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Cablegate: Analysts Discuss Economic Developments in Mexico

VZCZCXRO7560
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #1504/01 1401221
ZNR UUUUU ZZH
P 191221Z MAY 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 1906
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEHNSC/NSC WASHINGTON DC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 04 MEXICO 001504

SENSITIVE
SIPDIS

STATE FOR A/S SHANNON
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA
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 (LUYEN TRAN, RACHEL JARPE)
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 EFIN EINT MX
SUBJECT: ANALYSTS DISCUSS ECONOMIC DEVELOPMENTS IN MEXICO

REF: MEXICO 240

1. (SBU) SUMMARY: Market analysts are relatively upbeat
about prospects for the Mexican economy due in part to high
oil prices and domestic demand. Consumer price inflation is
expected to increase again in May and June, and then begin
falling slowly. Several local observers believe a watered
down energy reform will be passed this year, and that nothing
will come of the constitutional challenges against the Single
Rate Corporate Tax (IETU). The Mexican Social Security
Institute had to correct the way it measures formal
employment because it had been overestimating job creation.
An official at the Mexican Stock Exchange said the exchange
will launch an initial public offering to list its own shares
next month. END SUMMARY.

-----------------------------
Prospects for Economic Growth
-----------------------------

2. (SBU) Alberto Gomez, Banamex,s chief economist, was
relatively upbeat about prospects for the Mexican economy --
in part because the U.S. economy "is doing a little better
than expected." He believes Mexico will grow by 2.6% this
year. Mexico is weathering the U.S. slowdown better than in
the past because high oil revenues allow the government to
run countercyclical fiscal policy. Domestic demand is
stronger than in the past, giving Mexico a buffer against the
U.S.'s woes. Nonetheless, he believes that the U.S. slowdown
will negatively affect the Mexican economy eventually because
the link between to two economies is "simply too great."
Alonso Rios and Arnulfo Rodriguez, officials from Accival
(Banamex's brokerage arm), echoed Gomez's comments on growth,
adding that they believe remittances from the U.S. to Mexico
will be lower than the USD 24 billion recorded in 2007.

3. (SBU) The Accival officials said they are not concerned
about Mexico having the same problems as the U.S. with the
mortgage market because there are so many restrictions for
granting loans. For example, a client has to give a down
payment of at least 30% of the house's value (including
credits from the government's housing development agencies),
and monthly mortgage payments should be no more than 30% of
the person's income. The large down payment gives clients a
strong incentive to continue paying even if the value of
their house falls. Moreover, when Mexicans purchase a house,
it is usually used as their primary residence -- not a second
or third house. Finally, the mortgage market represents a
small portion of the debt market.

------------------------------
Inflation and the Central Bank
------------------------------

4. (SBU) A Bank of Mexico (BOM) official told Econoffs he
expects inflation to increase again in May and June, and then
to begin falling gradually. Gomez agreed, saying that
inflation would continue to rise in the near term due largely
to pressure from processed foods. He does not believe that
the BOM has room to adjust interest rates in the foreseeable
future given recent inflation readings. He remarked that
higher prices for food products (and a few other goods) have
not yet contaminated other prices.

5. (SBU) The Accival officials told Econoffs that there is an
ongoing debate between banks and the authorities regarding
the easing of monetary policy to stimulate growth.
Nonetheless, most analysts agree it would be difficult for
the BOM to change its mandate to include fostering economic
growth as long as it has difficulty keeping inflation near
its 3% target. Rodriguez, who knows BOM Governor Ortiz, said
Ortiz is a "conservative economist" who believes there should
be an instrument for each economic situation. That is, Ortiz

MEXICO 00001504 002 OF 004


believes that the BOM should focus on inflation, while other
government agencies should develop programs and implement
structural reforms to spur economic growth. Separately,
Rodriguez said that Calderon opposed Ortiz's appointment as
BOM Governor because Calderon partially blamed Ortiz for the
1994-95 economic crisis.

------------------------
Calderon's Reform Agenda
------------------------

6. (SBU) Gomez and Banamex economist Sergio Luna told Econoff
that energy reform would be passed -- probably in August
during an extraordinary congressional session -- but said the
reform will be even more watered down than the government's
initial proposal. Alejandro Reynoso, the Managing Director
of Corporate Strategy at the Mexican Stock Exchange (BMV),
agreed that the reform would be passed, but was more critical
of the proposal's contents. He said it is unclear what the
government hopes to accomplish with energy reform because its
proposal has "no game plan." Therefore, the proposal is open
to criticism and unlikely to get support from the Mexican
public. Reynoso lamented that there were not any brilliant
people, like Finance Secretary Carstens, behind the reform
package.

7. (SBU) Gomez believes that after energy reform is passed,
the government will turn its attention to labor and, to some
extent, competition reform. The latter will only happen
"little by little." It will be a give and take process
between the government and people like Carlos Slim. Gomez
noted that the government has been defending Telmex in
Ecuador and Venezuela, and that it will want concessions from
Telmex for this support. Luna said that the head of the
Federal Competition Commission's work of bringing competition
problems to the attention of legislators cannot be
understated. That said, Mexico still has a long way to go in
terms of creating a culture of competition.

8. (SBU) Gomez believes the government will focus more on
social issues in the run up to the midterm congressional
election in 2009. Luna said the Institutional Revolutionary
Party (PRI) wants more social programs run by the states, but
the federal government will resist this change because the
political benefits associated with such programs would be
credited to governors (the plurality of whom are PRI) versus
Calderon's own National Action Party (PAN). Gomez added that
no one really knows what reform the government will "pick"
after these are complete.

9. (SBU) Neither Gomez nor the BOM contact thought that
anything would come of the constitutional challenges against
the Single Rate Corporate Tax (IETU). Local lawyers and
Finance Secretariat officials have told Gomez they are
optimistic the IETU will hold up.

10. (SBU) When asked to characterize President Calderon's
approach to economic reform, Gomez responded that Calderon
focuses on passing reforms that are politically feasible,
even if they are not necessarily ideal. Luna asserted that
Calderon wants to maintain the momentum for reform and build
political capital so he is able to continue passing reforms
during his last three years in office. Calderon is picking
his fights and making allies. Alejandro Reynoso was more
severe on the government, saying that so far Calderon only
has completed former President Fox's reform agenda. He
opined that the federal government has capitulated to
entrenched interests (e.g. unions, monopolies, governors) and
that he does not see movement toward weakening these groups'
grip on power.

--------------------------------------------- -
Government Admits Unemployment Stats Incorrect

MEXICO 00001504 003 OF 004


--------------------------------------------- -

11. (SBU) The Mexican Social Security Institute (IMSS)
acknowledged that it has been overestimating formal
employment figures. According to estimates from BBVA
Bancomer, 529,000 jobs were created in 2007, not the 756,000
jobs previously reported (and often used in the President's
speeches). IMSS had been counting jobs that changed from
temporary to permanent status as new jobs. IMSS has
corrected its methodology and is supposed to release more
revised figures next month. A Bank of Mexico official told
Econoffs that he was not surprised when this news surfaced.
He said some government officials have been questioning the
calculations for some time.

------------------------------------
Stock Exchange Prepares for Sell-off
------------------------------------

12. (SBU) Reynoso told Econoffs on May 7 that the Mexican
Stock Exchange (BMV) will launch an initial public offering
(IPO) to list its own shares in June. (Note: The BMV
announced plans to go public in 2006 but has repeatedly
delayed the debut. End Note.) The prospectus is slated to
be posted on May 19. As of now, two of the BMV's 25
shareholders have said they will sell some of their shares.
The IPO was able to move forward because of four important
factors: improved market conditions, new-found support from
the BMV's board members for the IPO, the active role
government authorities took in promoting the transaction, and
the success of the Brazilian stock exchange's IPO. Recent
steps to make the BMV Board more independent and transparent
also helped. Proceeds will be channeled to integrate the
BMV's sister companies (derivatives, stock market, etc.) into
a holding company. It is expected that 30,000 small
investors will be able to acquire the shares in financial
markets.

13. (SBU) Reynoso said the IPO, together with steps to adopt
corporate governance measures, will make the stock exchange
"more democratic" and transparent. The general public will
have access to the exchange's financial information and how
it operates because it will be a public company. Reynoso
remarked that the IPO will help break the "cartel of families
that used to run this business."

-----------------------------------
Fibras Get Off the Ground (Finally)
-----------------------------------

14. (SBU) Reynoso told Econoffs that another project that
took a long time to become a reality was Mexico's version of
real estate investment trusts (called Fibras). Companies
were reluctant to issue Fibras because of the associated tax
burden and because the vehicle was untested. Reynoso
asserted that both issues have been resolved. Ironically,
the first issuer of Fibras was the Mexico City government
under PRD Mayor Marcelo Ebrard. The city government was
attracted to Fibras because it is highly indebted and because
it would not have to pay taxes on the transaction if it used
this vehicle.

15. (SBU) Reynoso told Econoffs that the city issued a Fibra
to tap into one of its highly valued assets that it cannot
legally sell: subway stations. Mexico City's 17 inter-modal
subway stations move around 4 million passengers a day --
making the areas immediately around them ideal locations for
commercial establishments. The city created an entity called
"Capital en Crecimiento" that will have the concession to
create joint ventures with the private sector to operate
these commercial facilities. Mexican businessmen --
including Carlos Slim, Moises Saba, the Chedraui family, and
David Serur -- have expressed interest in participating.

MEXICO 00001504 004 OF 004

16. (SBU) Reynoso said that people are "paying attention" to
Mexico City's Fibras. The federal government followed the
same model to create its National Infrastructure Fund, and
Carlos Slim is expected to list a Fibra within eight months
for one inter-modal subway station, which will include not
only commercial establishments but also a hospital and a
hotel. Moreover, Nuevo Leon and the State of Mexico are
interested in issuing Fibras. Interestingly, Reynoso said
that Finance Secretary Carstens and Mexico City's Finance
Secretary, Mario Delgado, cooperate behind-the-scenes on
financial issues. Reynoso added that Carstens' show of
respect for his counterparts fosters this cooperation.

---------
Bio Notes
---------

17. (SBU) When asked who President Calderon listens to on
economic policy issues, Gomez listed Secretary of Social
Development Ernesto Cordero, Under Secretary of Expenditures
(and Calderon's former economic chief within the Office of
the Presidency) Dionisio Perez Jacome, Finance Secretary
Carstens, Under Secretary of Finance Alejandro Werner, and
(to some extent) Economy Secretary Eduardo Sojo. Carstens
gained a lot of credibility with the President because of the
IETU, which is working well. Calderon also listens to
business leaders and people such as Arturo Fernandez at ITAM.
Gomez believes the President (who studied economics) takes
in the opinion of others, and then makes his own decision.
Alonso Rios told Econoffs he believes that Cordero is
Calderon's closest economic advisor, but added that the
President also listens to Carstens.

18. (SBU) The Accival officials and Reynoso suggested that
Calderon could make Carstens the head of the central bank
when Ortiz's term ends in 2009. Rios and Rodriguez remarked
that Carstens has always wanted this position and that he was
upset when he did not get a BOM deputy governor position
before he went to the IMF. The Accival officials suggested
that Cordero could replace Carstens as Finance Secretary
since he has some financial experience from his time at
Banobras (National Works and Public Services Bank). They
noted, however, that analysts are a little worried because
Cordero is so young and lacks experience in public
administration. Reynoso agreed that Cordero was a possible
candidate to replace Carstens, but noted that "anyone" could
end up getting the job.
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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