POTENTIAL EFFECT OF ELECTIONS ON MEXICO'S ECONOMIC AGENDA

UNCLAS MEXICO 002018 SENSITIVE, SIPDIS STATE FOR EEB/TPP/BTA/GROUT STATE FOR WHA/MEX/LEE/ROMANS USTR FOR MELLE/SHIGETOMI COMMERCE FOR ITA/MAC/ONAFTA/WORD/OLSEN NSC FOR O'REILLY TREASURY FOR JARPE E.O. 12958: N/A TAGS: ECON EFIN ETRD PINR PGOV PREL MX SUBJECT: POTENTIAL EFFECT OF ELECTIONS ON MEXICO'S ECONOMIC AGENDA ¶1. (SBU) SUMMARY: The worse-than-expected congressional election defeat for Calderon, giving the PRI a near majority in the House of Deputies, will now afford the PRI the opportunity to assume greater initiative and certainly assert greater leverage in debates over the economic reform agenda. Prospects for a more ambitious energy reform are significantly diminished; the fiscal reform that is necessary to boost Mexico's credit ratings will only happen on the PRI's terms. As the House of Deputies enjoys sole responsibility for passing the federal budget, the PRI is in a position to drive this debate as well. This situation will likely prompt the Calderon Administration to rely increasingly on non-legislative changes within institutions and programs over which the government has direct discretion and take initiatives to advance its reform agenda, promote growth and address poverty. This should afford us new opportunities for cooperation in the areas of competitiveness, the development of alternative energies, education, and competition. END SUMMARY. ¶2. (SBU) The PRI will likely be less inclined to compromise on its core principles and interests when it comes to GOM policy proposals on economic reforms. For example, the PRI has long opposed the participation of the private sector in the exploration, extraction, or refining of Mexico's petroleum, as laid out in the government's deeper energy reform plan. And while the 2012 election provides the PRI with an incentive to set the economy on a stronger footing, the PRI may push for the possible elimination of the personal income tax and the business flat tax, which could have negative effects on the government's fiscal situation. The PRI has also announced its intent to pass a new Emergency Economic Law to give businesses access to credit and help offset the negative impact of the financial crisis. Separately, while the Revenue Law must be approved by both the Lower House and the PAN-controlled Senate, the Expenditures Law is controlled only by the Lower House. As such, with its near majority in the House of Deputies, the PRI will effectively drive the debate over the federal budget, and will seek to direct greater resources to its constituencies in the countryside and the 19 of Mexico's 31 states where a PRI governor resides. ¶3. (SBU) No one in PAN or the Administration has stated publicly how this will affect Calderon's economic agenda. We believe the GOM will seek to improve the economic situation by creating jobs and opportunities for Mexicans. It may also work within the confines of institutions and programs over which it can exercise discretion to move forward on its reform agenda, without relying on Congress for approval. The hope is that, when a United States recovery translates into a Mexican recovery, Mexico will rebound close to the 6-8 percent growth rate necessary to address its 40 percent poverty level. ¶4. (SBU) The GOM will likely focus on competitiveness - by strengthening IPR protection and enforcement, by facilitating the cross-border movement of products and people, and by urging the United States Government to replace the cancelled pilot trucking program. It will also focus on improved education, research and development of alternative energies, and the growth of SME's by facilitating their access to credit. Roberto Newell from the Mexican Institute for Competitiveness, a leading think tank in Mexico that has done considerable research on the country's competitiveness, anticipates that the GOM will intensify its efforts to improve competition by legally challenging the monopolies in the electricity, oil, energy, telecommunications, cement, and other sectors. Mexico's anti-trust watchdog, the Federal Competition Commission, has stepped up its efforts recently. In the last month, it has fined two of Mexico's major railroad companies for collusive practices and has declared Mexico's largest fixed line telephone company to be the dominant player in the market. The GOM will attempt to close the tax loopholes, reduce deductions, and strengthen tax collection through non-legislative revisions of existing regulations. It will also likely move forward on several planned infrastructure projects. In short, the Administration will do as much as it can without legislative approval to ensure that the economy grows and the PAN does not lose in 2012. ¶5. (SBU) COMMENT: Despite the stinging rebuke to Calderon that the mid-term elections represented, we have a good opportunity to support his administration's concentration on improving Mexico's competitiveness and efficiency. One caveat, however: President Calderon has publicly stated on numerous occasions that NAFTA is not open for renegotiation. Any attempt to upgrade the side agreements on labor and the environment should be framed as building on the successes of NAFTA by focusing on improving the benefits of this trade agreement - in the areas of competitiveness, creating jobs and opportunities, eradicating poverty, social inclusion, and labor and environment. END COMMENT. FEELEY