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Cablegate: Mexican Officials Discuss Inflation, Growth, And

VZCZCXRO3796
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #0357/01 0392149
ZNR UUUUU ZZH
P 082149Z FEB 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 0439
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEHNSC/NSC WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUEHC/DEPT OF LABOR WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 MEXICO 000357

SIPDIS

SENSITIVE
SIPDIS

STATE FOR A/S SHANNON
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH
STATE FOR EB/ESC MCMANUS AND IZZO
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD
USDOC FOR ITS/TD/ENERGY DIVISION
TREASURY FOR IA (ALICE FAIBISHENKO, ANNA JEWEL)
TREASURY FOR IA (ALICE FAIBISHENKO)
DOE FOR INTL AFFAIRS KDEUTSCH, ALOCKWOOD, AND GWARD
NSC FOR RICHARD MILES, DAN FISK
EXIM FOR MICHELE WILKINS
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (ANDREA RAFFO)

E.O. 12958: N/A
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: MEXICAN OFFICIALS DISCUSS INFLATION, GROWTH, AND
REFORM EFFORTS

REF: MEXICO 240

------------------------
Summary and Introduction
------------------------

1. (U) Key cabinet members and economists discussed economic
challenges for the Mexican economy at a seminar hosted by the
Autonomous Technological Institute of Mexico (ITAM) last
month. Bank of Mexico Governor Ortiz said that the impact of
the 2007 fiscal reform on inflation may be smaller than
previously expected. To the surprise of many in the
audience, he said that the new gasoline tax hike will not
adversely affect inflation since the monthly gasoline price
increase will actually be smaller after the tax,s
implementation. Both Ortiz and Finance Secretary Carstens
said that Mexico is better positioned to weather a U.S.
recession than it was in 2001 thanks to solid macroeconomic
fundamentals, strong domestic demand, and increased
government spending. The head of President Calderon's
economic cabinet commented on how the government has
strengthened public finances and reduced the economy's
"operational costs." Labor Secretary Lozano spoke about the
need to make the labor market more flexible and competitive
without touching Article 123 of the constitution. The head
of the Automobile Distributors Association complained about
businesses overregulation, the slow judicial process, and the
government's lack of support for small businesses. End
Summary.

--------------------------------------------- ------
BOM Governor Discusses Inflation and Growth Outlook
--------------------------------------------- ------

2. (U) Bank of Mexico (BOM) Governor Guillermo Ortiz said
that the impact of fiscal reform on inflation may be smaller
than previously expected. He remarked that it was difficult
to measure how the new Single Rate Corporate Tax (IETU) would
affect inflation, adding that it may be less than what the
BOM had estimated at the end of last year. To the surprise
of many in the audience, Ortiz said that the new gasoline tax
hike will not/not adversely affect inflation since the
monthly gasoline price increase will fall from around 3
centavos per month before the tax's implementation to around
2 centavos per month. (Note: the government adjusts the
price of gasoline each month according to inflation. Post
assumes that Ortiz's statement means that the government will
halt these adjustments, and only increase gasoline prices as
specified in the gasoline tax hike. End Note.) Ortiz said
that the main risks to inflation in the short term include:
potential contamination from supply shocks into other prices
in the economy; additional hikes in international food
prices; a greater slowdown in the U.S.; and an increase in
volatility in international financial markets. He said that
so far there are no signs that high food prices have
contaminated salaries or long-term inflation expectations.

3. (U) Ortiz said that while the Mexican and U.S. economies
are still tied together -- especially through the
manufacturing sector -- Mexico is better prepared to handle a
U.S. recession than it was in 2001. He highlighted Mexico's
solid macroeconomic fundamentals and the dynamism of the
domestic economy. He remarked that the banking sector is
stronger and extends more credit to the private sector than
it did in 2001. The expected public-private investment in
infrastructure of 5% of GDP will also help reduce the effect
of a U.S. recession. Ortiz added, however, that Mexico's
growth prospects would depend in part on the "size" of the
U.S. recession. As in other forums, Ortiz called for the
approval of labor, education, and telecommunications reforms,

MEXICO 00000357 002 OF 003


the elimination of corruption, and improved rule of law.

--------------------------------------------- ---
Carstens Expresses Confidence in Mexican Economy
--------------------------------------------- ---

4. (U) Finance Secretary Agustin Carstens also said that
Mexico is better positioned to weather a U.S. recession than
it was in 2001 thanks to solid macroeconomic fundamentals,
strong domestic demand, investment in infrastructure, and
expected growth in the housing sector. The 2007 fiscal
reform and high oil prices will allow the government to
implement countercyclical fiscal policy. He remarked that
programmable expenditures are set to rise 10.5% this year and
that investment in infrastructure will reach a record high.
Carstens also noted that the government has been able to
consolidate the banking sector, which is now lending more to
the private sector.

----------------------------------------
Government Actions To Strengthen Economy
----------------------------------------

5. (U) Felipe Duarte Olvera, head of President Calderon's
economic cabinet, said that the government strengthened
public finances via the passage of the fiscal and pension
reforms, its commitment to maintain fiscal discipline, and
its efforts to improve the country's debt profile. The
pension reform will allow savings equivalent to 24% of GDP
over time, and the fiscal reform allows the government to
earmark more resources for social development and
infrastructure and to reduce the country's reliance on oil
revenues.

6. (U) The government also has taken steps to reduce the
economy's "operational costs," such as reducing the time to
open a new business, lowering industrial electricity rates
during peak hours, strengthening development banks, and
fostering more competition in LP gas distribution. The
government also created Promexico, an agency that will
promote Mexico as a safe and attractive destination for
foreign investment.

--------------------------------
Labor Secretary Calls for Reform
--------------------------------

7. (U) Labor Secretary Javier Lozano spoke about the need to
make the labor market more flexible and competitive without
touching Article 123 of the constitution -- the foundation
for all federal labor laws. He proposed including
productivity requirements in collective contracts and
modifying the "contratos-ley" (an industry-wide collective
bargaining agreement) in the textile and rubber sectors, for
example. The government recently negotiated a modification
to the sugar industry's contract to make the sector more
competitive. Another challenge for the Secretariat will be
developing training programs and investing in human capital.

---------------------------------
Auto Sector's View of the Economy
---------------------------------

8. (U) Jose Gomez, the head of the Automobile Distributors
Association (AMDA), complained about overregulation of
businesses and the slow judicial process. He said that it
takes an average of 421 days to conclude the judicial process
in Mexico. Gomez remarked that the government's financial
support to small- and medium-sized enterprises (SMEs) is
insufficient. He said that only 0.11% of the budget was

MEXICO 00000357 003 OF 003


channeled to SMEs from 2001 through 2006 even though SMEs
account for 72% of total employment. Gomez called for the
approval of structural reforms and a policy to reduce the
importation of used vehicles, which has affected his sector.

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

9. (SBU) Carstens' and Ortiz's views aside, Mexico's economy
is closely linked to that of the U.S. and will undoubtedly
suffer if the U.S. slips into recession. The BOM and Finance
Secretariat have both revised downward their GDP growth

SIPDIS
forecasts for this year, due largely to slower U.S. growth.
If the situation in the U.S. worsens, we can expect these
forecasts to fall even further.


Visit Mexico City's Classified Web Site at
http://www.state.sgov.gov/p/wha/mexicocity and the North American
Partnership Blog at http://www.intelink.gov/communities/state/nap /
GARZA

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