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