Mexico Economic Weekly - October 16

UNCLAS SECTION 01 OF 06 MEXICO 002996 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 - October 16 ¶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: -------------- INFLATION CONTINUES TO DROP, BUT NOT FOR LOW-INCOME FAMILIES - Mexico City BUDGET WOES IMPACT THE PRICE OF STAPLES - Monterrey OBSTACLES FOR BUSINESSES: REGULATION, MONOPOLIES AND INSECURITY - Mexico City JUAREZ: A GOOD PLACE TO DO BUSINESS - Ciudad Juarez THE NORTHEAST CONTINUES TO LEAD RECOVERY - Monterrey SECURITY-RELATED COSTS CREATE DRAG ON LOCAL JUAREZ ECONOMY - Ciudad Juarez U.S. BUSINESS EXPERT WARNS AGAINST TAX HIKE, RECOMMENDS ALTERNATIVE STRATEGIES - Monterrey TOURISM FROM US AND CANADA REBOUND IN YUCATAN BUT EUROPEANS STAYING AWAY - Merida TRADE AND INVESTMENT: -------------- INTEL DISCUSSING PLAN TO DOUBLE PRESENCE IN GUADALAJARA - Guadalajara ENORMOUS METAL AND MINERAL DEPOSITS DISCOVERED IN ZACATECAS, SAN LUIS POTOSI - Monterrey USD $55 MILLION WHIRLPOOL INVESTMENT IN NUEVO LEON - Monterrey OPERATION TO BE LAUNCHED AGAINST PIRATED SOFTWARE IN NUEVO LEON - Monterrey NUEVO LEON EXPORTS REBOUND - Monterrey TRANSPORTATION AND INFRASTRUCTURE: -------------- NUEVO LEON'S HIGHWAY INFRASTRUCTURE EXPANDS - Monterrey AEROMAR RETURNS TO MONTERREY - Monterrey ENERGY AND ENVIRONMENT: -------------- NATIONAL HYDROCARBONS COMMISSION RECOMMENDS PEMEX RETHINK CHICONTEPEC STRATEGY - Mexico City CALDERON ANNOUNCES MEXICO TO ENTER IRENA AT GLOBAL RENEWABLE ENERGY FORUM - Mexico City ENVIRONMENT, SCIENCE, TECHNOLOGY AND HEALTH: -------------- OCTOBER 5 NORTH AMERICAN INFLUENZA MEETING IN MEXICO CITY - Mexico City H1N1 CLAIMS 14TH VICTIM IN NUEVO LEON - Monterrey -------------- MEXICO 00002996 002 OF 006 ECONOMY AND FINANCE -------------- ¶3. (U) INFLATION CONTINUES TO DROP, BUT NOT FOR LOW- INCOME FAMILIES: Annual inflation fell to 4.89% in September from 5.08% the previous month. However, some food prices - especially those that have the largest impact on lower income families - have continued to rise. Produce prices rose 20.3%, the largest increase in three years. Tomato prices rose at an annual rate of 103%. For lower income households, the inflation rate rose from 5.75% in August to 5.84% in September, while inflation for households earning more than six times the minimum wage, headline inflation dropped from 4.72% to 4.48%. (Mexico City) ¶4. (U) BUDGET WOES IMPACT THE PRICE OF STAPLES: Public relations officials for HEB and Soriana announced September 30 that the price of tortillas in metropolitan Monterrey would increase the first week in October by 15% due to a reduction in flour and corn subsidies. Porfirio Garza Rojas, President of the Federation of Dough and Tortilla Producers, announced that neighborhood tortilla producers would likely follow suit, contingent upon approval from the Federal Attorney for Consumers (PROFECO). (Monterrey) ¶5. (U) OBSTACLES FOR BUSINESSES: REGULATION, MONOPOLIES AND INSECURITY: According to the World Economic Forum, (WEF),Mexico generally has a good business climate, with an enviable geographical location, cheap labor and a productive demographic. However, WEF cites some challenges to overcome in order to improve competitiveness and attract more investment, such as reducing regulations and streamlining the time to open and operate businesses. Other barriers include the lack of credit especially for small and medium-sized businesses and the growing informal sector. WEF says Mexico should improve the efficiency and productivity of its public institutions, make its labor market more flexible and improve education. In addition, the government should eliminate monopolies and continue to combat the security situation. Mexico also needs to strengthen the Rule of Law, especially with respect to land acquisition in order to protect investors from quarrels with 'ejidatarios'. The private sector acknowledged the government's efforts in passing and approving reforms, but it says it is time for 'second generation reforms'. (Mexico City) ¶6. (U) JUAREZ: A GOOD PLACE TO DO BUSINESS: Despite record violence associated with the ongoing drug war, Ciudad Juarez has one of the most favorable procedural environments in Mexico to do business. According to the World Bank report "Doing Business 2009" Ciudad Juarez ranks 11th among 32 cities in Mexico as far as ease of doing business. Juarez beat out metropolitan centers Mexico City and Monterrey, as well as its fellow border- towns of Tijuana and Matamoros. The report evaluates the ease of starting a business, dealing with construction permits, registering property and enforcing contracts. On average, it takes 17 days to start a business in Juarez compared to 29 in Tijuana, 28 in Mexico City , 24 in Matamoros and 19 in Monterrey. Juarez is one of the least expensive cities to register property. In Juarez the cost of registering a new property averages 2.9% of the property's value, compared to 4.8% in Mexico City, 3.6% in Tijuana, 3.5% in Monterrey and 3.3% in Matamoros. Juarez is also cheaper than the aforementioned cities in terms of the cost to enforce commercial contracts. Measuring cost as a percentage of the claim, the average in Juarez is 22.8% compared to 33.4% in Monterrey, 32% in Mexico City, 30.8% in Matamoros and 27.4% in Tijuana. Aguascalientes topped the list of Mexican cities. Of the 183 world economies evaluated, Mexico ranked 51st, and of the 32 countries in Latin America and the Caribbean, it ranked 6th. (Ciudad Juarez) ¶7. (U) THE NORTHEAST CONTINUES TO LEAD RECOVERY: The Northeast of Mexico continues to lead the national recovery in employment, according to statistics provided by the Mexican Institute of Social Security (IMSS). From MEXICO 00002996 003 OF 006 June to September, Coahuila generated 14,122 jobs, second only to Nuevo Leon, which generated 19,813 jobs over the same period. According to these statistics, construction leads in job creation, while agriculture, communications and transport continue to shrink. While the overall growth in employment is positive news, Fanny Arellanes, representative of Nuevo Leon's Secretary of Labor, affirms that this rate would not be enough to replace the approximately 80K jobs lost to the economic crisis within a year. Marcelo Canales, president of Coparmex in Nuevo Leon, speaking at Monterrey TEC's annual business forum on October 6, emphasized that simply recovering lost employment would not be enough: he estimated that Nuevo Leon would need to generate 100K jobs annually in order to replace lost jobs and absorb young adults into the labor pool. (Monterrey) ¶8. (U) SECURITY-RELATED COSTS CREATE DRAG ON LOCAL JUAREZ ECONOMY: A recent Inter-American Development Bank study claims that the cost of security in Mexico could be as high as 15% of GDP. Recent information suggests this number could be even higher in Ciudad Juarez. Security- related costs include wages for security guards, the installment of iron bars at businesses, extortion, movement of domestic investment to neighboring El Paso, or the diversion of funds from public works to pay for security. In the past year Juarez has experienced a 40% decrease in restaurant business due in large part to security concerns, according to the local business association, CANIRAC. At least 25 bars and 20 restaurants have closed in recent months. Anecdotally, many of these close to reappear on the other side of the border in El Paso. The Mexican Construction Industry Chamber (CMIC) says that around 90% of its members have faced some form of extortion. The construction industry estimates its losses at 720 million Mexican pesos (USD 55.3 million),or 60% of the total allotment of public funds to infrastructure improvements. While the security situation has had less impact on foreign domestic investment (FDI) and the maquilas, it has hit domestic investment and the local retail sector hard. Also, despite reallocating its budget to respond to security issues, the recently published "Doing Business 2009" prepared by the World Bank (SEE JUAREZ A GOOD PLACE TO DO BUSINESS) found that Juarez municipal authorities have improved procedural efficiency related to doing business in the city. These gains somewhat offset the negative externalities created by the poor security environment. (Ciudad Juarez) ¶9. (U) U.S. BUSINESS EXPERT WARNS AGAINST TAX HIKE, RECOMMENDS ALTERNATIVE STRATEGIES: Speaking to an audience of approximately 800 business leaders at Monterrey TEC's annual Business Forum, Professor Michael Porter, Director of the Harvard Business School's Institute for Strategy and Competitiveness, suggested that it would be a mistake for Mexico to increase taxes during an economic crises, and urged the Mexican government to instead restructure its tax collection system, and expand its base. Porter suggested there is insufficient competition in Mexico, and that current political realities were stifling innovation: he suggested the solution lie not simply in government reform, but in the business community becoming more involved in the political process and pushing that reform. Porter emphasized the value of forming clusters to create synergy and promote innovation, but warned that clusters established at government initiative rarely function, and that only those driven by industry have a track record of success. (Monterrey) ¶10. (U) TOURISM FROM US AND CANADA REBOUND IN YUCATAN BUT EUROPEANS STAYING AWAY: Juan Jose Martin Pacheco(PRI),Yucatan's Secretary of Tourism, told Merida Principal Officer that tourism from the US and Canada has rebounded but European tourism is still lagging. He cited a number of upcoming events and conferences in Merida in October, as well as a concert by Sarah Brightman at Chichen Itza on October 31, which he hoped would attract "cultural tourists." Although Yucatan has the third-highest number of H1N1 cases among Mexico's states, Martin Pacheco noted that the state has not seen MEXICO 00002996 004 OF 006 a new outbreak this fall. He touted plans to expand services at Chichen Itza Airport, and sees an opportunity to take business away from the Cancun airport, where wait times at customs and immigration have recently increased. He also pointed to new flights from Merida to Chiapas and Oaxaca as another inducement to tourists interested in culture, and that the increased frequency of flights to Mexico City starting at the end of October will increase domestic tourism as well as providing another easy connection for tourists with other destinations in Mexico. Finally, he is in contact with JetBlue and Spirit Air, and hopes to take advantage of their policy to allow passengers to buy "open jaw" tickets by establishing two or three flights weekly from Merida. He hopes that this will help draw tourists going to Cancun and the Maya Riviera westward. (MERIDA) -------------- TRADE AND INVESTMENT -------------- ¶11. (U) INTEL DISCUSSING PLAN TO DOUBLE PRESENCE IN GUADALAJARA: The Director of the Design Center of technology firm Intel announced that the company is looking to double its operations in Guadalajara. The project to create a second design center was originally conceived prior to the economic crisis, but suspended until this month. The company will recompile its data to reflect the current situation over the next few months and make a final decision in early 2010. The potential cost of the project has not been announced, but in the past year Intel invested about USD$7 million in new laboratories. Intel currently employs just under 400 workers, of which about 90% are electronic and computer engineers. (Guadalajara) ¶12. (U) ENORMOUS METAL AND MINERAL DEPOSITS DISCOVERED IN ZACATECAS, SAN LUIS POTOSI: Mining firm Pietro Sutti S.A. announced on October 9 the discovery of what may be the world's largest deposit of lithium in a region that straddles the border between the states of Zacatecas and San Luis Potosi. According to Pietro Sutti's owner, Martin Sutti Courtade, the deposit might not only prove the largest, but the densest, yielding 700-900 grams of lithium per ton of excavation, where most deposits average 200 grams of lithium per ton. The metal has increased in value by a factor of approximately four over the last five years, as it has become the metal of choice in fabricating large scale industrial batteries. Sutti noted that initial tests indicated that the deposits were also rich in potassium, a mineral that Mexico currently imports to produce fertilizer. His firm contemplates an investment of $1.8 billion to build three plants dedicated to processing the rich deposits. Jos de Jesus Parga, a geologist at the Autonomous University of Zacatecas, predicted that the discovery would be of great economic significance to Mexico, contributing to the nation's food security, transforming it into a leading exporter of lithium, and generating significant employment in a part of Mexico economically-marginalized. (Monterrey) ¶13. (U) USD $55 MILLION WHIRLPOOL INVESTMENT IN NUEVO LEON: Luis Fernando Reyes Pacheco, President of Whirlpool, Mexico, announced on October 7 the company's decision to invest USD$55 million in its Apodaca, Nuevo Leon, facility, where it produces its Supermatic line of refrigerators. A production line in Evansville, Indiana will be shut down and transferred to Nuevo Leon. According to Reyes, the Apodaca plant will gain approximately 1,100 jobs and production will increase from 1.5 to 2.5 million units, the majority destined for export. According to Michael Todman, president of Whirlpool North America, the decision to relocate the production line to Nuevo Leon was motivated by the facility's advantages in capacity and competitiveness. Reyes Pacheco notes that domestic sales of Whirlpool products in Mexico have fallen 12%-15% since the economic crisis began, but that the company expects to see a rebound in sales by the third quarter of 2010. (Monterrey) MEXICO 00002996 005 OF 006 ¶14. (U) OPERATION TO BE LAUNCHED AGAINST PIRATED SOFTWARE IN NUEVO LEON: The Business Software Alliance of Mexico (BSA) announced on October 12 an operation in conjunction with the Mexican Institute of Industrial Property (IMPI) to inspect software installations in Nuevo Leon businesses. This would be the third such inspection conducted this year. Prior inspections have, according to IMPI, resulted in proceedings against 35 businesses using software for which they could not provide licensing. From January to September of this year, BSA initiated 1,019 proceedings against copyright violators in Mexico: penalties range from administrative sanctions to fines and damages equivalent to a 40% premium over the original cost of the software pirated. According to an October 6 government report, state and federal authorities destroyed over 3 million pirated items in Monterrey, including compact disks, video games, DVD movies, tennis shoes, dish antennas, various kinds of clothing, and equipment used to copy genuine articles, such as disk burners and screen painters. (Monterrey) ¶15. (U) NUEVO LEON EXPORTS REBOUND: According to statistics released by the state government of Nuevo Leon last week, July's exports among the state's top seven manufacturing sectors, including automotive, electronics, and appliances, rose 19.4% over the monthly average six months ago. While this incipient recovery still leaves exports trailing 19% behind those of July 2008, according to the Nuevo Leon government, the trend signals a definite recovery. The lion's share of that recovery belongs to the automotive sector, which has increased its exports by 43% in from Jan to July 2009. That growth is largely credited to the now ended U.S. "cash for clunkers" stimulus and this recovery is still very uncertain. (Monterrey) -------------- TRANSPORTATION AND INFRASTRUCTURE -------------- ¶16. (U) NUEVO LEON'S HIGHWAY INFRASTRUCTURE EXPANDS: Without fanfare, the new four-lane highway linking Monterrey and Saltillo was opened to the public October ¶1. The project, initiated in March of 2007, is one year behind schedule; planned lateral roads connecting the route to Santa Catarina have not yet been completed. Isolux Corsan, the Spanish contractor awarded the concession to build the thoroughfare, will charge users approximately $3.00 during the first two months of operation and $3.60 thereafter to use the 50 KM highway. The highway, constructed with hydraulic concrete, is considered faster and safer than the existing link between the capitals of Nuevo Leon and Coahuila, but still offers a few risks to motorists in locations where dividers and retention barriers to guard against landslides have not yet been installed. (Monterrey) ¶17. (U) AEROMAR RETURNS TO MONTERREY: A year and a half after ceasing operations in Monterrey, regional airline Aeromar announced on October 5 its intention to return to the city with twice daily connections to San Luis Potosi. The company also announced plans to form an alliance with Mexicana to create other more direct routes that would avoid the need to pass through Mexico City. Aeromar hopes to establish five routes out of Monterrey by 2010. (Monterrey) -------------- ENERGY AND ENVIRONMENT -------------- ¶18. (U) NATIONAL HYDROCARBONS COMMISSION RECOMMENDS PEMEX RETHINK CHICONTEPEC STRATEGY: Mexico's newly created oil and gas sector regulator, the National Hydrocarbons Commission (NHC) wants energy monopoly Pemex to suspend new contracts at its Chicontepec oil field until the state-owned company completes a study on how to improve results. The NHC is in the process of submitting its recommendations to Pemex but the decision will ultimately be up to the company. Pemex has spent more than $3.4 billion so far on Chicontepec, amidst promises that the field's large reserves would halt declining MEXICO 00002996 006 OF 006 Mexico's oil output. Production at the Chicontepec field has lagged far behind its targets. The NHC is recommending that Pemex halt new contracts and revise existing ones until it can further study the geology of the area. Pemex will study the recommendations made by the NHC, Pemex officials insist that drilling in Chicontepc will continue in the most profitable areas. Pemex officials note that oil projects are long term and cannot be turned off from one day to the next. Investment in Chicontepec in the 2010 budget was cut from 26 billion pesos to 20 billion pesos. (Mexico City) ¶19. (U) CALDERON ANNOUNCES MEXICO TO ENTER IRENA AT GLOBAL RENEWABLE ENERGY FORUM: President Calderon used his opening remarks at the Global Renewable Energy Forum (GREF) in Guanajuato to announce that Mexico will become a member of the International Renewable Energy Agency. He added that the GOM new investments in the electricity sector would focus more heavily on renewable, but provided no details. Over a thousand participants from forty countries attended the GREF October 7-9 in Leon Guanajuato. The organization was co-hosted by the Government of Mexico and UNIDO and well attended by senior Mexican officials (four cabinet secretaries), foreign government and private sector representatives. Participants agreed that to promote renewable energy technologies, governments needed to establish a price for carbon; create stable and long term programs to support renewables; support commercialization of technologies and follow the market. Participants also agreed that renewable could be used to support rural electrification, but noted that electrification would not lead to development unless electricity is used for productive activities. (Mexico City) -------------- ENVIRONMENT, SCIENCE, TECHNOLOGY AND HEALTH -------------- ¶20. (U) OCTOBER 5 NORTH AMERICAN INFLUENZA MEETING IN MEXICO CITY: The GOM hosted a North American trilateral meeting to address H1N1 response capabilities on October 5 at the Secretariat of Foreign Relations in Mexico City. The trilateral focused on improving North American preparation and cooperation strategies during the 2009- 2010 H1N1 influenza season. Participants pledged to keep each other informed about vaccination programs and to exchange scientific and medical influenza experts to deepen channels of communication between public health agencies. The Mexican side subsequently put forth a set of action items that, if they are agreed, are comprehensive enough to form the basis of a new trilateral agreement on pandemic influenza. (Mexico City) ¶21. (U) H1N1 CLAIMS 14TH VICTIM IN NUEVO LEON: With the death of a 59 year old woman on October 12, Nuevo Leon confirmed the 15th fatality caused by the H1N1 virus since the season began. The state has confirmed 2,081 cases of infection as of October 13. On October 7, Nuevo Leon Governor Rodrigo Medina announced that his administration would invest $1.7 million USD in programs designed to combat the virus. Those funds will purchase vaccinations, 10K doses of Tamiflu and 10K doses of Relenza, 40 respirators, 500 oximeters - used to measure pulse - and other needed equipment. Health Secretary Villarreal is confident that the state is ready to deal with this latest wave of infections, which he credits to students having returned to school in recent months. He warns that this wave could bring from 75-300 mortalities. (Monterrey) PASCUAL