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