Mexico Economic Weekly - August 21

UNCLAS SECTION 01 OF 03 MEXICO 002601 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 - August 21 ¶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: ENERGY -------------- PRODUCTION AT MEXICO'S MAIN OILFIELD FELL 70 PERCENT SINCE 2003 - Mexico City HEALTH -------------- WORLD BANK POISED TO ISSUE $480 MILLION LOAN TO MEXICO FOR FLU CONTROL AND PREVENTION ECONOMY AND FINANCE: -------------- "MEXICO UNDERESTIMATED MAGNITUDE OF THE CRISIS" SAYS OECD SECRETARY GENERAL (Mexico City) INSTITUTE OF PUBLIC ACCOUNTANTS OF NUEVO LESN SUPPORTS FISCAL REFORM (Monterrey) CONFLICTING VIEWPOINTS REGARDING BORDER ECONOMY (Matamoros) SONORAN GOVERNMENT INTRODUCES TECHNOLOGY SECTOR STIMULUS PROJECTS (Hermosillo) TRADE AND INVESTMENT: -------------- BEACH MOLD & TOOL, INC. CLOSING REYNOSA PLANT, MOVING OPERATIONS TO QUERETARO (Matamoros) TWO U.S. FORTUNE 500 COMPANIES EXPANDING EMPLOYMENT IN MEXICO (Monterrey) -------------- ENERGY: -------------- ¶3. (SBU) PRODUCTION AT MEXICO'S MAIN OILFIELD DOWN 70 PERCENT SINCE 2003: Cantarell, Mexico's largest oil field, fell to under 650,000 barrels a day, a 21 percent since January 2009 and a full 70 percent down from its peak production of 2.2 million barrels a day in December 2003. Cantarell currently accounts for 25 percent of Mexican crude oil production, down from 64 percent in 2003. Pemex estimates total crude oil production will fall to 2.5 million barrels a day in 2010, down from 2.6 million barrels a day this year. This estimate seems optimistic given Cantarell's rapid decline and disappointing results from another key field under development, Chicontepec. (Mexico City) -------------- HEALTH: -------------- ¶4. (SBU) WORLD BANK POISED TO ISSUE $480 MILLION LOAN TO MEXICO FOR FLU CONTROL AND PREVENTION: Mexico's Secretariat of Health is in line to receive a $480 million loan from the World Bank to pursue an "Influenza Control and Prevention Project" that will monitor the spread of viruses and control epidemic waves. The loan will be accompanied by a $72.8 million contribution by the GOM and is scheduled for approval by the World Bank Board of Directors on September 10th. The GOM estimates that public spending on the H1N1 response has surpasses $600 million and the macroeconomic impact of the pandemic is expected to be 0.3-0.5 percent of Mexico's GDP. -------------- ECONOMY AND FINANCE: MEXICO 00002601 002 OF 003 -------------- ¶5. (U) "MEXICO UNDERESTIMATED MAGNITUDE OF THE CRISIS": Mexico, as well as other countries, failed to appreciate the magnitude of the economic crisis, according to OECD Secretary General Jose Angel Gurria. Speaking in Mexico City, Gurria added that Mexico is going through the worse "financial shock" in 70 years. In order to address the situation, Gurria opined that government expenditures in 2010 will have to be cut. He underlined the urgent need to strengthen Mexico fiscal structure and reduce the country's heavy reliance on oil revenues. As Finance Secretary during the Zedillo presidency, Gurria proposed a fiscal reform which was blocked by the PAN. When former President Fox subsequently proposed his own fiscal reform, the PRI voted against it. For Gurria, a fiscal reform should include taxes on consumption, lower taxes on investments and saving, an expanded taxpayer base, and higher rates of collection. Gurria recommend reducing public investment for the next year or two. (Mexico City) ¶6. (U) INSTITUTE OF PUBLIC ACCOUNTANTS OF NUEVO LESN SUPPORTS FISCAL REFORM: Consistent with calls for fiscal reform at the national level from the President of the Council of Mexican Businessmen, Claudio X. Gonzlez and President of the Institute of Public Accountants of Neuvo Lesn, Jaime Garca, called for an elimination of preferential regimes from the value added tax (VAT). Garca argued that such a regime would be much more equitable, ensuring that those that consume the most carry the largest tax burden. He further suggested that by augmenting the base of items contributing to the VAT, its rate could be reduced and its administration streamlined. Garca also recommended the elimination of the IETU - a tax roughly analogous to the U.S. Governments Alternate Minimum Tax (AMT) - which he claimed discourages investment, and the reduction of ISR, Mexico's capital gains tax. (Monterrey) ¶7. (U) SONORAN GOVERNMENT INTRODUCES TECHNOLOGY SECTOR STIMULUS PROJECTS. The state of Sonora announced in July a $500 million Mexican peso(US$38 million) plan to invest in software development capabilities over the next five years with the help of the firm GoNet Mexico. The plan adds to an existing software incubator project and with the cooperation of four of southern Sonora's universities is expected to create 400 new software development jobs in the next three years, attracting talent and projects from all over North America. On Aug 2nd, El Imparcial reported El Consejo Nacional de Ciencia y Tecnologa (CONACYT) approved $44.6 million pesos (US$3.4 million) for 14 companies in the technology related projects. The projects included copper extraction enhancements (Mexicanos de Cobre),aerospace turbine diagnosis (Teta Kawi),a Ford Motor manufacturing improvement and a water recycling project at a laboratory to name a few. Despite the "brand names" included in the list of recipients, the state says this is part of their effort to promote the development of micro to mid size companies. The economic development authorities express an interest in developing a long term competitive advantage for Sonora and point to Sonora's movement in the number of patents from 16th to 3rd nationally during the Bours administration as an example of their success in that regard. (Hermosillo) ¶8. (U) CONFLICTING VIEWPOINTS REGARDING BORDER ECONOMY: El Colegio de la Frontera Norte (COLEF),an economic think tank with focus on the northern border of Mexico, recently stated that Mexican northern border cities will experience a further economic contraction in 2010. Cirila Quintero, investigator for COLEF, highlighted two principal factors in the contraction: a weak and extended recovery of the maquila sector and high levels of expected migration to the region. She also indicated that some new companies have entered the region, but the number of jobs generated is not high enough to offset recent layoffs, particularly in the automotive sector. Ms. Quintero also noted there is a lack of short and medium term economic strategies in Mexican automotive plants, which will undoubtedly result in further layoffs and adjustments in the maquila sector. This is in contrast to the plans Econ Off heard during automotive sector sessions during Foro Internacional Clusters 2009 two weeks ago, where maquilas outlined efforts to strengthen their common cluster interests, and share information. (Matamoros) -------------- TRADE AND INVESTMENT: -------------- ¶9. (U) BEACH MOLD & TOOL, INC. CLOSING REYNOSA PLANT, MOVING MEXICO 00002601 003 OF 003 OPERATIONS TO QUERETARO: According to local news reports, Beach Mold & Tool, Inc., a privately held custom injection molder that manufactures automotive, consumer, and other electronic parts will close its' Reynosa plant and move production to a sister plant in Queretaro, Mexico. Beach indicates the move was made to offset the impact of lower sales volumes and to reduce infrastructure costs in Mexico. (Matamoros) ¶10. (SBU) TWO U.S. FORTUNE 500 COMPANIES EXPANDING EMPLOYMENT IN MEXICO: In an August 21 conversation with Consul General, Whirlpool Mexico Director Luis Fernando Reyes stated that, assuming the incoming Nuevo Leon governor ratified certain tax breaks promised by the outgoing governor, his company planned to move a new line of production to the Monterrey region, adding more than 1,000 jobs to current payrolls. Separately, Cummins announced that it would move filter production to its facilities in San Luis Potosi, thereby expanding employment in that city by an additional 800 new jobs. In both cases, the employment increases in Mexico translate into job cutbacks at the companies' U.S. plants. Meanwhile, officials from Altos Hornos de Mexico, one of Mexico's largest steel manufacturers, has told us that because of cash flow issues the company would soon have to announce a layoff (hopefully short) of 1,000 employees at its plant in Monclova, Coahuila. (Monterrey) PASCUAL