Identifier
Created
Classification
Origin
07MEXICO529
2007-02-02 18:15:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Mexico
Cable title:  

KEY MEXICAN LEADERS AND ACADEMICS DISCUSS ECONOMIC

Tags:  ECON EFIN ELAB PGOV PINR MX 
pdf how-to read a cable
VZCZCXRO6782
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #0529/01 0331815
ZNR UUUUU ZZH
P 021815Z FEB 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 5200
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 03 MEXICO 000529 

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/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, CYNTHIA PENDLETON

E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV PINR MX
SUBJECT: KEY MEXICAN LEADERS AND ACADEMICS DISCUSS ECONOMIC
POLICY

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

UNCLAS SECTION 01 OF 03 MEXICO 000529

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/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, CYNTHIA PENDLETON

E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV PINR MX
SUBJECT: KEY MEXICAN LEADERS AND ACADEMICS DISCUSS ECONOMIC
POLICY

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


1. (SBU) Two GOM ministers, Bank of Mexico (BOM) Governor
Guillermo Ortiz, and leading experts discussed the future of
economic policy in Mexico and key economic challenges at
seminar hosted by the Autonomous Technological Institute of
Mexico (ITAM) on January 11, 2007. Finance Secretary Agustin
Carstens said Mexico will probably not have to make any
adjustments to the budget this year because of lower oil
prices, but noted the importance of fiscal reform to reduce
the government's reliance on oil-related revenues. Carstens
said that the administration plans to begin negotiations on a
fiscal reform soon. He also highlighted the importance of
"translating" recent economic growth into poverty
alleviation. Ortiz said inflation would remain relatively
high during the first half of the year, but then fall during
the second half. He said that the recent increase in prices
is temporary, but emphasized the importance of these shocks
not contaminating inflation expectations. Participants also
highlighted the need for pension reform, noting the fast rate
at which Mexico's population is aging. Secretary of
Communications and Transportation Luis Tellez spoke about the
need to address globalization and migration issues and the
need for better infrastructure to meet the demands of
increasing foreign trade. ITAM professor Jesus Silva Herzog
said that the prospects for getting reforms though Congress
are better under President Felipe Calderon than they were
under the previous administration. He added that Calderon's
initial "signals" have been encouraging. End Summary.

-------------- --------------

Finance Secretary Calls for Reforms and Poverty Alleviation
-------------- --------------


2. (SBU) Speaking at a seminar held at the Autonomous
Technological Institute of Mexico (ITAM) on January 11,
Finance Secretary Carstens said that the Mexican economy will
face a moderate slowdown this year due to slower growth in
the U.S. and lower oil prices. He believes Mexico will be
able to weather a U.S. economic slowdown through strong
domestic demand, robust consumption, additional investment in
the construction sector, and prudent fiscal and monetary
policies. Carstens said that if there is a large, sustained
drop in oil prices, the government would have to cut
spending, but he does not foresee the need to make any
adjustments this year. He explained that the government has
built mechanisms into the 2007 federal budget to help absorb
the shocks associated with volatile oil prices. He said that
the recent fall in oil prices highlights the need for Mexico
to advance fiscal reform and to confront the challenges
facing Pemex.


3. (SBU) Carstens announced that in the coming weeks the
administration would begin negotiations with Congress and the
states for a comprehensive fiscal reform. He said that
measures in the 2007 federal budget -- such as the reduction
of the income tax from 29% to 28%, the tax hike on tobacco
products, and the scaling back of tax deductions on new cars,
assets, and consumption in restaurants -- are "steps in the
right direction." According to Carstens, a comprehensive
fiscal reform should improve tax collection, cut back on tax
exemptions, diversify income sources so the government is
less dependent on oil, and address the public pension system.
Carstens criticized generous tax deductions and exemptions,
which allow companies to significantly reduce the amount of
income on which they have to pay taxes. For him, liabilities
from the public pension system and long-term infrastructure
investment projects called "Pidiregas" represent the largest
sources of pressure on public finances.


4. (SBU) Carstens acknowledged that Mexico needs to
"translate" recent economic growth into poverty alleviation.
To reduce poverty -- a key government objective -- Carstens
said that Mexico needs to increase the "capacity" of the

MEXICO 00000529 002 OF 003


individuals, create employment, and invest more in food,
health, and educational programs. As a way to help reduce
income inequality, Carstens called for better infrastructure
in southern Mexico to link this region with the rest of the
country. Development banks will help extend credit to small-
and medium-sized businesses and to the agricultural sector.

-------------- --------------
BOM Governor Discusses Interest Rates and Inflation
-------------- --------------


5. (SBU) Bank of Mexico (BOM) Governor Ortiz sees two main
risks to the Mexican economy: the slowdown in the U.S.
construction sector and the drop in demand and output of the
automobile sector. Ortiz said that in general the economic
outlook for Mexico is good, and that inflationary pressures
in the U.S. are receding due to the fall of energy prices.
Given existing levels of global liquidity, he does not expect
other central banks to further tighten monetary policy.
Ortiz does not expect 2007 to be a repeat of 2001 in terms of
slowed economic growth, citing the growth in housing and
consumption credit and the strength of domestic consumption.


6. (SBU) Ortiz blamed the recent hike in tortilla prices on
speculation, noting that this pushed up core inflation in
late 2006 and early 2007. Ortiz asserted that corn
distribution in Mexico is not competitive. The 4.05%
inflation seen in 2006 was due to increases in tomato, sugar,
and corn prices. He explained that these inflationary shocks
were temporary, but emphasized the importance of these shocks
not contaminating inflation expectations. He said inflation
would remain relatively high during the first half of the
year, but then fall during the second half. Ortiz also
called for labor, energy, and fiscal reforms.

--------------
Speakers Highlight Need for Pension Reform
--------------


7. (SBU) Moises Schwartz, the head of the National Retirement
Funds Commission (CONSAR),said that the population in Mexico
was aging at a faster rate than many developed countries. By
2030, 17% of the Mexican population will be older adults, and
by 2050, the population pyramid will begin to invert. This
shift in the age structure will put even more strain on
public finances and the pension system. In the mid-1990s,
Mexico passed a reform that created individual retirement
accounts for private sector employees enrolled in Mexico's
main pension system, the Mexican Social Security Institute
(IMSS). Schwartz noted that, nevertheless, the Government
Workers' Social Security and Pension Institute (ISSSTE),
IMSS, the Federal Electricity Commission, Pemex, public
universities, and state and local government officials are
still under the old defined-benefit plan. More than 3.5
million government employees are still under the old plan.
The challenge for the new administration will be passing a
reform that balances assets with existing liabilities and
creating a National Pensions System. Schwartz said that
there is also a need to simplify the system, promote more
voluntary contributions, and provide more information on the
different funds and on commissions. He said funds need to
diversify even more. While they are investing more in
long-term bonds, funds continue to invest heavily in
government paper.


8. (SBU) Javier Berinstain, Director General of Afore XXI and
creator of the 1996 reform, said that future reforms should
take into consideration older people who do not have a
pension, those who do not have a pension because they work in
the informal economy, and those whose pensions are too small
to be considered "dignified." He suggested that reforms
should move towards a funded capitalization system.
Berinstain said reforms were largely a political issue, in
which some will lose (e.g. employees of IMSS and Pemex),but
the rest of the population will gain. He said it will have
to be a joint effort where public sector workers increase

MEXICO 00000529 003 OF 003


their contributions and private sector employees help pay
existing liabilities.

-------------- --------------
SCT Secretary Talks About Infrastructure and Telephones
-------------- --------------


9. (SBU) Secretary of Communications and Transportation Luis
Tellez spoke about the need to address globalization and
migration issues and the need for better infrastructure to
meet the demands of increasing foreign trade. He said the
new administration will face the following challenges:
regulating airports to make their fees and services more
competitive, improving railway interconnections and
regulations, improving the conditions of highways, and using
highways and railways to better connect ports to urban
production centers.


10. (SBU) Tellez said that along with Cofetel, SCT will look
to have more competition and more access to broadband.
Tellez said that telephone rates have fallen since 1998, but
acknowledged that they were still high.

-------------- ---
Analysts Discuss Calderon's First Steps, Reforms
-------------- ---


11. (SBU) ITAM professor Jesus Silva Herzog said that the
prospects for getting reforms though Congress are better
under Calderon than they were under former President Vincente
Fox. Silva Herzog said that the "signals" Calderon has sent
so far are encouraging, and that they show determination and
strength. Since his first day in office, Calderon has shown
that he plans to maintain order and lead a cohesive team.
Silva Herzog praised the new government's work fighting drug
trafficking and organized crime, saying that this was clearly
Calderon's top priority. That said, he noted a lack of
progress on other fronts (e.g. fiscal and labor reform),
saying that he did not even know what Calderon's second and
third priorities were. He believes it would be a good sign
if the administration followed through on its plan to begin
serious discussions on fiscal reform.


12. (SBU) Jorge Chavez Presa -- former advisor to PRI
presidential candidate Roberto Madrazo -- called for an
energy policy that would increase Mexico's capacity to refine
oil, explore and exploit natural gas, and produce
petrochemicals. He said that talk of privatization should be
changed to talk about "timely supply at lower costs."


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