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Cablegate: Mexico Economic Notes, December 7 Q December 13

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DE RUEHME #6933/01 3482314
ZNR UUUUU ZZH
P 142314Z DEC 06
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 4586
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
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UNCLAS SECTION 01 OF 04 MEXICO 006933

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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/ARUDMAN
USDOC FOR ITS/TD/ENERGY DIVISION
TREASURY FOR IA (ALICE FAIBISHENKO)
DOE FOR INTERNATIOANL AFFAIRS KDEUTSCH AND SLADISLAW
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA)
NSC FOR DAN FISK

E.O. 12958: N/A
TAGS: ECON ENRG ELAB EFIN PGOV PREL MX

SUBJECT: MEXICO ECONOMIC NOTES, DECEMBER 7 Q DECEMBER 13
2006

REF: MEXICO 6823

MEXICO 5854

Summary
-------

1. (U) The first budget from the Calderon Administration,
for fiscal year 2007 (ref A) was met by loud protests over
proposed funding levels for education and infrastructure,
as well as an increase in the tax for soft drinks. A
detailed cable regarding contentious parts of the budget
will follow. The Mexican legislature seems likely to pass
legislation complying with the recent WTO decision on long-
grain rice, but may refuse the governmentQs proposed tax on
soft drinks which would also bring Mexico into compliance
with the WTO decision on MexicoQs unfair beverage sweetener
tax. Broadcast duopolists TV Azteca and Televisa have been
using the airwaves for attacks on their rivalQs Mexican
company Casa Saba and its U.S. partner GE/NBC. According
to press reports, China-based Giant Motors is opening a
light truck production plant in Hidalgo. Calderon announces
anti-poverty program geared at poorest 100 towns.
Inflation falls while financial markets continue to rally.
Finally, biographic information is provided on new Under
Secretaries in the Secretariats of Energy and

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Transportation and Communication. End Summary.

Cuts to Public Spending on Infrastructure
-----------------------------------------

2. (U) According to leading analysts, the proposed 43
percent cut in funding for the Secretariat of
Transportation and Communication (SCT) is part of the
administrationQs strategy to replace government investment
with private investment. CalderonQs federal spending bill,
presented to Congress for approval last week, would give
the agency responsible for overseeing transit
infrastructure 27.6 billion pesos (2.45 billion USD) in
2007 - a significant reduction from FY 2006. While the
Mexican Constitution limits private participation and
investment in public infrastructure, the federal government
has experimented in recent years with contracts in which
companies are hired to complete infrastructure projects
(schools, prisons, highways, etc.) which the government
then pays to use. Recently, the new Secretary of
Transportation and Communication, Luis Tellez, stated that
the government is looking for methods that allow private
sector participation in the construction of highways,
bridges and roads in order to reduce the level of federal
resources directly involved.

Concerns Rising Over Education Cuts
-----------------------------------

3. (U) The administrationQs proposed level of education
funding has set off a firestorm of protest. Lawmakers from
the two major opposition parties, PRD and PRI, formed a
working group to restore the slashed education funds before
the Chamber of Deputies approves a final budget sometime
this month. The ChamberQs Policy Coordination Board,
controlled by the PRI, will present a resolution calling
for the protection of the universities from any budget
cuts. Reactions to CalderonQs proposed education cuts were
so heated over the weekend that even Education Secretary
Josefina Vazquez Mota promised to urge the Finance
Secretariat to reconsider the decrease, which amounts to a

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1.2 percent cut, or about 415 million USD. Some lawmakers
grumbled that the cuts aimed at the universities may have
been politically motivated. UNAM, which recently broke into
the top 100 list of worldwide universities, has
traditionally nurtured leftist thinkers opposed to the
conservative policies of CalderonQs National Action Party

MEXICO 00006933 002 OF 004


(PAN).

4. (U) Comment: While spending on education in the
Calderon governmentQs 2007 budget proposal fell by 1.2
percent in real terms when compared to an estimate of what
was actually spent on education in 2006, it increased by
4.2 percent when compared to the approved 2006 budget.
Some educational experts in Mexico, criticized the
government for diverting funding to the universities at the
expense of MexicoQs poor, most of who never have a chance
to get to universities, or even a decent education, because
of the lack of reform and funding for primary and secondary
education (see ref b and septel). End Comment.

Soft-Drink Makers Enraged by Proposed Beverage Tax
--------------------------------------------- -----

5. (U) Mexican soft-drink makers vociferously urged
Congress to reject a proposed tax increase, saying it would
hurt not only the companies that produce the beverages, but
also low-income families who spend nearly as much on soda
as on basic products like beans and tortillas. The National
Association of Soft Drink and Carbonated Water Producers
took out a full-page ad in Mexican newspapers in which they
also claimed that the proposed 5 percent excise tax - which
would come on top of a current value-added 15 percent tax -
would result in a drop in demand, loss of jobs, and a
reduction in the demand for sugar. The new administration
included the tax in its 2007 budget proposal. The proposal
is linked to the dropping of the 20 percent tax on
beverages made with non-sugar sweeteners in order to comply
with a WTO decision against such discrimination.

6. (U) On another WTO issue, PRI Senator Cant, President of
the SenateQs Trade and Industry Commission reported that
the Chamber of Deputies has passed the bill (already
approved by the Senate in November) changing the
antidumping provisions of MexicoQs Foreign Trade Law. The
new provisions grant accused exporters more time to present
their cases to the government and also no longer require
that the highest retaliatory rate be applied. The change
was made to comply with the lost WTO ruling on long-grain
rice.

PAN Lawmakers State Willingness to Reallocate Resources
--------------------------------------------- ----------

7. (U) The Chairman of the Finance Committee of the
Senate, Gustavo Madero (PAN), asserted that PAN legislators
are willing to make moderate corrections to CalderonQs
budget proposal. He claimed confidence that agreement will
be reached and the 2007 budget will be approved by all
political parties. (Mexican law requires the budget to be
approved by December 31, 2006.) Common points of
convergence between the parties will prevail over Qsmall
discrepancies.Q Jorge Estefan (PRI), Chairman of the
Finance Committee of the Chamber of Deputies, however,
warned that the 5 percent tax on beverages would have to be
discussed more with the beverage industry to determine to
what extend the impact of this tax can be absorbed. He
worried that approving a tax that was unaffordable would
ultimately result in higher prices.

Duopolist Attacks GE
--------------------

8. (U) Broadcast duopolist TV Azteca, which along with
Televisa has in recent weeks frequently denounced Casa Saba
on the airwaves for what they term monopolistic practices
in the pharmaceutical industry, stepped up its attacks on
Casa Saba to include GE, SabaQs American partner in the TV
market through Grupo Extra. In early news broadcasts, TV

MEXICO 00006933 003 OF 004


Azteca and Televisa concentrated on the high cost of
medicines in Mexico, pinning the responsibility on Grupo
Saba and accusing it of Qsentencing to deathQ Mexicans who
are ill. On December 7, however, TV Azteca further upped
the stakes, focusing its attacks on members of the Saba
family and drawing the line between Grupo Saba and GE,
which it accused of monopolistic practices and fraud.
AztecaQs new programs referred to GEQs Qdirty historyQ of
the 1980s and 1990s and accused Casa Saba of Qextending its
tentaclesQ in Mexico with the help of GE, Qprofiting from
the health and well-being of Mexicans.Q GEQs general
director in Mexico defended the company in the next days on
radio and in newspapers. So far, Televisa has not joined
in TV AztecaQs attacks on GE. Comment: The attacks are
likely inspired by Grupo SabaQs request for a license to
open frequencies for a new television channel, probably in
conjunction with GE/NBCQs Telemundo, which would threaten
the Televisa/TV Azteca dominance of Mexican television
content. End Comment.

Chinese Company Will Assemble Trucks in Hidalgo
--------------------------------------------- --

9. (U) According to press reports, the Chinese company
Giant Motors will open a plant in Hidalgo to produce light
trucks with an initial investment of MP 180 million (16.7
million USD). First year manufacturing numbers are
expected to reach 2,800, 15 percent of which will be
exported. The company reportedly plans to create 700 jobs
with a total investment reaching 500 million pesos (46.3
million USD). The company is reported to be making
alliances with national suppliers to reduce the number of
imported spare parts. The units will be distributed in
Mexico through a joint-venture with Grupo Bler in
Monterrey, Guadalajara, Ciudad Obregon and Chihuahua.

Calderon Announces Program for the Poor
---------------------------------------
10. (U) On December 6, Calderon announced a program to
help the countryQs 100 poorest communities. Guerrero Gov.
Zeferino Torreblanca, a member of the PRD, attended
CalderonQs ceremony in Tlacoachistlahuaca, which the press
noted was a sign that partisan solidarity with Lopez
Obrador may be trumped by the need to cooperate with aid-
bearing federal officials. In Tlacoachistlahuaca, Calderon
urged Mexicans to bury their differences over the election
and focus on the nationQs problems. He said his anti-
poverty program will draw money from several federal
agencies and will be duplicated in 100 deeply poor towns
where people suffer malnutrition and disease and lack roads
and clean water.

Inflation Falls in November on Fruit Prices
-------------------------------------------
11. (U) Annual inflation slowed in November on falling
prices for tomatoes, avocados and oranges, ending a three-
month spike which brought the inflation rate above the
central bankQs target range of 3 percent plus or minus 1
percentage point. The inflation rate fell to 4.1 percent in
the 12 months ending in November from 4.3 percent in
October. Slowing inflation heightens speculation the
central bank may begin lowering its benchmark lending rate
from 7% in the first quarter of next year, however,
according to a recent Bloomberg survey of 15 economists,
policy makers will leave the benchmark rate unchanged
during their next meeting. Core consumer prices rose 0.29%
in November after rising 0.27% in October. The increase in
core prices was above the 0.26% median forecast in the
Bloomberg survey.

Financial Markets Continue to Rally
-----------------------------------

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12. (U) The peso keeps recovering and yesterday closed at
$10.84 pesos per dollar due to less uncertainty among
investors regarding Mexican paper, more remittances,
Christmas bonus and the low demand for dollars from
holdings. Yields in the secondary market also declined and
the 10-year peso-denominated bond closed at 7.48 percent.
The stock market hit its 54th record during the year closing
at 25,615.

Secretariat of Energy Appointments

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

13. (U) Secretary of Energy, Georgina Kessel, appointed
Ruben Flores Garcia as Under Secretary of Electricity,
Jordy Herrera as Under Secretary of Energy Planning, and
Mario Gabriel Budebo as Under Secretary of Hydrocarbons.
Flores Garcia was previously Director of Distribution and
Electricity Storage. He has a degree in electromechanical
engineering from the Instituto Technologico de Monterrey
and a MBA from the Autonomous University of Guadalajara.
He was also commissioner of the Energy Regulatory
Commission (CRE) and director of the electrical system at
the Mexican electricity monopoly (CFE). Herrera was
previously Director General of the Energy SecretariatQs
Investment Promotion Unit. He has a Bacehlors degree in
economics from Universidad Iberoamericana and also has
professional certificates in economics, politics and
marketing. He was the Secretary of EnergyQs executive
assistant in 2003. Budebo was formerly Chair of the
National Retirement Saving Commission (CONSAR). He has a
Bacehlors in economics from Instituto Technologico Autonomo
de Mexico (ITAM) and has a Masters and Phd from the
University of California. Budebo was also coordinator of
advisors for Secretary of Finance Francisco Gil Diaz, and
coordinator of revenue and fiscal policy. In 1998, Budebo
received an Economics Award from Banamex.

Appointments in Secretariat of Transportation and
Communication (SCT)
--------------------------------------------- ----

14. (U) Secretary of Transportation and Communication Luis
Tllez Kuenzler has named his under secretaries. Manuel
Rodriguez Arregui, Under Secretary of Transportation, has
experience in public and private sector infrastructure
projects. He was Director General of Studies in the
Secretariat of Agriculture where he designed programs to

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support agricultural producers and alleviate poverty. He
studied economics at Massachusetts Institute of Technology
(MIT) and has a Master in Public Administration from
Harvard. Oscar de Buen Richkarday, Under Secretary for
Infrastructure, has been working in SCT for 25 years. He
has a degree in civil engineering from Universidad National
Autonoma de Mexico (UNAM) and has a Master of Science with
specialization in transportation from MIT. In SCT, he has
served as Chief of the Highway Unit and Director General of
Highway Development. He was responsible for the design of
the new concession scheme launched by the Fox
administration. Rafael del Villar Alrich, Under Secretary
for Communications, had been working for the Bank of Mexico
since 1996. He holds a Bachelors degree in economics from
ITAM and earned a Masters and a PhD from the University of
Pennsylvania. He has also worked for the Organization for
Economic Cooperation and Development (OECD). He previously
worked for SCT as Director General of Telecommunications
and International Policy from 1995-1996.

BASSETT

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