FORMIDABLE ECONOMIC CHALLENGES FACE NEW NUEVO LEON GOVERNOR

C O N F I D E N T I A L SECTION 01 OF 02 MONTERREY 000378

SIPDIS

STATE PASS ONDCP FOR BRAD HITTLE

E.O. 12958: DECL: 10/13/2019
TAGS: PGOV ECON MX
SUBJECT: FORMIDABLE ECONOMIC CHALLENGES FACE NEW NUEVO LEON GOVERNOR

REF: A) MONTERREY 304 B) MONTERREY 292

MONTERREY 00000378 001.2 OF 002


CLASSIFIED BY: Bruce Williamson, Consul General .
REASON: 1.4 (b)

1. (U) This is the second in a two part series covering the
challenges Nuevo Leon's new administration is facing upon
assuming office. This first cable focused on the security and
political situation in Nuevo Leon. This cable overviews the
fiscal and economic environment in the state government.


2. (SBU) Summary: On October 4, Nuevo Leon's newly installed
governor, Rodrigo Medina de la Cruz, took over a state
government struggling under immediate economic and fiscal
burdents. His predecessor, Jose Natividad Gonzalez Paras, left
Nuevo Leon as Mexico's most heavily indebted state, hobbled by a
dwindling budget and deeply impacted by the world economic
downturn. End Summary.

Debt-Straddled
--------------


3. (U) Immediately, Medina faces a daunting state budget
situation. Nuevo Leon is Mexico's most indebted state - total
public debt increased over 74 percent during former Governor
Jose Natividad Gonzalez Paras' term and now accounts for 51
percent of the state's budget versus a national average of 17
percent. In his last month alone, Gonzalez Paras incurred an
additional $250 million in state debt.


4. (SBU) Much of this indebtedness went to fund over $3.1
billion in big ticket public works projects such as metro line
and highway expansion, construction of Monterrey's "Riverwalk",
Nuevo Leon's Command, Control, Communication and Coordination
Center (C5),the state's new Innovation and Investigation Park
(PIIT),an administrative tower and a pediatric hospital.
Medina will be hard pressed to continue spending at this rate.
Indeed, a PIIT official recently told EconOff that she was
concerned about the park's future viability in the face of
uncertain state funding.

Empty Coffers
--------------


5. (U) In 2009, the state depended on federal revenue sharing
to fund most of its $3.1 billion budget, which the central
government reduced by $186.9 million in the last half of 2009,
forcing the state government to announce $19.5 million in
additional emergency spending cuts in July on the heels of an
earlier $113 million budget reduction. At the time, state
Secretary of Finance and General Treasury Ruben Martinez Donde,
described rural municipalities, which rely wholly on state
funding, as "practically broke" (ref A). In 2010, Nuevo Leon is
scheduled to receive a further reduction of 10.5 percent in
federal funding, making it one of the Mexican states most
impacted by federal spending cuts.

Economy Reeling from Recession
--------------


6. (U) The world economic downturn has hit the state economy,
which relies heavily on exports to the U.S., particularly hard.
Exports have dropped around 26 percent, foreign direct
investment in the state is down around 36 percent (ref F),and
recent unemployment figures hover around 7.2 percent - double
that of 2003, when the previous administration took office and
higher than the national average of 6.2 percent. (Note:
Employment figures are derived from Mexican Institute of Social
Security (IMSS) and are considered only a rough estimate of the
employment situation in Mexico. Mexico has a significant
informal economic sector, which does not participate in the
IMSS, making aggregate unemployment figures unavailable. End
note.)


7. (SBU) Yet the state is well positioned to benefit from a
U.S. economic rebound and there are signs that the worst may
have passed (ref B). A business recovery could give new impetus
to the public-private partnerships that the state has created to
move forward economic development projects such as the PIIT and
other industrial parks.

Comment
--------------


8. (C) The state's overall economic prospects seem set to
brighten somewhat with the advent of a U.S. recovery. However,
Nuevo Leon's heavy reliance on shrinking federal subsidies and
growing debt service will most likely mean a continuing fiscal
crunch. Medina may be frustrated by the prospect of having to

MONTERREY 00000378 002.2 OF 002


drop or postpone many big-ticket items not yet completed. While
the Monterrey metropolitan area is home to around 3.7 million of
Nuevo Leon's 4.2 million residents, there are still 500,000
citizens in rural areas that depend on state funding for public
services, further constraining Medina's purse. In the end,
Gonzalez Paras' spending spree may have left Medina with an
impossible legacy and an administration doomed to come up second
best in comparison with the previous one.
WILLIAMSON