubic feet daily with this tender.

Calderon Receives Long-Term Infrastructure Plan


22. (U) The Mexican Construction Chamber has given Calderon
their long-term infrastructure plan. This "Great Vision
Project" is the result of a list of proposals derived from
five regional forums organized by the Chamber. In receiving
the document, Calderon promised his administration will be
the "government of infrastructure" because he believes that
the investment in infrastructure is the best way to achieve
equity and social justice.

Calderon Pledges To Increase Competition in Telecommunications

23. (U) On November 2, Calderon publicly pledged to boost
competition within the Telmex-dominated telecommunications

MEXICO 00006424 005 OF 005


industry. Calderon said it was "indispensable that Mexico be
able to integrate its citizens into a society of information
and knowledge." A 2006 OECD report says that
telecommunication costs in Mexico are among the highest in
the OECD. Telephone coverage is inadequate, with internet
and fixed-line phone service still unavailable in many rural
areas.

Suspension to "Calling Party Pays" (CPP) System


24. (U) Mexican telecommunications companies Alestra, Axtel,
Avantel, Marcatel, and Maxcom have filed legal injunctions to
suspend long distance CPP. All companies except for Marcatel
obtained a temporary suspension from Mexican judges. In
addition, Axtel and Marcatel will file a complaint with the
Federal Telecommunication's Commission (Cofetel). Marcatel's
CEO said that Cofetel is obliging companies to accept the
measure rather than creating a positive environment for
negotiation. (Note: Despite the injunctions, CPP went into
effect in Mexico on November 4. Telmex, which provides 95% of
fixed line services in Mexico, implemented CPP, as did mobile
phone companies. End Note.)

Injunctions Denied Against Convergence in Telecommunications


25. (U) Six cable TV companies filed injunctions against the
Convergence Agreement (Ref D) published on October 3, but
none of the judges decided to temporarily suspend the
agreement, and only one of injunctions was accepted by the
judge.

Speculation on Carstens' Finance Team


26. (U) According to the press, Carstens asked Alejandro
Werner, current Chief of the Economic Planning Unit in the
Secretariat for Finance, to become his Under Secretary of

SIPDIS
Expenditures. Jose Antonio Meade from the Rural Finance
Division would be Carstens' coordinator of advisors.


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