DESPITE UPBEAT STATE FORECAST CHALLENGES REMAIN TO NUEVO

UNCLAS MONTERREY 000060 SENSITIVE SIPDIS STATE PASS USTR E.O. 12958: N/A TAGS: EFIN ETRD EIND EINV ELAB ECON MX SUBJECT: DESPITE UPBEAT STATE FORECAST CHALLENGES REMAIN TO NUEVO LEON'S FUTURE ECONOMIC GROWTH REF: 09 MONTERREY 386; 09 MONTERREY 378; 09 MONTERREY 453 ¶1. (SBU) Summary: A recent Nuevo Leon Secretariat of Economic Development (SEDEC) report predicted that state growth would continue to surpass that of Mexico as a whole, moving 2009 state per capital nominal GDP from US $12,445 to US $25,426 by 2015, 104 percent above the predicted national average at that time. However, a slowdown or reversal of a U.S. economic recovery could stymie growth of the state's heavily export dependent economy. Monterrey's rising cost of living could also negatively impact growth. In the end, investor concerns over rising insecurity and the impact of a large state debt on future governmental operations loom large in any projection of the state's financial future. Rosy Forecast for State's Economic Future -------------- ¶2. (SBU) A February 22 report released by the Nuevo Leon State Secretariat of Economic Development (SEDEC) predicted that GDP growth in the state would outstrip that of Mexico as a whole, reaching 8.3 percent by 2015 (vs. 7.3 percent countrywide). The report estimated that nominal per capita GDP would escalate 60 percent in the next six years, reaching US $25,426 or 104% greater than Mexico as a whole (US $12,445),driven predominantly by the manufacturing industry. (Note: Nuevo Leon nominal per capita GDP in 2009, US $15,794, topped the average for Mexico, US $8,166, by around 93 percent. End note.) As the state is heavily dependent on manufactured goods exports, mostly to the U.S. market, SEDEC caveats its predictions based on the speed and durability of a worldwide economic recovery and, in particular, on a U.S. economic rebound. ¶3. (SBU) Around 4.1 percent of the country, according to the report, lives in Nuevo Leon, yet the state accounts for 8 percent of the country's GDP, 10.2 percent of its manufacturing, and 9.3 percent its exports. The state is the home to several major multinationals, such as ALFA, CEMEX, and VITRO. Over 2,200 foreign companies - about 1,200 from the U.S. - have established operations in the state, and its auto parts manufacturing industry was among the first in Mexico to show signs of life after the worst of the recession had passed. ¶4. (SBU) However, SEDEC's optimistic predictions aside, the state faces a number of hurdles to its fiscal future: Cost Of Living Escalates -------------- ¶5. (SBU) In its annual Mexico cost of living survey released on February 2, Mercer Consulting named Monterrey as having Mexico's highest cost of living - ahead of Los Cabos, Baja California, Cancun, Mexico City and 37 other Mexican cities. While other cities showed a decrease in housing rentals of up to 8.21 percent, Monterrey's rents increased 3.37 percent. Nationally, the cost of food in 2009 rose 7.74 percent, but in Monterrey it increased 10.47 percent compared with 2008. This is the third consecutive year that Monterrey has topped Mercer's list. Security - An Elephant in the Room -------------- ¶6. (SBU) While Monterrey has yet to reach the levels of violence found in many border towns such as Ciudad Juarez, Reynosa, or Tijuana, any discussion of the state's business future must factor in what appears to be a deteriorating security situation. In Monterrey and its environs, home to most of the state's population and businesses, stories of violent criminal activity fill the local media. For example, car hijackings have surged and home break-ins have jumped 300 percent in the Monterrey suburb of San Pedro de Garza Garcia, Mexico's most affluent. ¶7. (SBU) Compounding citizen concerns have been several high profile shootouts. In December a bloody battle between Mexican marines and drug cartel members, coupled with a prison breakout, left 17 dead and closed the city's main northern roads (ref C). In October, a violent shootout between police and drug cartel members shut down a main Monterrey thoroughfare for several hours (ref A). Corruption-riddled state and municipal forces are often in league with the drug cartels or fail to respond in force to these incidents, leaving security in the hands of the military. The impact on economic activity is becoming apparent. Many executives from foreign-based companies have told EconOff that their parent companies plan to defer or change investment plans in Mexico due to fears about the crime situation (septel). State Indebtedness - The Other Elephant in the Room -------------- -------------- ¶8. (SBU) During the six-year term of former Nuevo Leon Governor Gonzalez Paras (PRI),the media and opponents pointedly criticized him for his spendthrift approach to managing the public coffers. Indeed, during his administration, public indebtedness increased over 74 percent (the state incurred US $ 250 million alone during September 2009, his last month in office). Much of the proceeds were used to fund over US $ 3.1 billion in big ticket public works items 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 administration tower, and a pediatric hospital. ¶9. (SBU) The incoming administration of Governor Rodrigo Medina (PRI) appeared to have little financial room with which to maneuver after taking office in October. Nevertheless, during the state's December budget deliberations, Nuevo Leon State Congress President Sergio Alejandro Alanis Marroquin (PRI) told EconOff that he anticipated more big-ticket capital improvements. He described ongoing and projected highway projects, including future plans for expanding the state road north from Monterrey to the Colombia border crossing to facilitate trade. The state's revenue transfer budget request, estimated to be six percent higher than the 2009 budget, is currently awaiting federal approval. Comment -------------- ¶10. (SBU) Nuevo Leon has a number of significant advantages that make it an economic powerhouse, particularly in the age of NAFTA. It is close to the U.S. border, has an educated and motivated workforce, and a U.S.-centric business ethic. It has weathered the recession relatively well and was one of the first Mexican states to report employment gains at the end of 2009. From all indications, international companies overall still view their current operations in the state as productive and profitable. ¶11. (SBU) However, a number of hurdles face actualization of SEDEC's optimistic economic outlook. In real terms, the rising cost of living in Monterrey will temper actual gains in the earning power of employees and increase the cost of doing business in the state. The SEDEC projection for 2015 notes the importance of a sustainable U.S. economic recovery to the state, but Post believes that, should the security situation (or perception thereof by foreign companies) continue to worsen, the impact on the economy could become significant as companies defer or cancel investments and hesitate to send expatriate workers to oversee operations. Equally worrisome is the high debt load the state continues to incur and indications that the new state administration plans to continue spending at previous rates. Since Nuevo Leon depends on federal funding for the majority of its budget, a significant federal budget crunch could hamper the state's ability to meet creditor payment schedules. While the state continues to have tremendous future economic potential, its ability to realize that potential will be dependent of a variety of factors, some beyond its control. WILLIAMSON