H1N1 ECONOMIC RELIEF PACKAGE - BEST MEDICINE?

UNCLAS SECTION 01 OF 03 MEXICO 001260

SENSITIVE, SIPDIS

FED FOR DURDU
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E.O. 12958: N/A
TAGS: ECON EFIN ETRD KFLU TBIO PINR PGOV PREL MX
SUBJECT: H1N1 ECONOMIC RELIEF PACKAGE - BEST MEDICINE?


1. (SBU) Summary: In an effort to resuscitate an economy laid low
by the flu, on May 5 the Mexican government unveiled a stimulus
package totaling 18.8 billion pesos (USD 1.4 billion). As the
hardest hit sectors, tourism and SMEs will be the main beneficiaries
of the plan, although Mexico's pork producers will also receive some
assistance. Public reaction to the stimulus package has been mixed.
The government has been praised for its swift action and its
responsiveness, but businesses and analysts assert that this aid
package is insufficient. With Mexico already hit hard by a
recession, the adjusted government 2009 GDP forecast now stands at
-4.5 percent. The H1N1 outbreak has only made a recovery more
difficult. End Summary.

THE PACKAGE
--------------


2. (U) On the final day of a five-day shutdown of commercial
activity meant to slow the spread of the H1N1 virus, Finance
Minister Carstens acknowledged in a press conference that the flu
outbreak will have a "significant" impact on Mexico's economy.
Based on his ministry's study of similar cataclysmic events in other
countries, he said the impact could be between 0.3 and 0.5 percent
of Mexico's GDP, which was USD 1.14 trillion in 2008. Unlike
similar natural disasters however, Mexico's economic infrastructure
remains intact and therefore, Carstens stressed, Mexico will likely
recover quickly. Many analysts have countered that because of the
current recession facing Mexico, the recovery could take a little
longer. Indeed, the Mexican government's new GDP forecast for 2009,
adjusted to include the maximum 0.5 percent impact of H1N1, now
stands at negative 4.5 percent. Independent analysts believe the
economy will shrink even further, by as much 5.9 percent.


3. (U) Carstens outlined seven economic supports to help Mexico
recover quickly. First, the Finance Ministry assumes that given the
maximum impact of 0.5 percent of Mexico's GDP, tax collection will
fall by 10 billion pesos (USD 760 million). However, the Mexican
government will make no attempt, such as implementing new taxes, to
recoup these estimated losses. To foster liquidity, the government
will allow businesses to deduct around 2 billion pesos (USD 150
million) in excess business flat tax (IETU) payments from their
monthly payments of the ISR income tax. To protect employment,
businesses will be granted a 20 percent reduction in employee health
care payments in the IMSS social security system over the next two
months (an estimated 2.2 billion pesos or USD 167 million).

SHORING UP TOURISM
--------------


4. (U) The package also proposes a reimbursement to the states for
businesses in the tourism sector of 25 percent of their losses over
the next three months (an estimated 500 million pesos or USD 38
million). In effect, the government will compensate 25 percent of
their tax collection losses to those states that authorize tax
exemptions on the local 2 percent payroll tax and lodging taxes. To
assist the airlines and cruise ships, there is a compensation
package of about 250 million pesos - USD 19 million, consisting of a
50 percent reduction in air traffic control fees, but only for those
few airlines that are not behind on their payments. The government
also proposes halving the port docking fees for cruise ships and
migration fees for the next three months. An additional 200 million
pesos (USD 15.3 million) will be used to promote tourism in Mexico.
Finally, 2.2 billion pesos (USD 167 million) in loans and loan
guarantees will be made available to SMEs in the tourism industry,
as well as to airlines and pork producers. Together, with the
anticipated tax exemptions by state governments for lodging and
payroll fees (1.4 billion pesos - USD 160 million),the total
stimulus package amounts to 18.8 billion pesos (USD 1.4 billion).

BUSINESS REACTION IS LUKEWARM
--------------


5. (U) Many in Mexico's business sector have given the stimulus
package mixed reviews. The president of Mexico City's National
Chamber of Commerce (CANACO) told reporters that the government
assistance was welcome, but he was not sure it was enough. "We hope
that this is only the one of the first steps in economic aid," he
said. Outside of Mexico City, Nuevo Leon business leaders were
highly critical of the government's plan to reduce taxes to support
businesses hurt by H1N1 flu closing, and called the measures absurd.
They told the local press that the package was a farce, as the

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government was already unable to collect the taxes that were reduced
in the relief plan. In Ciudad Juarez, many business leaders
welcomed the assistance, but opined that the measures fall far short
of meeting the needs of the business community. The
government-mandated closures, they argue, resulted in millions of
dollars in lost revenue which will not be fully recovered as a
result of this relief package.

ANALYSTS SIMILARLY UNIMPRESSED
--------------


6. (SBU) AmCham Mexico's economist told EconOffs May 6 she suspected
that the plan's impact would be "fairly insignificant." Since more
than half of the plan's 18.8 billion pesos were actually simply tax
reductions, the government's injection of funds into the economy was
rather limited; i.e., only 8.8 billion pesos (USD 669 million) in
relief, or a mere .07 percent of Mexico's GDP. (Note: By contrast,
tourism generated $13.3 billion in revenue in 2008, or 7 percent of
GDP - Mexico's third largest source of foreign income. Tourism
Secretary Rodolfo Elizondo has been quoted in the press as saying
that losses in this sector could exceed 40 percent this year as
frightened travelers stay away. End note.) She pointed out that
the real difficulties remain the recession, declining production,
and falling consumption.


7. Other analysts concur that this package is not enough, but given
that Mexico faces an economic recession, a decline in oil revenues,
and a shortfall in tax revenues, this is realistically the extent of
what the government can offer. The Mexican Congress mandates a
balanced book; Congress has already authorized a deficit of 1.8
percent of its GDP. Carstens and the Calderon Administration could
appeal to Congress to authorize a deeper deficit, but experts do not
believe anything above 2 percent as politically viable. The
government's domestic debt - 21.5 percent of GDP - and its foreign
debt - 5 percent - are still manageable, but would become less so if
encumbered by additional obligations.

PORK PRODUCERS
--------------


8. (U) The National Organization of Pork Producers in Mexico stated
that while the package would help offset some of the damage caused
by H1N1, it alone is not enough. They estimate their losses at 2.5
billion pesos, above the 2.2 billion pesos in loans and loan
guarantees (USD 167 million) to be extended to pork producers,
SME's, and airlines. The pork producers encouraged the Agriculture
Secretariat to grant an additional 100 million pesos (USD 7.6
million) in lines of credit.

STATES' RESPONSE
--------------


9. (U) For their part, Mexico's 32 states responded to the federal
government's stimulus plan through a public request by the
Association of Economic Development Secretaries. They called for:
the expansion of the federal stimulus package; additional economic
supports for SME's affected by the outbreak through a program of
direct, timely and flexible credits; the acceleration of the
government procurement program for Mexican SMEs, and; the
implementation of an intensive overseas promotion campaign for
Mexican products.

COMMENT
--------------


10. (SBU) Comment: Reaction to the stimulus package introduced by
Minister Carstens has been mixed, with hard-hit businesses -
particularly in the tourism sector - wanting more. The Mexican
government appears to be extending as much assistance as it can.
However, it may not be absorbing all the costs related to the
outbreak. Responding to criticism, Carstens stated that should it
become necessary, the government is leaving the door open for
additional measures. However, it will not be easy for the
government to release more funds during the first half of the year.
Even using the most sophisticated model to compare this outbreak
with similar events in other countries, it is still too early to
know the full extent of the impact of H1N1 on the Mexican economy.
The worst of the H1N1 epidemic may be over in Mexico, but the
patient is still suffering from other complications. End Comment.


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BASSETT