Mexico Economic Weekly - May 22

UNCLAS SECTION 01 OF 05 MEXICO 001428 SIPDIS SENSITIVE STATE FOR WHA/MEX, WHA/EPSC STATE FOR EEB USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD TREASURY FOR IA ENERGY FOR WARD, LOCKWOOD AND DAVIS E.O. 12958: N/A TAGS: ECON EFIN ETRD ENRG ELTN EAIR PGOV SENV MX SUBJECT: Mexico Economic Weekly - May 22 ¶1. (U) The Mexico Economic Weekly supplements reporting from Mission Mexico Consulates and the Embassy Mexico Economic Section to provide a sense of ongoing trends. Please contact Adam Shub (shubam@state.gov) or Sigrid Emrich (emrichs@state.gov) for questions or comments about this report. ¶2. (U) Table of Contents: ECONOMY AND FINANCE: -------------- ZEDILLO AND ORTIZ CALL FOR TAX REFORMS - Mexico City INDUSTRIAL OUTPUT PLUNGES 9.9% IN THE FIRST QUARTER - Mexico City ECONOMIC AID OR ELECTION PLOY? - Monterrey NUEVO LEON STATE ECONOMIC AID AFTER H1N1 - Monterrey BAJA CALIFORNIA ECONOMY SUFFERS FROM THE SWINE FLU - Tijuana ENSENADA'S TOURISM SECTOR LOSES MILLIONS OF DOLLARS - Tijuana MEXICO COUNTRY RISK - Monterrey BUSINESS LEADERS REQUEST FEDERAL SUPPORT DURING CALDERON VISIT - Ciudad Juarez TRADE AND INVESTMENT: -------------- H1N1 AFFECTS BAJA EXPORTS - Tijuana JUAREZ REGISTERS RISE IN INFORMALITY AS FORMAL SECTOR OPTIONS DIMINISH - Ciudad Juarez ASIAN COMPANIES COMING TO BAJA CALIFORNIA - Tijuana PRESIDENT CALDERON HIGHLIGHTS STRENGTH OF CHIHUAHUA?S AERONAUTICAL INDUSTRY - Ciudad Juarez AUTO SUPPLY MANUFACTURERS CONTINUE TO STRUGGLE IN TAMAULIPAS - Matamoros H1N1 STILL CONCERNING MAQUILADORA MANAGERS - Matamoros ENERGY: -------------- INCREASING BLACKOUTS DAMAGING MACHINERY - Matamoros -------------- ECONOMY AND FINANCE: -------------- ¶3. (U) ZEDILLO AND ORTIZ CALL FOR TAX REFORM: Bank of Mexico Governor Guillermo Ortiz acknowledged Mexico's fiscal vulnerability and called for the approval of a tax reform aimed at increasing collection in the medium term, but without raising taxes. He argued that "raising taxes in the middle of a recession is simply not a good idea." He recalled that Mexico has the lowest collection rate among OECD members. The income tax and the value-added tax currently represent 8.8% of GDP while the average in the OECD is 19.8% of GDP. Tax collection in Mexico is even lower than the average in Latin America, which is 11.3% of GDP. Ortiz also criticized the country's significant reliance on oil revenues, which last year represented 8.7% of GDP. This year, oil revenues are expected to fall to 7.1% of GDP. Criticizing Calderon's government for not doing enough to offset the negative impact of the economic crisis, former President Ernesto Zedillo also called for the approval of a fiscal reform. Zedillo noted that the existing resources are MEXICO 00001428 002 OF 005 insufficient to face a decline in remittances, demand and credit. (Mexico City) ¶4. (U) INDUSTRIAL OUTPUT PLUNGES 9.9% IN THE FIRST QUARTER: The government reported May 18 that Mexico's industrial production fell dropped at an annual rate of 9.9% in the first quarter of the year, the deepest decline since 1983 when it fell 12.6%. During the so- called Tequila Crisis in 1995, industrial output fell at an annual rate of 10.8%. The index has been declining since August of 2008. Manufacturing output, which contributes 60% of total production, fell 13.8%, while production in the transportation sector dropped 38.3%, followed by software and hardware with a decline of 29%. The construction sector, which had been the strongest before the crisis, fell 7.7%, and mining and utilities fell 3% and 1.1%, respectively. (Mexico City) ¶5. (U) ECONOMIC AID OR ELECTION PLOY?: The governor of Nuevo Leon announced free water (up to five cubic meters per month) and metro service to help cash strapped residents in the state from May 15 until July 15. The offer comes in response to growing unemployment, rising inflation and the aftershocks of the H1N1 flu. The latest April jobs report shows that the state has lost over 76,000 formal sector jobs since October 2008. This stimulus plan will cost the state over $6 million USD in lost revenue. A portion of the funds will come from federal programs to alleviate the effects of the economic recession. Critics of the PRI governor called the latest measure an election year ploy to win over voters in the upcoming July 5 midterm elections. (Monterrey) ¶6. (U) NUEVO LEON STATE ECONOMIC AID AFTER H1N1: The economic sector of Nuevo Leon took a MXN$6 billion direct hit as a result of the H1N1 flu according to Guillermo Dillon, the director of the trade group CAINTRA Nuevo Leon. Dillon warns that the state could lose an additional MXN$6 billon as part of ongoing flu concerns. The tourism sector has been the hardest hit in Nuevo Leon. Other than a small temporary tax benefit for the tourism sector, the state has not offered any flu related economic aid relying on the federal government to take the lead. According to Monterrey's tourism office, hotel occupancy fell to 20% during the peak of the H1N1 flu epidemic and the full impact will not be known until the peak travel season that starts in November. Several convention organizers have already cancelled events scheduled for this summer. (Monterrey) ¶7. (U) BAJA CALIFORNIA ECONOMY SUFFERS FROM THE H1N1FLU: The tourism, services, export, and construction industries in Baja California were hard hit by the suspension of activity announced by authorities in response to the influenza scare. In construction, over 50% of the affiliates of CMIC (Mexican Chamber of Construction Industry)halted work due to the AH1N1 virus. Additionally, a survey of 3,000 workers affiliated with the Alliance of Carriers in Tijuana found that the occupancy of taxis and trucks had dropped to 20 percent from May 3 to May 5. (Tijuana) ¶8. (U) ENSENADA'S TOURISM SECTOR LOSES MILLIONS OF DOLLARS: The president of CANIRAC said that the two week "break" imposed by the federal government because of the H1N1 virus had caused a loss of one million dollars in Ensenada's tourism sector alone. He added that the 12,500 tourists who anchor at the port each week, were diverted to San Diego after it was announced that there was a risk of influenza throughout Mexico. Ensenada was one of the most heavily affected cities in Mexico. (Tijuana) ¶9. (U) MEXICO COUNTRY RISK: Monterrey area economic contacts expect a deeper recession than the federal government estimates but a recovery in Mexico is expected as early as the first quarter of next year. Econoffs met with area economists and industrial sector experts between May 6 and May 12 and there was a strong consensus that Mexico GDP will fall 5.5% or more and inflation could run as high as 6%. Our contacts believe a recovery in Mexico depends highly on a U.S. recovery and the long- MEXICO 00001428 003 OF 005 term effects of the H1N1 flu were downplayed. The fall in GDP may be steeper than expected but Mexico still has many factors in its favor such as a federal deficit that is only 2% of GDP and a forecasted current account deficit of only 3% of GDP. (Monterrey) ¶10. (U) BUSINESS LEADERS REQUEST FEDERAL SUPPORT DURING CALDERON VISIT: The president of the Ciudad Juarez Maquiladora Association (AMAC) told local press that she conveyed to President Calderon and Secretary of Economy Gerardo Ruiz Mateos the need for the federal government to develop an economic stimulus plan that addresses the unique needs of Ciudad Juarez. President Calderon met with local business leaders in Ciudad Juarez May 14 to discuss stimulus options for Chihuahua's ailing economy. Chihuahua has lost more formal sector jobs over the past 18 months than any other Mexican state, despite accounting for only 3 percent of the nation's total population. In addition to the 115,000 formal sector jobs lost state-wide during this period, in Ciudad Juarez there are currently 40,000 workers in temporary lay-off arrangements (paro tecnico),according to AMAC. Meanwhile, the President of the Southwestern Maquila Association (based in El Paso, Texas),Enrique Morales, purportedly urged Calderon to consider additional government subsidies for natural gas, electricity and water to improve the manufacturing sector's competitiveness. Morales also communicated to Calderon that many maquilas under paro tecnico have been unable to access federal funding under the stimulus plan, because they have not reduced the number of employees on their payroll. While Calderon reportedly acknowledged the acute needs of Chihuahua's economy, he did not establish a time-line to respond to the business leaders' proposals. (Ciudad Juarez) -------------- TRADE AND INVESTMENT: -------------- ¶11. (U) H1N1 AFFECTS BAJA EXPORTS: Major importers of Mexican meat from Baja have closed their borders almost 100% to the product. About 20 tons of fine cuts of beef per day are affected. Local merchant Barraquiel Fimbres asserted that the image of Mexico prompted by the H1N1 flu also affected cattle exports to China, Japan, and Korea. Mario Escamilla, president of National Chamber of Transformation Industries (CANACINTRA),said that container ships loaded with Baja California merchandise have been stranded at sea near major Asian ports by dock workers who refuse to handle the ships of fears about the AH1N1 virus. At the same time, Mexican law prohibits the return and sale of the goods in Mexico, effectively leaving the articles marooned at sea. Canacintra representatives asked the intervention of Baja California Governor Osuna Millan to help resolve the issue and prevent the loss of millions of dollars in goods. (Tijuana) ¶12. (U) JUAREZ REGISTERS RISE IN INFORMALITY AS FORMAL SECTOR OPTIONS DIMINISH: The number of informal vendors in the city increased from 15,000 in January of this year to 29,000 in May, according to the Municipal Commerce Office of Ciudad Juarez. Municipal authorities require all informal street vendors to purchase a 500 peso permit to sell their products. Since permits are not registered with the state treasury, vendors are not required to pay taxes or meet other payroll requirements. Permits are required for all activities ranging from selling food to shining shoes. Despite registering with the city, vendors exhibit many of the characteristics typically associated with the informal sector. Thus, the increase in permits issued serves as a sound proxy for the state of informality in the city, which appears to be on the rise as formal sector job opportunities decline. Monitoring trends in the informal economy can provide insight into future levels of fiscal collection, national productivity and credit expansion. (Ciudad Juarez) ¶13. (U) ASIAN COMPANIES COMING TO BAJA CALIFORNIA: Two companies of oriental origin are locating in Tijuana and are expected to generate more than 2,000 jobs, said Jesus MEXICO 00001428 004 OF 005 Manuel S ndez Contreras, secretary of Economic Development City XIX. S ndez Contreras explained that a Taiwanese manufacturer of computer monitors and televisions will open its doors next September. Another company - an automobile manufacturer - is expected to be established in Tijuana in early 2010. According to the secretary of Economic Development City XIX, these companies will operate in the Otay area, initially employing over 250 people, and expanding to more than a thousand by 2010. (Tijuana) ¶14. (U) PRESIDENT CALDERON HIGHLIGHTS STRENGTH OF CHIHUAHUA'S AERONAUTICAL INDUSTRY: President Calderon claimed that Cessna Aircraft and Bell Helicopters decision to invest an estimated USD 106 million in Chihuahua over the next eight years highlights Mexico's continued competitive advantages even amidst a period of considerable economic contraction. President Calderon visited two new parts assembly plants owned by U.S. aeronautical companies, Cessna Aircraft and Bell Helicopter during his May 14 trip to Chihuahua. According to local media, Calderon claimed that 20 percent of all jobs in Mexico related to the aeronautical industry are in Chihuahua. He further commented that the goal of Mexico's aeronautical industry should be to move up the value chain from parts assembly to final assembly production of airplanes and helicopters. The two new parts assembly plants will reportedly create almost 900 jobs once they reach full operation. (Ciudad Juarez) ¶15. (U) AUTO SUPPLY MANUFACTURERS CONTINUE TO STRUGGLE IN TAMAULIPAS: 1,700 Matamoros jobs will be lost due to the closing of two maquiladora plants, according to Mayor Erick Silva. Both maquiladoras are linked with General Motors. However, other plants in the area are moving forward with expansion efforts. Inteva, formerly part of auto parts supplier Delphi, held an inaugural ceremony this week for its second Matamoros plant, a new metal stamping and injecting molding facility. Despite moving forward with the expansion, Joe Long, Chief Engineer for Inteva, noted that the new facility is operating at only about 40 percent capacity. (Matamoros) ¶16. (U) H1N1 STILL CONCERNING MAQUILADORA MANAGERS: Maquiladora Association Meetings in both Reynosa and Matamoros focused heavily on the continuing effects of the H1N1 flu on manufacturing operations, particularly in regard to human resources concerns. Managers in Reynosa plants, in particular, continue to be concerned about regulations involving pregnant and nursing employees and semantics surrounding safe working conditions and national regulations mandating that such workers be sent home with pay under certain circumstances. Approximately 50 percent of member companies of the Reynosa Maquiladora Association (RAMMAC) had called pregnant and nursing employees back to work, while the rest continue to give them paid leave. Francisco Pena, a local attorney who represents numerous manufacturers in the area, noted that the verbiage of the national regulations mandate that such workers stay home. However, he also noted that the support of local and state government entities offer certain protection for employers who have asked their workers to return to work in the wake of the influenza scare, eliminating fears of fines. Randy Main, a member of the RAMMAC board of directors, noted that the difficulty lies in a company's ability to prove that it is a 'low risk operation' and relevant ambiguity around the regulations. (Matamoros) -------------- ENERGY: -------------- ¶17. (U) INCREASING BLACKOUTS DAMAGING MACHINERY: A string of blackouts in Matamoros blamed on an alleged lack of maintenance to local substations are affecting local businesses. "All the Matamoros business owners are worried about damages caused to their equipment by the constant blackouts, some of them last up to five hours," said local merchant Yadala Charur. The General Secretary of the Matamoros Electricians Union, Mauro Longoria, said MEXICO 00001428 005 OF 005 that the latest frequent blackouts that sectors of Matamoros suffer are caused by the lack of maintenance by the Federal Electricity Commission (CFE). (Matamoros) WILLIARD