MONTERREY ECONOMIST WEIGH PROSPECTS FOR RECOVERY IN

UNCLAS SECTION 01 OF 02 MONTERREY 000314 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EFIN ETRD EINV ELAB PGOV ECON MX SUBJECT: MONTERREY ECONOMIST WEIGH PROSPECTS FOR RECOVERY IN EMPLOYMENT REF: A) MONTERREY 304 B) MONTERREY 292 C) MONTERREY 278 MONTERREY 00000314 001.2 OF 002 ¶1. (SBU) Summary. Monterrey-based economists remain hopeful as employment in Mexico's formal sector recorded its second straight month of growth in July. Even though they believe the worst of the recession may be over, David Martinez, the Chief Economist for Nuevo Leon's Secretary of Economic Development, recently warned Post that a full recovery will likely take two more years. Separately, Monterrey central bank delegate Agustmn Del Rio speculated that Bank of Mexico Governor Guillermo Ortiz may not be reappointed when his term expires in December 2009 because of dissatisfaction with him within the PAN party. End Summary. A Long Road to Recovery ¶2. (SBU) According to July statistics from the Mexican Social Security Institute, employment in Mexico increased modestly for the second month in a row, signaling the start of a possible economic recovery. Nationally, official Mexican employment increased by 19,243 jobs in June and 14,260 jobs in July. For the year, however, national employment in the formal sector is still down by 221,028 jobs. For the two month period, job growth was led by the states of Jalisco and Nuevo Leon - two of the most industrially advanced states in Mexico. Informal sector jobs such as those in underground retailers and restaurants are believed to have increased as well but are harder to measure. Current unemployment in Nuevo Leon according to Mexico's statistics bureau (INEGI) unemployment is currently at 7.02% vs. 11.57% for the entire country. ¶3. (SBU) David Martinez, Chief Economist for the State of Nuevo Leon's Secretariat of Economic Development, applauded the news as a sign the worst of the recession is over, however, he predicted a long recovery period. Martinez compared the current recession to the 2000-2002 recession in Mexico, precipitated by the dot-com crash in the United States, the 9/11 attacks, and the wars in Afghanistan and Iraq. U.S. demand, like in the current recession, fell dramatically. The lack of export demand prolonged the Mexican recession (Ref A). Indeed, he forecast that it will take 47 months for employment to reach pre-recession levels. Based on this comparison, he believed that a complete economic recovery will not occur until December ¶2011. ¶4. (SBU) Martinez added that analysts err by comparing the current recession to the 1994-1995 Peso Crisis - even though he said the current recession is as severe or worse. Then, exports to the United States remained high, since the crisis was caused by internal factors opposed to worldwide ones. At that time, the country also suffered from high rates of inflation and an accompanying loss of wealth. Mexico only needed 22 months to recover from the Peso Crisis. Central Bank Perspective and Possible Changes ¶5. (SBU) In an August 7 presentation to U.S. and Mexican real-estate executives, the regional delegate to Monterrey for the Bank of Mexico (Mexico's central bank),Agustin del Rio, agreed that the Mexican economy continues to suffer from the recession and will take years to recover. Central bank economists have been surprised by the severity of the recession.. Recently, Fitch Ratings downgraded the debt of the border state of Coahuila, where many export related companies are located. For the first time ever, Del Rio stated that Mexican union leaders have not requested an increase in the minimum wage this year, in order to help save jobs. ¶6. (SBU) Del Rio reported of speculation that Bank of Mexico Governor Guillermo Ortiz will not be reappointed when his term expires in December. Ortiz, who was nominated to be the governor by former PRI President Zedillo in 1998 is not popular within the PAN party. However replacing him would be difficult. The most likely candidate is the current Secretary of Finance Agustmn Carstens, but Carstens' deputy, Alejandro Werner, cannot MONTERREY 00000314 002.2 OF 002 become the Secretary because he is not a natural born Mexican citizen. Moreover, Ortiz is also the chairman of the board of directors of the Bank of International Settlements. Mexico would lose the international prestige of the position if Ortiz were to be replaced. ¶7. (SBU) Comment: The economy continues to show signs of improvement. The employment numbers for Nuevo Leon were encouraging since it will likely be one of the states to lead the rest of the country out of the recession. The state, where many maquilas are located, would be one of the first to benefit from a rebound in the U.S. economy. However, if the forecasts for an extended recession are true, it will have a devastating effect on state budgets (Ref B). The reduced income from payroll taxes combined with lower transfers from the federal government (largely because of falling oil revenue) could mean states will have to cut spending on essential programs, such as social services and law enforcement. End Comment. WILLIAMSONB