MEXICO ECONOMIC NOTES, JANUARY 11 - 17 2007

UNCLAS SECTION 01 OF 03 MEXICO 000279

SIPDIS

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/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, CINDY PENDELTON

E.O. 12958: N/A
TAGS: ECON EAGR ECPS ELAB EPET ETRD PGOV MX
SUBJECT: MEXICO ECONOMIC NOTES, JANUARY 11 - 17 2007

REF: MEXICO 152

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


1. (U) In response to sharp increases in tortilla prices, the
Calderon government has agreed to temporary price restraints
with a number of producers and distributors. Finance
Secretary Carstens has said he believes that the drop in oil

SIPDIS
prices is temporary and will not result in budget cutbacks
during 2007, but oil price declines would harm the Mexican
economy if fiscal reform is not enacted for 2008 and 2009.
The independent Federal Telecommunications Commission
(Cofetel) faces a threat from the Secretariat of
Communications and Transportation. Ten years after the
opening of the telecommunications sector, Telmex still
maintains its monopoly. Calderon voiced his support for open
markets and assured that he would comply with Cofetel's
ruling on the possibility of a third channel. End Summary.

Agreement Reached on Tortilla Pricing
--------------


2. (U) Over the past few weeks, there have been sharp
increases in prices for corn tortillas - a staple of the
Mexican diet. Tortilla prices had spiked to as much as 10
pesos per kilo (USD 0.91) in some parts of Mexico. After
initially saying it would not resort to price controls, the
Calderon Administration has reached an agreement with some
corn and tortilla producers and distributors to limit prices.
The "Agreement for the Stabilization of Tortilla Prices"
will be in affect until April 30. The association
representing small neighborhood tortilla producers committed
to limit prices to 8.5 pesos per kilo, while Wal-Mart and the
association covering all supermarkets in Mexico (The National
Association of Retail Industry, ANTAD) agreed to sell
tortillas for 6.5 pesos per kilo. The Chamber of Corn
producers agreed to sell corn meal/flour to tortilla makers
at 5 pesos per kilo. Diconsa, a government agency that sells
staples to the poor, will sell corn for 3.5 pesos a kilo.
Experts blame speculation and hoarding, rather than an actual
shortage of corn, for rising tortilla prices. The government
agreed to allow additional corn imports, in order to force
hoarders to put their stocks on the market. (See Septel)

GOM Not Disturbed by Oil Price Drop
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3. (SBU) In discussions with USG officials and in public
statements, Finance Secretary Agustin Carstens has said the
decline in oil prices will not force cuts to the government
budget in 2007, but will in 2008 and 2009 unless fiscal
reform is enacted to increase tax collection and move away
from a budget so dependent on petroleum revenues. Carstens
and Under Secretary of Finance Alejandro Werner explained
privately that use of the Oil Stabilization Fund and other
hedging mechanisms would avoid the need for cuts in the 2007
budget. Carstens publicly claims he believes the decline in
oil prices to be temporary, and has not admitted to any price
below which the Mexican government would have to cut the 2007
budget. Both government and private analysts admit that there
is a delicate public relations game being layed because the
threat of declining oil revenues is needed to force the
Congress and special interests in Mexico to approve fiscal
reform, such as measures to broaden the tax base and reform
operations in the state oil company, PEMEX. Yet, the budget
situation is not yet dire, and there is no need to upset
international markets.


4. (U) Pemex figures show the average price of Mexico's
export blends at 40.44 USD per barrel on January 18, below
the 42.80 USD price assumed by officials in drawing up the
country's budget for 2007. A private analyst from HSBC Bank
estimates that the Mexican crude export mix would have to

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fall below USD 37.30 a barrel before the government would be
required to cut spending for 2007.

President Announces Jobs Initiative
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5. (U) On January 15, President Calderon signed a decree
establishing the "National First Job Program" to give cash
incentives to companies hiring first-time job holders. The
government will also pay social security costs for first-
time job holders for one year. Calderon said the program is
aimed at helping young people and millions of women who have
never worked. In announcing the program, Calderon noted that
about one million young Mexicans enter the work force every
year but the economy struggles to provide enough jobs for
them, forcing many into the huge informal economy where they
neither pay taxes, nor receive pension or health benefits.
Calderon also noted that the government estimates around
400,000 Mexicans leave their homeland every year to seek
work. Speaking later that day before a convention of Mexican
industrialists, (the Canacintra),Calderon urged potential
employers to participate in the program.

Telecom Regulator vs. the Secretariat for Communications
-------------- --------------


6. (U) Past reforms to the Federal Telecommunications Law and
the Federal Radio and Television law have left wounds that
threaten to weaken the telecom regulator Cofetel. These
reforms declared that the naming of commissioners at Cofetel
(Federal Telecommunication Commission) is exclusively an
executive branch prerogative. By law, the executive branch
appoints Cofetel commissioners, but Congress has to ratify
them. The current Undersecretary of Communications, Rafael
del Villar, and Gonzalo Martinez Pous, Chief of the Legal
Department for the Secretariat of Communications and
Transportation (SCT),filed injunctions against the
appointments of Cofetel commissioners, Eduardo Ruiz Vega and
Gerardo Gonzalez Abarca. Experts worry that this SCT
intervention could turn Cofetel into a hostage of private
interests. Del Villar himself had been named as a Cofetel
commissioner during the Fox Administration, but the Congress
rejected his and other nominations.

Monopolies in the telecom sector
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7. (U) Former Mexican officials from the telecommunications
sector have publicly acknowledged that authorities have
failed to open the sector to more competition. They say that
although there are currently 27 long distance carriers,
Telmex still holds a 90 percent market share. Jorge Arreola,
a former Cofetel commissioner, acknowledged that Cofetel and
SCT were unresponsive to investors and unable to ensure
compliance with the principles of competition inherent in the
law. He said that many of these foreign investors, who
invested more than 2 billion USD combined, left Mexico after
failing to see returns on their investments. The remaining
companies, such as Alestra, Avantel, and Marcatel decided to
focus on niches. Arreola said that regulations continue to
be confusing and lack transparency. Albert Hilbert, another
ex-commissioner, said that the priorities now should be to
extend the coverage area for basic telecommunications, and
eliminate monopolistic practices such as tariff schemes and
the refusal of interconnections to competitors. Telmex
representatives counter that, while the number of operators
has remained low, there has been a market opening that has
brought increases in total traffic volume and improved market
conditions overall. More competition is clearly needed. The
fact that Mexico faces some of the highest charges for
telecommunications services among OECD countries is a major
drag on competitiveness, and forces all consumers and
businesses to pay monopolistic fees to the telecom giant
Telmex.

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8. (U) In his first press conference since taking office,
President Calderon voiced his opposition to monopolies. He
said he was convinced that competition benefits consumers and
makes economies more efficient. When asked about the
possibility of his administration authorizing a third
broadcasting company in Mexico, Calderon demurred, explaining
that Cofetel was the only authority responsible for
auctioning frequencies. He said that he would comply with
what Cofetel decides, in accordance with the law.


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