ECONOMIC TRANSITION NOTES, NOVEMBER 9-15, 2006

UNCLAS SECTION 01 OF 04 MEXICO 006516

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E.O. 12958: N/A
TAGS: ECON ENRG ELAB EFIN PGOV PREL MX
SUBJECT: ECONOMIC TRANSITION NOTES, NOVEMBER 9-15, 2006


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Summary
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1. (U) Fitch Ratings warned that MexicoQs credit rating
could fall in the next three years if President-elect
Calderon fails to pass reforms needed to encourage faster
economic growth. Calderon continued to publicly call for
reforms, and promised to encourage financing for
infrastructure; strengthen financial institutions and
capital markets; increase security; and invest in human
capital. Bank of Mexico (BOM) Governor Guillermo Ortiz
again called for more competition in the financial and
telecommunications sectors, and for economic reforms.
Reported discussions on the 2007 budget, however, indicate
it will not include structural reforms. Calderon and his
transition team continue to publicly lay out their
priorities including construction of 1 million houses a
year, plus highways, railways, ports, and airports; and
allowing PEMEX to enter into joint ventures for deep-water
oil exploration and production. Some economic reforms are
progressing. The Finance Secretariat expects to authorize
five new banks, including one by Wal-Mart de Mexico, within
two weeks. The Secretariat has also drafted a bill to make
it easier for the government to recover assets when banks
go into bankruptcy. MexicoQs Federal Competition
Commission blocked the merger of railroads Ferrosur and
Ferromex. Controvery over the Cell Phone QCalling Party
PaysQ system continues, but authorities maintain that the
new system will be implemented. Consumer price inflation
in Mexico rose to a 15-month high in October, but the BOM
still maintains that inflation will drop below 4% by
yearend. Industrial production rose by a still-strong 5.0%
year-over-year in September. End Summary.

Credit Rating Could Hinge on Economic Reform

2. (U) Shelly Shetty, Fitch RatingsQ Senior Director of
Sovereign Ratings, said publicly that MexicoQs credit
rating could fall in the next three years if President-
elect Felipe Calderon fails to pass the fiscal, energy,
labor, and educational reforms needed to encourage faster
economic growth. "Politics will define the trajectory of
ratings in Mexico," Shetty said at a conference in Mexico
City. She said that Calderon must find a way to break the
gridlock in Congress that prevented President Vicente Fox
from passing much-needed economic reforms. She noted that
these reforms are particularly important because oil prices
and U.S. demand will slacken next year.

Central Bank Stresses Need To Strengthen Economy and
Diversify Trade


3. (U) Deputy Central Bank (Bank of Mexico, BOM) Governor
Guillermo Guemez said publicly that Mexico should
strengthen its domestic market and diversify its trade to
face an expected economic slowdown in the U.S. Guemez said
that the government should improve MexicoQs productivity so
that it relies more on its domestic market than abroad.
Guemez added that reforms are needed to improve the
countryQs competitiveness.

Ortiz and Calderon Discuss Economic Growth, Competition and
Competitiveness


4. (U) BOM Governor Guillermo Ortiz spoke at the Mexican
Foreign Trade CouncilQs (COMCE) annual conference on
November 6. As in previous speeches, Ortiz called for more
competition in the financial and telecommunications
sectors, and asserted that competitiveness is tightly
linked with fair competition. He criticized the large gap
in the total annual cost for credit cards in Mexico and
abroad. He noted that while CitibankQs annual cost in the
U.S. is 22.4%, its subsidiary Banamex charges 62.2%; HSBCQs
annual cost in the U.K. is 21.7%, whereas in Mexico it is

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74.1%. Noting that MexicoQs low economic growth rate shows
a lack of competitiveness and low productivity, he stressed
that Mexico is losing ground to Asian and Eastern European
countries. Ortiz recommended approving reforms to make the
labor market more flexible, encourage innovation and
technology, and open keys sectors of the economy to more
competition. He also called for more government investment
in education, health care, and infrastructure.


5. (U) At the same conference, President-elect Calderon
called for energy, fiscal, labor, and pension reforms and
for the creation of export-oriented productive chains to
regain market share and achieve sustained economic growth.
Calderon promised to encourage financing for infrastructure
to reduce logistical costs, and to strengthen financial
institutions and capital markets to increase access to
credit at competitive interest rates. He also promised to
increase security and invest in human capital through
better educational and training programs.

Infrastructure Will be a Calderon Priority


6. (U) Dionisio Perez Jacome, Deputy Coordinator of
Economic Policy on CalderonQs transition team, said
publicly that the incoming administration will make
construction of highways, railways, ports, and airports a
priority. Regarding tourism, Perez said that the
government will develop other tourism sites, so-called
QIntegral Planned Centers,Q such as Nayarit, Palenque,
Chiapas, and Chihuahua, and that it will consolidate a
tourism project in the Mar de Cortes. In the housing
sector, he said the incoming governmentQs goal is to
construct 1 million houses a year.

Planned Energy Reform To Include Joint Ventures for Deep
Water


7. Perez also said the Calderon government will allow
PEMEX to enter into joint ventures for deep-water oil
exploration and production. He said the incoming
government will look for investment for refineries, natural
gas, and petrochemicals; a new fiscal regime for PEMEX; a
stronger Energy Regulatory Commission; and long-term
contracts for major energy consumers and private producers.

2007 Budget Will Not Include Structural Reforms


8. (U) Gustavo Madero, Chairman of the Senate Finance
Committee, said publicly that the 2007 budget will not
include structural reforms. Agustin Carstens, the head of
CalderonQs economic transition team, met with senators on
November 13 to discuss the 2007 budget package. Madero
said that they discussed how oil production and revenues
would probably be lower next year and the need for more
resources to pay public pension liabilities and long-term
infrastructure contracts (so-called Pidiregas debt).
Madero said CalderonQs transition team will present a
cautious budget this year in order to facilitate discussion
on fiscal reform in the coming year. Institutional
Revolutionary Party Senator Jose Eduardo Calzada
acknowledged CarstensQ willingness and openness to
negotiate with all political parties.

Outgoing Fox Administration Drafts Bankruptcy Law, Plans
Other Reforms


9. (U) The Finance Secretariat (Hacienda) sent the Federal
Commission for Regulatory Improvement (Cofemer) a draft
bill that would make it easier for the government to
recover assets when banks go into bankruptcy. Guillermo
Zamarripa, head of HaciendaQs Banking and Savings Unit,
said Hacienda will leave the draft bill ready for the
incoming administration to submit to Congress. Zamarripa
also said that before the end of the Fox administration on

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November 30, 2006, the Finance Secretariat will present
reforms to create specialized banks, regulate outsourcing,
and strengthen the National Banking and Securities
Commission (CNBV).

Wal-Mart To Get Banking License


10. (U) MexicoQs Finance Secretariat on November 15 said
that it has given the green light for the opening of five
new banks, including one by Wal-Mart de Mexico, and that it
expects to give final authorization within two weeks. The
other banks that the Secretariat said it expects to approve
applications for are Banco Facil, Banco Comercial Del
Noreste, Bancoppel, and Prudential Bank -- bringing to 13
the number of new banking licenses financial authorities
have granted this year. The entry of these banks into the
financial services market will generate more competition in
the sector and expand banking services to low-income
Mexicans, a segment of the population that traditionally
has not been served by MexicoQs large retail banks.

Anti-trust Commission Rejects Rail Merger


11. (U) MexicoQs Federal Competition Commission on
November 10 blocked the planned merger of Ferrosur and
Ferromex. This was the second time that the commission
rejected the merger of these two companies, which would
have created MexicoQs largest railroad firm. The
commission first rejected the plan in June, ruling that the
merger would hurt competition. The owner of Ferrosur said
it may challenge the ruling in court.

Controversy Continues Over QCalling Party PaysQ (CPP)


12. (U) The head of the Federal Telecommunications
Commission (Cofetel) said last week that Cofetel will not
allow companies that refused to implement CPP to Qaffect
the majority.Q His statement came after the fixed line
telephone companies (including Mexican companies Alestra,
Avantel, and Axtel) that had obtained an injunction against
implementing CPP complained that calls from their customers
to cell phones were being blocked. Mobile companies
countered that they were only alerting their customers with
a phone message informing them of the charges they were
about to incur before connecting calls from non-
participating fixed line companies. In response to the
complaints, Cofetel decided that mobile phone companies
were not violating the Federal Telecommunications Law
because they were not blocking calls. One of the
commissioners stated that despite the injunctions against
CPP, the system will be implemented. The commissioner
explained that mobile phone companies are only warning
their customers that they will have to absorb the cost of
the long distance calls coming from fixed line phone
companies that have not implemented CPP, which Cofetel does
not consider to be blocking calls.
Inflation Climbs to 15-Month High

13. (U) Consumer price inflation in Mexico rose to a 15-
month high in October as the price of tomatoes,
electricity, milk, and onions surged. Prices climbed 0.44%
in the month, bringing the annual inflation rate to 4.29% -
- above the Bank of MexicoQs (BOM) target of 3% and outside
the 2% - 4% band it considers acceptable. The BOM still
expects inflation to fall below 4% by yearend.

Industrial Production Figures Still Strong


14. (U) Industrial output rose by 5.0% year-over-year in
September, down from 5.6% the month before but still
slightly above market estimates. On a monthly basis,
output rose by a seasonally adjusted 1.0%. Growth is
largely being led by a booming construction sector. Most
market analysts expect growth rates to continue to soften
in the final quarter of the year and into 2007, in part due

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to the economic slowdown in the U.S.

GARZA