MEXICO ECONOMIC NOTES, MARCH 16-23, 2007

UNCLAS SECTION 01 OF 03 MEXICO 001451

SIPDIS

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: ECON ECPS EFIN ELAB MX PGOV PREL
SUBJECT: MEXICO ECONOMIC NOTES, MARCH 16-23, 2007

REF: MEXICO 1389

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Summary
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1. (SBU) The Mexican Chamber of Deputies (lower house) on
March 22 approved new draft legislation to reform the agency
responsible for providing pension and health care services
for government employees. The centerpiece of the reform is
the replacement the current "defined-benefits" system with a
defined-contribution scheme (individual retirement accounts)
-- similar to the system created in 1997 for private sector
employees. President Calderon on March 18 gave a frank
speech about the challenges facing Mexico in the petroleum
sector, and said that the country has less than ten years of
reserves remaining at current production rates. A DOT-GOM
monitoring group on the cross border trucking pilot program
is making progress on working out lingering issues regarding
Mexican companies, participation in the program and creating
guidelines for how U.S. companies will apply to take part in
the second phase of the pilot. The President and the
Governor of Baja California inaugurated a NADBank-financed
wastewater treatment plant in Mexicali. As a part of the
government's strategy to strength its debt structure, Mexico
on March 15 sold warrants that allow investors to swap
foreign bonds worth USD 2.66 billion for fixed-rate
peso-denominated bonds in September, October, and November.
The IPC stock index rose 3% to 29,220 on March 21 on news
from the U.S. Federal Reserve about interest rates. End
Summary.

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Government Advances Long-Awaited Pension Reform
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2. (U) The Mexican Chamber of Deputies (lower house) on March
22 approved new draft legislation to reform the agency
responsible for providing pension and health care services
for government employees. Amid protests both inside and
outside the building, the 500-member Chamber voted 313-146
with two abstentions in favor of the bill. Local press
reports say the Senate could approve the reform proposal as
early as March 27. The reform would gradually raise the
retirement age and replace the current "defined-benefits,"
pay-as-you-go pension system with a defined-contribution
scheme (individual retirement accounts) -- similar to the
system created in 1997 for private sector employees. To make
the proposal more palatable to Mexico's powerful unions, the
bill doubles the size of the minimum guaranteed pension and
increases government contributions to some the agency's
funds. Although the proposal seems assured of more than
enough votes for passage, the Democratic Revolution Party
(PRD) and some unions are opposing it -- arguing that it will
lead to the privatization of social security for state
workers. This reform would relieve significant pressure on
government finances and would be the first major economic
reform passed under the Calderon administration. See reftel
for more information on this reform.

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Calderon's Discusses Challenges to Petroleum Sector
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3. (U) On Pemex Day, March 18, the 69th anniversary of the
expropriation of foreign oil company assets, President
Calderon spoke frankly about the challenges facing Mexico in
the petroleum sector. He announced that Mexico has less than
ten years of reserves remaining at current production rates,
that in past years Pemex has operated below the industry
standard of replacing 100 percent or more reserves, and that

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Pemex has more than USD 5 billion in pension liabilities
alone. Calderon noted that oil income will be essential for
funding future government spending on poverty and
infrastructure, and he concluded that if Mexico "did not act
soon to reverse the situation, the country would face severe
problems." While pundits and industry participants have
described Mexico's oil woes at length, this is the first time
a Mexican President has outlined the situation in such stark
terms. Post will report on the speech and reaction to it
septel.

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USG Officials Discuss the Trucking Pilot Program
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4. (SBU) On March 21, Econoff met with Secretariat of
Communication and Transportation (SCT) and Economia officials
to conduct a video conference with the Department of
Transportation on the cross border trucking pilot program.
The group is making progress on working out lingering issues
regarding the Mexican companies participating in the program
and creating guidelines for how U.S. companies will apply to
participate in the second phase of the pilot. The SCT noted
that there is significant pressure from Mexican carriers and
the business community to address chronic border crossing
issues, such as long wait times, parallel to implementing the
pilot program.

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NADBank Opening a Sewage Treatment Plant
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5. (U) President Calderon and Governor of Baja California
Eugenio Elorduy have inaugurated the Las Arenitas Wastewater
Treatment Plant in Mexicali. The project is part of a
wastewater improvements project certified by the Border
Environment Cooperation Commission (BECC) in September 2003
and financed with grants from the North American Development
Bank (NADBank). The project is estimated to cost just over
USD 30 million, and was partially financed with a USD 12.85
million construction grant from the Border Environmental
Infrastructure Fund (BEIF),which is funded by EPA and
administered by NADBank. The plan will provide service to
almost 175,000 people in Mexicali and eliminate discharges of
untreated wastewater into the New River, which flows into the
U.S.

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Mexico Continues To Whittle Down its Foreign Debt
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6. (U) As a part of the government's strategy to strength its
debt structure, Mexico on March 15 sold warrants that allow
investors to swap foreign bonds worth USD 2.66 billion for
fixed-rate peso-denominated bonds in September, October, and
November. The auction attracted demand to exchange more than
USD 3.5 billion with respect to the dollar-denominated
warrants and approximately 530 euros for the euro-denominated
bonds. The Secretariat of Finance's Director of Public
Credit, Gerardo Rodriguez, said publicly that the government
planned to wait until all the warrants come due late this
year before deciding whether to sell more.

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Stocks Climb on Positive News From the U.S.
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7. (U) Mexican stocks rose the most in five months as the
U.S. Fed Open Market Committee signaled that it will consider
cutting rates by the June policy meeting, easing concern that
higher borrowing costs will hurt demand in Mexico's largest

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export market. The IPC stock index rose 3% to 29,220 on
March 21, surpassing for the first time closing level of
February 26, the day before a 9-percent decline in Chinese
share prices sparked a global selloff.


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