MEXICO ECONOMIC NOTES, APRIL 27 - MAY 4

UNCLAS SECTION 01 OF 03 MEXICO 002202

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SENSITIVE
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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/ARUDMAN
USDOC FOR ITS/TD/ENERGY DIVISION
TREASURY FOR IA (ALICE FAIBISHENKO)
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND ALOCKWOOD
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA)
NSC FOR DAN FISK

E.O. 12958: N/A
TAGS: ECON ECPS EFIN MX PGOV PREL
SUBJECT: MEXICO ECONOMIC NOTES, APRIL 27 - MAY 4


Summary
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1. (SBU) The Mexican senate approved a bill combating
terrorist financing that will now go to the President for
signature. The Bank of Mexico (BOM) raised interest rates by
a quarter percent to head off inflation, and the Finance
Secretariat and BOM revised this year's growth forecast

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downwards. Mexican economic leaders met to call for change
in the wake of yet another study showing dropping Mexican
competitiveness. GOM officials pledged to better protect
copyrights, trademarks, and patents after reappearing on the
"USTR Special 301 IPR Watch List." Both Standards and Poors
and Fitch Ratings assigned their highest ratings to the State
of Hidalgo newest financing vehicle after the state received
USAID technical assistance in the field. Finance Secretary
Carstens, in a meeting with congressional representatives,
confirmed that Congress would have a fiscal reform package to
consider before September. End summary.

Terrorist Financing Bill Passes Congress
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2. (SBU) Mexico's Senate passed a bill on April 26 that
would punish people who finance terrorist groups with up to
40 years in prison (See Mexico 963). The measure passed over
the PRD's opposition to what they called vague wording
defining terrorism that could be used against legitimate
political activity. The bill would establish terrorism
financing and international terrorism as serious criminal
offenses, as called for in UN Resolution 1373, and also would
make it easier for police to investigate bank records in
cases of suspected terrorism. The Chamber of Deputies (lower
house) approved the bill on February 20, 2007. To become
law, the bill must be signed by the President and published
in the official gazette.

BOM Raises Interest Rates
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3. (U) The Bank of Mexico (BOM) caught many economists off
guard on April 27 when it decided to raise its benchmark
interest rate from 7.0% to 7.25% to head off the threat of
inflation. All 16 economists surveyed by Bloomberg had
expected the BOM to hold rates steady after consumer prices
fell in the first half of April, bringing headline inflation
down to 3.96%, below the BOM's 4% upper limit. Most analysts
believe that this is not the beginning of a tightening cycle,
but rather a move intended to keep hikes in food prices from
spreading to other areas of the economy and, as some note, a
move to help restore the BOM's credibility. The Finance
Secretariat this week revised its growth forecast for 2007

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from 3.6% to 3.3%, and the central bank lowered its forecast
to 3.0-3.5%. Unemployment rose from 3.5 to 4.0 percent in
the first four months of the Calderon presidency according to
the Mexican National Statistics Institute. Observers noted
that both the formal and the informal sector, which can act
as a "safety valve," are weakening.

Economic Leaders Call for Action on Competitiveness
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4. (U) Secretary of Economy, Eduardo Sojo; Senate
Competitiveness Chair Eloy Cantu Segovia; Chamber of Deputies
Competitiveness Chair, Mariano Gonzalez Zarur; and Roberto
Newell of the Mexican Competitiveness Institute (IMCO) spoke
together on the need to immediately address Mexico's grave
competitiveness problems. By IMCO's own analysis, Mexico
dropped from 30th to 33rd place among the world's 45 largest
economies in terms of its competitiveness. The conference's
message was that the decision time is now and that Chile,
Ireland, and South Korea were able to turn their economies

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around with sensible and sustainable policies. Mexico can do
it too. All participants received a large tome describing
Mexico's shortcomings with respect to other nations that have
done better in many global/sectoral rankings during 2006.
OECD Secretary General Jose Angel Gurria spoke to the
audience by video link from Paris and echoed others' comments
that Mexico faces "very serious" competitiveness problems.
The OECD plans its economic review of Mexico to help set the
stage for needed economic policy actions. Review
recommendations include (1) promoting free competition in the
economy (code words for taking on monopolies and
oligopolies); (2) ensuring a high-quality and effective
regulatory structure; and (3) promoting more effective
government (good governance/rule of law/combating corruption).

Mexico Will Do Better on IPR
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5. (SBU) GOM officials responded positively to news that
Mexico will stay on USTR's Special 301 IPR Watch List,
expressing their commitment to take measures both
domestically and in coordination with the U.S. to better
protect copyrights, trademarks, and patents. In recent weeks
there have been encouraging signs of progress. President
Calderon reiterated in an April 26 speech his government's
determination to combat piracy. The Mexican Senate passed a
bill that would give law enforcement officials ex officio
authority to go after pirates and counterfeiters. The
Chamber of Deputies is expected to pass the bill into law in
September. Mexico's Office of the Prosecutor General of the
Republic (PGR - equivalent of U.S. Department of Justice) has
finished staffing its IPR team and is set to launch an
interactive IPR website. Mexico also asked to join as a
third party the consultations the U.S. requested with China
regarding its failure to honor its WTO commitments with
regard to IPR protection. The upcoming visit of Commerce
Under Secretary Lavin and the meeting of the SPP working
group on IPR scheduled for next month provide opportunities
to recognize these advances and push for further progress.
For more details, see septel.

State Public Finance Success
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6. (SBU) USAID's program to help Mexico's states and
municipalities tap innovative sources of financing had a
major success when both Standards and Poors and Fitch Ratings
assigned their highest ratings (AAA.Mx) to the Hidalgo
financing vehicle that is comparable to a state revolving
fund. The State of Hidalgo received technical assistance
through USAID's Global Development Alliance partner, Evensen
Dodge International. This is the first state revolving fund
to receive the highest domestic rating in Mexico, AAA.Mx. It
will permit the State of Hidalgo to access capital market
financing at preferential rates, which will benefit Hidalgo
itself, and allow 84 underlying municipalities and parastatal
entities to access private financing through this revolving
fund. The fund will issue 2,387,000,000 Mexican pesos (USD
221 million) to refinance and restructure outstanding debt.
The deal is in final negotiations and is expected to close on
May 8.

Fiscal Reform Coming This Summer
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7. (U) Finance Secretary Augustin Carstens in a meeting with
congressional representatives, confirmed that congress would
have a fiscal reform package to consider before September
when the session reopens, but no decision has been taken as
to whether the package would include controversial provisions
extending value added tax to food and medicine. PRD and PRI
members have signaled that any proposal including such a tax

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would fail. President Calderon outlined the "four pillars"
of the reform proposal as (1) improve transparency and
accountability in government spending and gear more
expenditures towards socioeconomic development; (2) diversify
sources of government income to reduce vulnerability of the
federal budget to changes in the oil price; (3) re-establish
"on a firm basis" the financial relationship between the
federal government and the states; and (4) improve tax
collection efficiency, with the goal of increasing
collections by 3 percent of GDP during the Calderon sexenio.


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