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Cablegate: Fdi in Mexico: 2007 Great, What About 2008?

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RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #0142/01 0181924
ZNR UUUUU ZZH
R 181924Z JAN 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 0180
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 MEXICO 000142

SIPDIS

SIPDIS, SENSITIVE

STATE FOR WHA/MEX AND EB/IFD/OIA
STATE PLEASE PASS TO USTR (EINSSENSTATE/MELLE)
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD
TREASURY FOR IA (ALICE FAIBISHENKO, ANNA JEWEL)

E.O. 12958: N/A
TAGS: EINV ECON PGOV MX
SUBJECT: FDI IN MEXICO: 2007 GREAT, WHAT ABOUT 2008?

REF: 07 MEXICO 4276

1. Summary: FDI inflows to Mexico for the first three quarters of
2007 topped USD 18 billion and are expected to reach USD 23 billion
for CY2007. At the same time, Mexico fell three slots in investment
confidence as other countries surpassed it in investment
attractiveness. CY2008 will likely see FDI inflows drop to under
USD 20 billion on U.S. economy woes, as well as changes to the
Federal Foreign Investment Law. The consensus among economic
analysts is that, to ensure that FDI levels maintain their growth,
the Calderon Administration should continue its reform push and look
to increase investment from non-U.S. sources. Mexico is currently
at an important point in time as actions, or lack thereof, by the
GOM could result in steady year-over-year FDI growth or continued
stagnation for the near future.

2007: Record Year
-----------------

2. For the period January to September 2007, FDI equaled USD 18.4
billion, an increase of 30.3% over the same period in 2006 (USD 14.1
billion). This is the second highest amount recorded, surpassed
only in 2001 when CitiBank acquired Banamex for 12.5 billion
dollars, skewing the FDI figures for that year. Of this amount,
39.7% (USD 7.3 billion) went towards new investments, 21.7% (USD 4
billion) towards reinvestment, and 38.6% (USD 7.1 billion) towards
transfers between company accounts. The manufacturing sector
continued to be the primary beneficiary of FDI, receiving 51.1%
while the service sector received 31.4%. The U.S. was the source
country for 50.4% of FDI followed by the Netherlands (12.6%), Spain
(9.8%), and France (9.3%).

3. Undersecretary for Regulation, Foreign Direct Investment and
International Commercial Practices, Carlos Arce, continues to
predict that total FDI for 2007 will top USD 23 billion (reftel),
although he said preliminary figures will not be available until the
third week of February. Secretary of Economy Sojo attributes the
strong increase in FDI to international investors' favorable
expectations for the Mexican economy and says that the flows confirm
that Mexico is one of the most attractive destinations for
international investment flows, especially in Latin America.

4. Conversely, Mexico's rank in A.T. Kearney's Foreign Direct
Investment Confidence Index was recently lowered from 16 to 19.
According to company officials, the new rank reflects measures other
countries have taken to increase their attractiveness to investors
rather than Mexican shortcomings. Mexico is also more strongly
affected by volatility in the U.S. economy and the weak dollar, both
which factor heavily in international investors' decision making
processes. Additionally, while Mexico ranks 10th in investor
confidence for North American investors, it fails to attract Asian
and European investors, making it even more vulnerable to a U.S.
recession. By comparison, Brazil ranked 7th among North American
investors, 4th among Asian investors, and 8th among European
investors.

2008: Strong, but suffering from U.S. economic weakness
--------------------------------------------- ----------

5. FDI inflows for 2008 will be strong, but will not reach 2007
levels according to Secretary of Economy Eduardo Sojo who announced
that FDI in 2008 will only reach USD 20 million as Mexico feels the
effects of the U.S. deceleration. Total FDI inflows of USD 20
billion would make 2008 the 4th strongest of the past 10 years.

6. In 2008, Economy Secretariat (SE) officials will also continue
their push to update the Federal Foreign Investment Law. The
planned amendments increase sanctions on companies that fail to
report their investments on time. Currently, companies report
investments up to 3 years after the deadline required by law,
meaning that the SE has to estimate FDI figures. For example, the
total amount listed above for the first three quarters of 2007
includes an estimate of USD 3.3 billion in new investment that has
not yet been reported. Salvador Carrerus Lemus, Director of Quality
and Statistics for the General Directorate of Foreign Investment
explained that, between March 31, 2007 and September 30, 2007, an
additional USD 1 billion in FDI for 2006 was reported even though
reports for the final trimester of 2006 were due before February 7,
2007. He further estimates an additional USD 2.3 billion to be
reported over the next 2 years from investments that SE is aware
have already taken place. Final figures change every quarter,
making it difficult for officials to analyze trends and provide
timely policy recommendations in a timely fashion. Additionally,
requiring companies to report investments quickly will increase
transparency as companies will be less able to modify numbers and
final numbers will be less affected by possible errors in GOM

MEXICO 00000142 002 OF 002


estimates.

Comment
-------

7. The passage of the fiscal reform package and the government's
receptiveness to complaints by the business community showed
investors that the GOM is committed to strengthening Mexico's
investment climate. However, continued weakness in the U.S. economy
will reduce FDI coming from U.S. sources for at least the next 12-24
months while overall growth could be effected for an even longer
period.

8. While Mexico has a growing economy, a stable democratic
political environment, and a strategic location adjacent to the U.S.
and both the Pacific and Atlantic oceans, it is nonetheless in a
delicate position with respect to foreign investment. Other
developing countries are stepping up promotion efforts to lure
investors. Mexico no longer has a monopolistic advantage when it
comes to cheap semi-skilled labor (in fact, this might be a
disadvantage now compared to India and China). Delays due to
inefficiency, lack of infrastructure, and increase border security
cut into the benefits of Mexico's proximity to the U.S. Mexico will
have to become more competitive, at a quicker pace, in order to
maintain its spot.

9. Mexico will need to continue its reform push. Labor reform will
allow companies to find and hire the most efficient workers will
education reform will prepare the next generation and increase the
pot of skilled workers to chose from. Telecommunication and energy
reform would open up the Mexican economy to billion of dollars in
investment, while helping to lower prices for telecommunication
consumers and modernize and develop the energy sector. While
political realities mean that meaningful reform in these areas will
be nearly impossible over the next year, even small steps toward
reform will shore up investor confidence and draw additional FDI
inflows.

10. Additionally, Mexico needs to also expand its investment base
beyond the U.S. President Calderon's administration understands the
need to branch out and "put more Mexico in the world and more of the
world in Mexico", if nothing more than to decrease the country's
overwhelming dependence on the U.S. A major responsibility of the
GOM agency ProMexico, created in July 2007, will be to promote
investment from high potential countries such as Spain, Great
Britain, Japan, and Germany, from which Mexico currently captures
slightly more than 1% of a combined 230 billion dollars in global
FDI.

Conclusion
----------

11. The immediate future of FDI in Mexico depends on many factors,
both internal and international. While the GOM cannot change
international economic realities, it can take concrete steps to
increase the attractiveness of Mexico vis-a-vis the rest of the
world and draw a larger share of investment from a growing global
pot.

GARZA

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