MEXICAN CENTRAL BANK REGIONAL DELEGATE PAINTS A GRIM PICTURE

UNCLAS SECTION 01 OF 02 MONTERREY 000508

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV EPET PGOV MX
SUBJECT: MEXICAN CENTRAL BANK REGIONAL DELEGATE PAINTS A GRIM PICTURE
OF THE ECONOMY

REF: A) MEXICO 3345 B) MONTERREY 495

MONTERREY 00000508 001.2 OF 002



1. (SBU) Summary. On November 14 the Nuevo Leon regional
delegate of the Mexican Central Bank briefed the local American
Chamber of Commerce on the U.S. financial crisis and its impact
on Mexico. His analysis reflects many negative trends and
portrays a much more negative picture of the Mexican economy
than described by the Mexican Treasury Ministry. In particular,
delegate Agustin del Rio emphasized that the Central Bank's
immediate priority will have to be market intervention in order
to maintain a stable exchange rate. He foresaw long term
threats to the Mexican peso in view of dropping oil production,
exports and remittances. He stated that the outlook for the
Mexican economic growth has dimmed due to declines in the
Mexican stock market, falling consumer demand and retail sales.
Employment is not growing, wage growth is stagnant, and total
bank credit is declining. End Summary.



Central Bank Interventions to Stabilize the Mexican Peso




2. (SBU) According to del Rio, the Mexican peso has lost
value due to the `flight to quality' to the U.S. dollar, and
money is draining out of Mexico. Del Rio presented graphs
showing that the Mexican peso devalued 16% from September 11 to
October 13, the Mexican stock market fell 19%, and Mexico
country risk, measured by EMBI+ (Emerging Markets Bond Index
plus) rose from 200 basis points in September to 400 basis
points. In addition, over $6 billion dollars have been
withdrawn from emerging markets (not just Mexico) in the last
month or six weeks. Del Rio thought that the economy had not
yet reached the bottom, and mutual funds would continue to pull
investments from the emerging markets. He also worried that
although the Federal Reserve and other Central Banks have
invested in the commercial banks, there is still a lack of
access to credit and liquidity.




3. (SBU) Del Rio stated that the Mexican Central bank will
continue to intervene to stabilize the value of the peso (see
reftel B). In addition, the U.S. Federal Reserve has offered
$30 billion dollars to the Central Bank to support the Mexican
currency. That said, Del Rio is still worried about the long
term exchange rate, since Mexico's oil production and exports
are declining, as are worker remittances, all three of which
will bring fewer dollars into the Mexican economy.



Impacts on the Real Mexican Economy




4. (SBU) The Central Bank found that the U.S. financial
crisis has resulted in sharp reductions in the growth of
consumer spending, retail sales, exports and industrial
production. Mexican industrial output is closely tied to the
U.S. index of manufacturing production, and the U.S. index is
falling rapidly. Del Rio did not present Mexican figures, but
he expected them to follow suit. Del Rio did present charts
showing that growth in Mexican private consumption, bank
consumption credit and retail sales have fallen since March
2008, although they are still positive. In addition, Mexican
worker remittances are dropping following the fall in U.S.
construction employment. The Central Bank statistics also show
that since August there has been a large decline in the growth
of gross capital formation and a small drop in investment
growth. In general manufacturing exports are still increasing
at 10% per year according to the most recent statistics,
although automotive exports declined by 4%. The same trend
holds for industrial production, manufacturing output, and
electrical consumption, where annual growth rates have fallen
substantially since December 2007, and each of the indexes are
now growing at only 1-2% per year.




5. (SBU) The slowdown in the Mexican economy has also
affected employment and wages. Since December 2007 the annual
increase in total wages have fallen from 5.3% to 1.8%, formal
employment growth has declined from 3.9% to 1.6%, and the mean
wage in the formal economy, which was up 1.4% in December 2007,
is now stagnant at 0.1% growth. The growth in formal employment
has fallen from 3.87% in December 2007 to 1.64% in September

2008. The percentage increase in permanent formal employment

MONTERREY 00000508 002.2 OF 002


fell from 4.3% in April 2007 to 1.5% in September 2008, while
the increase in temporary workers has fallen from 14.4% in July
2006 to 3.2% in September 2008.



Mexican Central Bank Distributing Business Surveys




6. (U) Del Rio gave his presentation to the American
Chamber of Commerce monthly board meeting, and requested that
board members fill out a survey of their perceptions of business
conditions. Del Rio had requested that the Consulate arrange
for the briefing to the AmCham, so that he could gather more
real time information on economic trends. Post will forward an
electronic copy of the presentation (in English) upon request to
the following e-mail address: heartneyep@state.gov
.




7. (SBU) Comment. There is a clear division between the
public stances of the Mexican Central Bank and the Ministry of
Hacienda (Treasury). Hacienda argues that the U.S. financial
crisis has had a much more mild impact on Mexico and that the
Mexican economic fundamentals are solid. Del Rio acknowledged
Hacienda's differing view, but countered that the numbers
support the Central Bank position. End Comment.
WILLIAMSON