MEXICO ECONOMIC NOTES, DECEMBER 7 - DECEMBER 13 --

UNCLAS SECTION 01 OF 04 MEXICO 000108

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SUBJECT: MEXICO ECONOMIC NOTES, DECEMBER 7 - DECEMBER 13 --
CORRECTED COPY

REF: A. MEXICO 6823


B. MEXICO 5854

Summary
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1. (U) The first budget from the Calderon Administration, for
fiscal year 2007 (ref A) was met by loud protests over
proposed funding levels for education and infrastructure, as
well as an increase in the tax for soft drinks. A detailed
cable regarding contentious parts of the budget will follow.
The Mexican legislature seems likely to pass legislation
complying with the recent WTO decision on long-grain rice,
but may refuse the government's proposed tax on soft drinks
which would also bring Mexico into compliance with the WTO
decision on Mexico's unfair beverage sweetener tax.
Broadcast duopolists TV Azteca and Televisa have been using
the airwaves for attacks on their rival's Mexican company
Casa Saba and its U.S. partner GE/NBC. According to press
reports, China-based Giant Motors is opening a light truck
production plant in Hidalgo. Calderon announces anti-poverty
program geared at poorest 100 towns. Inflation falls while
financial markets continue to rally. Finally, biographic
information is provided on new Under Secretaries in the
Secretariats of Energy and Transportation and Communication.

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End Summary.

Cuts to Public Spending on Infrastructure
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2. (U) According to leading analysts, the proposed 43 percent
cut in funding for the Secretariat of Transportation and
Communication (SCT) is part of the administration's strategy
to replace government investment with private investment.
Calderon's federal spending bill, presented to Congress for
approval last week, would give the agency responsible for
overseeing transit infrastructure 27.6 billion pesos (2.45
billion USD) in 2007 - a significant reduction from FY 2006.
While the Mexican Constitution limits private participation
and investment in public infrastructure, the federal
government has experimented in recent years with contracts in
which companies are hired to complete infrastructure projects
(schools, prisons, highways, etc.) which the government then
pays to use. Recently, the new Secretary of Transportation
and Communication, Luis Tellez, stated that the government is
looking for methods that allow private sector participation
in the construction of highways, bridges and roads in order
to reduce the level of federal resources directly involved.

Concerns Rising Over Education Cuts
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3. (U) The administration's proposed level of education
funding has set off a firestorm of protest. Lawmakers from
the two major opposition parties, PRD and PRI, formed a
working group to restore the slashed education funds before
the Chamber of Deputies approves a final budget sometime this
month. The Chamber's Policy Coordination Board, controlled
by the PRI, will present a resolution calling for the
protection of the universities from any budget cuts.
Reactions to Calderon's proposed education cuts were so
heated over the weekend that even Education Secretary
Josefina Vazquez Mota promised to urge the Finance
Secretariat to reconsider the decrease, which amounts to a

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1.2 percent cut, or about 415 million USD. Some lawmakers
grumbled that the cuts aimed at the universities may have
been politically motivated. UNAM, which recently broke into
the top 100 list of worldwide universities, has traditionally
nurtured leftist thinkers opposed to the conservative
policies of Calderon's National Action Party (PAN).


4. (U) Comment: While spending on education in the Calderon
government's 2007 budget proposal fell by 1.2 percent in real

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terms when compared to an estimate of what was actually spent
on education in 2006, it increased by 4.2 percent when
compared to the approved 2006 budget. Some educational
experts in Mexico criticized the government for diverting
funding to the universities at the expense of Mexico's poor,
most of who never have a chance to get to universities, or
even a decent education, because of the lack of reform and
funding for primary and secondary education (see ref b and
septel). End Comment.

Soft-Drink Makers Enraged By Proposed Beverage Tax
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5. (U) Mexican soft-drink makers vociferously urged Congress
to reject a proposed tax increase, saying it would hurt not
only the companies that produce the beverages, but also
low-income families who spend nearly as much on soda as on
basic products like beans and tortillas. The National
Association of Soft Drink and Carbonated Water Producers took
out a full-page ad in Mexican newspapers in which they also
claimed that the proposed 5 percent excise tax - which would
come on top of a current value-added 15 percent tax - would
result in a drop in demand, loss of jobs, and a reduction in
the demand for sugar. The new administration included the tax
in its 2007 budget proposal. The proposal is linked to the
dropping of the 20 percent tax on beverages made with
non-sugar sweeteners in order to comply with a WTO decision
against such discrimination.


6. (U) On another WTO issue, PRI Senator Cant#, President of
the Senate's Trade and Industry Commission reported that the
Chamber of Deputies has passed the bill (already approved by
the Senate in November) changing the antidumping provisions
of Mexico's Foreign Trade Law. The new provisions grant
accused exporters more time to present their cases to the
government and also no longer require that the highest
retaliatory rate be applied. The change was made to comply
with the lost WTO ruling on long-grain rice.

PAN Lawmakers State Willingness To Reallocate Resources
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7. (U) The Chairman of the Finance Committee of the Senate,
Gustavo Madero (PAN),asserted that PAN legislators are
willing to make moderate corrections to Calderon's budget
proposal. He claimed confidence that agreement will be
reached and the 2007 budget will be approved by all political
parties. (Mexican law requires the budget to be approved by
December 31, 2006.) Common points of convergence between the
parties will prevail over "small discrepancies." Jorge
Estefan (PRI),Chairman of the Finance Committee of the
Chamber of Deputies, however, warned that the 5 percent tax
on beverages would have to be discussed more with the
beverage industry to determine to what extend the impact of
this tax can be absorbed. He worried that approving a tax
that was unaffordable would ultimately result in higher
prices.

Duopolist attacks GE
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8. (U) Broadcast duopolist TV Azteca, which along with
Televisa has in recent weeks frequently denounced Casa Saba
on the airwaves for what they term monopolistic practices in
the pharmaceutical industry, stepped up its attacks on Casa
Saba to include GE, Saba's American partner in the TV market
through Grupo Extra. In early news broadcasts, TV Azteca and
Televisa concentrated on the high cost of medicines in
Mexico, pinning the responsibility on Grupo Saba and accusing
it of "sentencing to death" Mexicans who are ill. On December
7, however, TV Azteca further upped the stakes, focusing its
attacks on members of the Saba family and drawing the line
between Grupo Saba and GE, which it accused of monopolistic

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practices and fraud. Azteca's new programs referred to GE's
"dirty history" of the 1980s and 1990s and accused Casa Saba
of "extending its tentacles" in Mexico with the help of GE,
"profiting from the health and well being of Mexicans." GE's
general director in Mexico defended the company in the next
days on radio and in newspapers. So far, Televisa has not
joined in TV Azteca's attacks on GE. Comment: The attacks
are likely inspired by Grupo Saba's request for a license to
open frequencies for a new television channel, probably in
conjunction with GE/NBC's Telemundo, which would threaten the
Televisa/TV Azteca dominance of Mexican television content.
End Comment.

Chinese company will assemble trucks in Hidalgo
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9. (U) According to press reports, the Chinese company Giant
Motors will open a plant in Hidalgo to produce light trucks
with an initial investment of MP 180 million (16.7 million
USD). First year manufacturing numbers are expected to reach
2,800, 15 percent of which will be exported. The company
reportedly plans to create 700 jobs with a total investment
reaching 500 million pesos (46.3 million USD). The company
is reported to be making alliances with national suppliers to
reduce the number of imported spare parts. The units will
be distributed in Mexico through a joint-venture with Grupo
Bler in Monterrey, Guadalajara, Ciudad Obregon and Chihuahua.

Calderon announces program for the poor
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10. (U) On December 6, Calderon announced a program to help
the country's 100 poorest communities. Guerrero Gov.
Zeferino Torreblanca, a member of the PRD, attended
Calderon's ceremony in Tlacoachistlahuaca, which the press
noted was a sign that partisan solidarity with Lopez Obrador
may be trumped by the need to cooperate with aid-bearing
federal officials. In Tlacoachistlahuaca, Calderon urged
Mexicans to bury their differences over the election and
focus on the nation's problems. He said his anti-poverty
program will draw money from several federal agencies and
will be duplicated in 100 deeply poor towns where people
suffer malnutrition and disease and lack roads and clean
water.

Inflation falls in November on fruit prices
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11. (U) Annual inflation slowed in November on falling prices
for tomatoes, avocados and oranges, ending a three-month
spike which brought the inflation rate above the central
bank's target range of 3 percent plus or minus 1 percentage
point. The inflation rate fell to 4.1 percent in the 12
months ending in November from 4.3 percent in October.
Slowing inflation heightens speculation the central bank may
begin lowering its benchmark lending rate from 7% in the
first quarter of next year, however, according to a recent
Bloomberg survey of 15 economists, policy makers will leave
the benchmark rate unchanged during their next meeting. Core
consumer prices rose 0.29% in November after rising 0.27% in
October. The increase in core prices was above the 0.26%
median forecast in the Bloomberg survey.

Financial markets continue to rally
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12. (U) The peso keeps recovering and yesterday closed at
$10.84 pesos per dollar due to less uncertainty among
investors regarding Mexican paper, more remittances,
Christmas bonus and the low demand for dollars from holdings.
Yields in the secondary market also declined and the 10-year
peso-denominated bond closed at 7.48 percent. The stock
market hit its 54th record during the year closing at 25,615.

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Secretariat of Energy Appointments

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13. (U) Secretary of Energy, Georgina Kessel, appointed Ruben
Flores Garcia as Under Secretary of Electricity, Jordy
Herrera as Under Secretary of Energy Planning, and Mario
Gabriel Budebo as Under Secretary of Hydrocarbons. Flores
Garcia was previously Director of Distribution and
Electricity Storage. He has a degree in electromechanical
engineering from the Instituto Technologico de Monterrey and
a MBA from the Autonomous University of Guadalajara. He was
also commissioner of the Energy Regulatory Commission (CRE)
and director of the electrical system at the Mexican
electricity monopoly (CFE). Herrera was previously Director
General of the Energy Secretariat's Investment Promotion
Unit. He has a Bachelors degree in economics from
Universidad Iberoamericana and also has professional
certificates in economics, politics and marketing. He was
the Secretary of Energy's executive assistant in 2003.
Budebo was formerly Chair of the National Retirement Saving
Commission (CONSAR). He has a Bachelors in economics from
Instituto Technologico Autonomo de Mexico (ITAM) and has a
Masters and Phd from the University of California. Budebo
was also coordinator of advisors for Secretary of Finance
Francisco Gil Diaz, and coordinator of revenue and fiscal
policy. In 1998, Budebo received an Economics Award from
Banamex.

Appointments in Secretariat of Transportation and
Communication (SCT)
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14. (U) Secretary of Transportation and Communication Luis
TQllez Kuenzler has named his under secretaries. Manuel
Rodriguez Arregui, Under Secretary of Transportation, has
experience in public and private sector infrastructure
projects. He was Director General of Studies in the
Secretariat of Agriculture where he designed programs to

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support agricultural producers and alleviate poverty. He
studied economics at Massachusetts Institute of Technology
(MIT) and has a Master in Public Administration from Harvard.
Oscar de Buen Richkarday, Under Secretary for
Infrastructure, has been working in SCT for 25 years. He has
a degree in civil engineering from Universidad National
Autonoma de Mexico (UNAM) and has a Master of Science with
specialization in transportation from MIT. In SCT, he has
served as Chief of the Highway Unit and Director General of
Highway Development. He was responsible for the design of the
new concession scheme launched by the Fox administration.
Rafael del Villar Alrich, Under Secretary for Communications,
had been working for the Bank of Mexico since 1996. He holds
a Bachelors degree in economics from ITAM and earned a
Masters and a PhD from the University of Pennsylvania. He
has also worked for the Organization for Economic Cooperation
and Development (OECD). He previously worked for SCT as
Director General of Telecommunications and International
Policy from 1995-1996.


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