MEXICAN BUSINESS SUMMIT TOUTS LIMITED ENERGY REFORM;

UNCLAS SECTION 01 OF 06 MONTERREY 000506

SIPDIS

E.O. 12958: N/A
TAGS: PGOV ECON ENRG ETRD EINV SNAR MX
SUBJECT: MEXICAN BUSINESS SUMMIT TOUTS LIMITED ENERGY REFORM;
ANTICIPATES THAT MEXICO CAN MUDDLE THROUGH U.S. FINANCIAL CRISIS

REF: A) MEXICO 3210; B) MEXICO 3345

MONTERREY 00000506 001.2 OF 006



1. Summary. Approximately 200 business leaders and
government officials attended the sixth annual Mexican Business
Summit in Monterrey, and they discussed energy reform, the
impact of the U.S. financial crisis on Mexico, whether Mexican
can increase its economic development, President Calderon'
political reforms, security issues, and the bilateral
relationship. Colombian President Alvaro Uribe described
Colombia's efforts against drug cartels and measures taken to
maintain stability in the face of the global financial crisis.
Mexican Energy Minister Georgina Kessel promoted the recent
energy reform, claiming that the reforms would permit the state
oil company Pemex to maintain oil production, increase the use
of renewable energy, and allow for private sector participation.
On the margins, several private companies said that they are
interested in working with Pemex. GOM Undersecretary of the
Economy Felipe Duarte Olivera claimed that Mexico would avoid an
economic downturn and he praised Calderon's economic reforms,
while others saw the U.S. financial crisis as far more
threatening to Mexico and dismissed the reforms as cosmetic.
Honduran President Jose Manuel Zelaya Rosales argued that the
financial crisis could be overcome through greater economic
integration. Mexico was also urged to increase its focus on
trade with China. End Summary.



Colombia President Uribe Preaches Success in Drug Battle;
Economic Stability




2. Colombian President Alvaro Uribe emphasized the measures
taken by his government to maintain stability during the global
financial crisis. Uribe, speaking to a packed audience for over
an hour and a half, maintained that only private investment
coupled with social reforms could alleviate poverty. He
described tax incentives used to attract foreign investment in
Colombia, particularly in the energy field. According to Uribe,
Colombia has sufficient dollar reserves, banks have not been
exposed to high risk mortgages, and speculation in derivatives
has not been a problem. Further, he was proud that his
government had dismantled many subsidies over the past several
years.




3. Despite his general confidence in the Colombian economy,
Uribe noted several areas of concern. He fears a drop in
foreign investment and a loss of tax revenue resulting from
global demand reduction. Many energy projects dependent on
foreign capital could be postponed in his view. Uribe also
condemned fraudulent pyramid financial schemes which could
damage the financial sector and he vowed to prosecute those
involved with such illegal financial schemes.




4. Uribe fielded numerous questions related to his
government's success in combating organized crime and
narcotrafficking. He argued that economic stability required
public trust and that such trust emerged from a secure physical
environment. Uribe attributed Colombia's success against
organized crime to public involvement in security programs;
awards for persons identifying criminals; protection programs
for crime victims; a robust extradition program; reform of the
intelligence community; national control of police forces; a
doubling of the justice budget; a significant coca eradication
program, and zero tolerance for corruption in government.
Responding to a question about the targeting of labor leaders,
Uribe stated that murders in his country had been reduced from
35,000 per year to about 16,000 and that many areas, including
Bogota, had become much safer. He added that success against
crime required social advances, including improved education,
health, labor, and tax programs.




5. Uribe stressed the importance of a free market
capitalist system, coupled with strict regulations against wild
speculation. He expressed confidence that the G-20 would
address the need for reforms and promoted continued reliance on
free trade agreements, including the pending agreement with the
United States. Uribe expects to have some 45 trade agreements
in force by 2010.


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Can the Mexico's Energy Reform Maintain Oil Production?




6. Minister of Energy Georgina Kessel pitched Mexico's
energy reform law as just the right medicine to modernize Pemex,
maintain oil production, permit contracts with private industry
(but not share profits),build a refinery and encourage
renewable energy (see details in reftel A). Kessel claimed that
the reform will encourage Pemex to continue production of 3
million barrels of oil per day `in the near term', add 1% GDP
growth, create 300,000 jobs per year, and maintain revenue for
the federal government, provide 26% of Mexico's electricity
through renewable energy by 2012, and provide funding for the
federal, state and local governments.




7. There was considerable skepticism whether the energy
reform package could meet its goals. In a subsequent panel
discussion on energy, Eugenio Laris Alanis, Director of Financed
Investment projects for the Federal Commission of Electricity
(CFE) described the reform as a political consensus that
delivered minimum economic impact. Laris noted that oil
production was declining, so in the near future Mexico could no
longer export oil. Note. Kessel had claimed that Pemex could
compensate for declines in existing fields by boosting deep
water production, which seems optimistic since Mexico has
drilled few deep water wells and these fields take years to come
on line. End Note. Laris further asked how Mexico would cover
the hole in government spending, since the GOM relies on oil
revenue for up to 35% of its revenues. Political analyst
Sergio Sarmiento questioned Kessel's job creation and GDP growth
targets, stating that Pemex would have to create double its own
payroll every year to meet this goal. The renewable energy goal
also appears to be a reach. Herbert Mills, Managing Director
for Duke Energy's business development, privately estimated that
Mexico currently produces 16% of its electricity through
hydropower, adding that Mexico plans to add several more
megawatts through wind energy. Mills thought that perhaps
Mexico could get to 20% renewable energy, but it will be
difficult to expand wind power further because the demand for
wind turbines and equipment is so high that equipment is ordered
years in advance.




8. Although many economists and commentators have blasted
the energy reform law since it prohibits profit sharing
contracts with private industry, in side conversations, some
private companies noted their interest in production contracts
with Pemex. In public, officials such as Exxon Mobil's Neal
Goins blandly said that it is too early to tell if the energy
reform is bold enough to attract deep water investment.
However, several officials from British Petroleum told Econ
MinCounselor that they saw a number of opportunities for
contracts under the new law. A Monterrey energy lawyer also
said that his firm is studying the law for possible investment
opportunities and he was optimistic that they could be found.



Honduran President Zelaya Urges Further Economic Integration




9. Honduran President Jose Manuel Zelaya Rosales delivered
an upbeat message grounded in his conviction that the present
financial crisis will be confronted and overcome. Zelaya blamed
the continuing crisis on a lack of public trust that must be
restored through strengthened international regulations and the
establishment of firm dates for resolving outstanding banking
and financial issues.




10. Zelaya called for development of a financial architecture
that would unite Mesoamerica in a manner similar to the European
Union. He envisions the integration of the 190 million people
in the region, joined through common communications,
transportation and customs systems. Zelaya suggested that such
integration would give the region more independence in matters
of energy, food, and the economy. He informed the audience of
the tax free zone in the Bay Islands of Honduras, the advantages

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of the Port of Cortes, and of Honduran tax incentives for
foreign investment in bio fuel production and the tourism
industry.




11. Zelaya praised both President Calderon and President Uribe
for their fight against narcotrafficking. He referred to both
the drug consumption problem in the United States and the coca
production problem in South America. He termed the Merida
Initiative a good first step, but acknowledged that a policeman
could be bribed with more narco money in one day than the
government could provide in a year's salary. Despite the
challenges, Zelaya said that narcotrafficking must be fought
from Colombia to the US.




12. Zelaya's remarks were largely devote of criticisms or blame
for the financial crisis or the drug situation. Instead, he
emphasized the value of free trade agreements, the importance of
regulating the free market system, and continued regional
economic integration. He further expressed confidence in the
next US administration and urged broader diplomatic relations
between the US and Latin America.



Mexican Economic Ministry Describes Positive Economic Growth




13. Standing in for Economy Minister Ruiz Mateo, Undersecretary
Felipe Duarte Olivera painted a mostly positive picture of the
Mexican economy. Despite the financial crisis, Olivera cited
some growth in the economy, the creation of about 375 thousand
jobs this year, continued foreign investment and Mexico's
infrastructure program as signs that the country will weather
the financial storm. While acknowledging slowdowns in all of
the above areas, Olivera maintained that Mexico was gradually
moving away from the traditional effects of cyclical downturns
in the U.S.




14. Olivera also listed advances in structural reforms
accomplished during the Calderon administration. He identified
pension reform and recent energy reform measures giving oil
monopoly Pemex greater flexibility in contracting private firms
as two primary examples of economic advances. He maintained
that the government would make Small and Medium sized
Enterprises the driver of Mexico's economy. Further, he
described the massive road, port, and bridge construction
programs as evidence of the government's determination to spend
more money to expand the economy. He looked to more regional
integration as a step toward greater economic prosperity.




15. Comment. Somewhat surprisingly, Olivera made almost no
mention of current dangers to the Mexican economy: falling oil
production; reduced remittances; weakened demand for Mexican
exports; expected losses in the tourism industry; postponements
of some infrastructure development programs; and declining
foreign investment. End Comment.



Differing Views of the Seriousness of the U.S. Financial Crisis




16. While several foreign commentators argued that the U.S.
financial crisis will fundamentally change world consumption
patterns, forcing Mexico to move beyond primarily exporting to
the U.S., Mexican government officials and businessmen simply
saw a deep, but typical, recession, and expected U.S.
consumption habits to resume after a pause. In a panel
discussion of the consequences of the U.S. financial crisis,
Justine Thody of the Economist Intelligence Unit said that while
the typical recession affected investment, this one is much more
severe since it is linked to a drop in household spending, and
another panelist noted that consumption accounts for 70% of the
U.S. GDP. Thody compared the U.S. crisis to the lost decade for
Japan, and thought that global demand would be restructured.
Eric Siegel, President of Export Development of Canada, agreed

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that this would be a very deep and broad recession, and the
recapitalization process would be difficult since banks were
hesitant to lend any money, affecting liquidity. Clyde
Prestowitz, President of the Economic Strategy Institute (of the
U.S.) argued that U.S. consumption had reached its limits, and
forecast a global re-adjustment because America must stop living
beyond its means.




17. Most Mexican panelists thought that the U.S. was just
suffering a downturn, and like Under Secretary Olivera, they
expected things to soon return to normal. Nuevo Leon Governor
Jose Natividad Gonzalez Paras stated that President Calderon had
reacted well to the crisis, and that Mexico's national
infrastructure program would have a good countercyclical effect.
Governor Gonzalez also thought that the crisis would bring
areas of opportunity, and he promoted his long term strategy of
building clusters of information technology, biotechnology, and
health services to Nuevo Leon, in addition to automotive and
household appliances. Governor Gonzalez also touted a well
publicized plan by Nuevo Leon to combat the crisis, arguing that
states could alleviate the problem, although much of his plan
consists of making suggestions for actions by the federal
government. In other panels several other Mexican business
leaders took a similar line, suggesting that the Mexican
government should react with their usual remedies of decreasing
regulation and increasing financial incentives for investment
(see also reftel B). None of them suggested that Mexico needed
to re-examine its dependence on U.S. consumer spending. (Mexico
currently exports 78% of its goods to the United States, many of
them bulky consumer items).



Mexico is Not Poised to Become a BRIC country




18. According to several panelists, Mexico is not making the
fundamental changes required to become a high growth BRIC
(Brazil, Russia, India and China) country. The discussion was
kicked off with a Goldman Sachs study predicting that Mexico
would become the fifth largest economy in the world by 2050 and
that Mexico and Korea were becoming BRIC countries in terms of
economic growth. Guillermo Prieto Trevino, President of the
Mexican stock market, dissented stating that the BRIC countries
are making fundamental reforms to improve competitiveness and
labor productivity, but Mexico is not. Indeed, Mexican income
levels are actually declining relative to the United States.
Axel van Trotsenburg, World Bank Director for Mexico and
Colombia, pointed out that before Mexico's income was 33% of the
U.S., but now it has declined to 25%, while Korea and Chile are
showing marked improvement. Moreover, the Mexican educational
system has fallen behind, as Mexican students have the lowest
marks in the OECD countries, while Korea had an outstanding
educational system. In addition, Mexico only devotes 1% of its
GDP to research and development, while China spends 3% on R&D.
Mexico also ranks poorly in studies of international
competitiveness and regulatory burden on businesses. The
Mexican people still have a low rate of financial
intermediation, 30% of banking assets to GDP compared to Brazil
at 80%. Pedro Garcia, Managing Partner of Accenture, made the
interesting point that in Brazil President Lula convinced the
Brazilian people that to become a world player Brazil had to
make enormous changes, and they have done so.



Greater Trade With China as a Solution?




19. The conference opened with a discussion of the economic
relationship between Mexico and Asia, with an emphasis on China.
Hong Kong businessman Chen Yuming encouraged a much stronger
Mexican effort to address the current trade imbalance with
China. He urged the Mexican government to actively promote
quality goods and services in China. Saying that China had some
USD 7-8 trillion dollars in reserves, Chen advocated for more
Mexican trade in architecture, food, cultural and other products
unique to this country. Chen also noted that Mexico should take
greater advantage of its position as the gateway to the U.S.




MONTERREY 00000506 005.2 OF 006



20. Chen stated that three of the 10 largest Chinese auto
manufacturers currently maintain investments in Mexico and 4
more companies are considering establishing production here.
When asked how this could be happening at a time when the auto
industry is under stress, Chen viewed the financial crisis as a
passing phenomenon, stating that Chinese companies sought to be
in a strong position to serve the US auto market when economic
conditions improve.




21. Several speakers promoted a comprehensive trade agreement
between China and Mexico and some commented on the importance of
Japan, Malaysia, Vietnam, and other Asian markets as essential
to further diversification of Mexican global trade. Note.
Mexico has free trade agreements with over 40 countries, but 78%
of its exports are still destined for the American market. End
Note.



Mexico's Political System produces Tepid Economic Reforms




22. Several prominent political commentators agreed that
Mexico's political system produces minimal economic reforms that
cannot transform the country. Political commentator Denise
Dresser described Calderon as a pragmatic minimalist, who thinks
small so reforms are diluted. Dresser castigated the Mexican
political class for celebrating political consensus, such as on
energy reform, which does not solve the problem. Political
analyst Sarmiento agreed that the energy reform was a political
success for Calderon, especially since it divided the leftist
opposition PRD party, but questioned whether the reforms would
result in increased oil production. Sarmiento commented that
the ISSTE pension reform was the best reform, the fiscal reform
only met a small part of the needs, and the energy reform was
primarily a political success. In contrast, in a panel
discussion on increasing Mexico's internal market, several
speakers mildly praised Calderon's reforms as a step forward and
improving competitiveness. Similarly Alfonso Zarate Flores, CEO
of Grupo Consultor Interdisciplinary, acknowledged weaknesses in
the Calderon reforms, but he put them in the context of the
evolution of the Mexican political system, so there are
political checks on the Mexican President, who can no longer
dictate reforms.



Security Battle




23. Although Mexico remains a major drug transshipment country,
there have been significant successes in the war on drug
cartels. Jorge Chabat, Professor at the Economic Education and
Study Center, maintained that the Mexican Government military
offensive against the drug cartels and extradition of key
narcotics traffickers has fragmented the cartels and increased
Calderon's popularity, albeit at the price of much higher
violence. Chabat also said that the GOM had improved its
intelligence systems, and cited the Merida Initiative as an
example of the increased level of trust with USG law
enforcement. Monte Rubido Garcia, executive secretary for the
National System of Public Security, claimed significant advances
in the fight against drug cartels, citing the arrest of drug
kingpins, seizures of cocaine, money and arms, and attributed
these successes to better intelligence work. Despite these
advances, much remains to be done. Rubido Garcia acknowledged
that citizens are reluctant to report crimes, since the police
forces were originally designed to control the population, not
to protect the people. A questioner described Mexico as having
a culture of impunity, beginning with black market goods and
extending to police corruption.




24. In spite of the diagnosis, there were few real suggestions
how to change Mexico's culture of impunity or improve the police
forces. For example, Thody of the Economist Intelligence Unit
stated that Colombia substantially improved its police force
through higher salaries financed through higher taxes, but no
one responded that they were willing to pay more taxes for a
more effective police force. Instead the panel ended with
comfortable platitudes that all Mexicans are in this together

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and we must improve the culture of lawfulness in Mexico.



U.S. Priority will be the U.S. Economy; Immigration Reform will
Wait




25. Panelists forecast that President-elect Obama would
principally focus on the U.S. economy and mark time on
immigration reform. James Kolbe, former U.S representative and
current senior fellow with the German Marshall fund, thought
that President-elect Obama would need to focus first and
foremost on the U.S. financial crisis. Roger Wallace of the
Mexico Center in the Woodrow Wilson Center agreed that Mexico
would not be a priority, but other panelists pointed out that
this is positive, because the bilateral relationship was strong.
The panel generally agreed that with rising unemployment, Obama
would not be able to tackle immigration reform in the first two
years of his presidency. However, it is also possible that the
issue could bubble up through pressure from Congress. Several
speakers also praised the Merida Initiative as symbolic of the
shared responsibility to confront the problem of drug cartels.




26. Comment. Although the 2008 Mexican Business Summit had
headliners such as Colombian President Uribe and Mexican Energy
Secretary Kessel, the Mexican Government representation was
lower level. President Calderon made presentations at the 2006
and 2007 Summits, Treasury Secretary Carstens spoke at the 2006
Summit and Central Bank President Guillermo Ortiz in 2007. In
Econoff's view, the summit mood also shifted. In 2006 there
were great expectations for the Calderon Administration, and
President-elect Calderon promised that Mexico would become the
best place in the world for foreign investment. In 2007,
business leaders were frustrated that President Calderon had not
enacted the fundamental structural economic reforms needed to
lift Mexican international competitiveness. In the 2008
edition, although there were calls to improve Mexican economic
competitiveness and enhance security, the Mexican attendees
seemed less demanding and accepted that Mexico had taken the
first steps on reforms and would ride out the U.S. financial
crisis. End Comment.




27. This cable was drafted collaboratively between the Embassy
in Mexico City and the Consulate General in Monterrey.
WILLIAMSON