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Cablegate: Mexico Economic Notes, June 2 - June 22

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PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #3266/01 1731618
ZNR UUUUU ZZH
P 221618Z JUN 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 7594
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEHRC/DEPT OF AGRICULTURE WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEHC/DEPT OF LABOR WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHMFIUU/CDR USSOUTHCOM MIAMI FL PRIORITY
RHMFIUU/CDR USNORTHCOM PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

UNCLAS SECTION 01 OF 04 MEXICO 003266

SIPDIS

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

E.O. 12958: N/A
TAGS: EAGR ECON ECPS EFIN ELAB ENRG ETRD KIPR MX
PGOV, PREL, SCUL
SUBJECT: MEXICO ECONOMIC NOTES, JUNE 2 - JUNE 22

Summary
-------

1. (SBU) Reaction to the Calderon Administration's release
of its fiscal reform proposal was mixed. Consumer price
inflation fell 0.49% in May, resulting in a reduced annual
inflation rate of 3.95%. Opening of corn, bean, milk and
sugar markets under NAFTA scheduled for January 2008 may not
have as negative an effect on farmers as had been previously
thought, according to one local analyst. The CROC union
(Revolutionary Confederation of Workers and Peasants/
Farmers) may be planning to sever its longstanding ties to
the Institutional Revolutionary Party (PRI). The U.S film
industry may support PRD Senator Maria Rojo's proposal for a
one peso tax on movie tickets to help support Mexican film
producers if that would help win her support on passing
legislation to stiffen IPR enforcement. Cofetel, the Mexican
telecom regulator, published rules on number portability
while legislators proposed allowing 100% foreign ownership of
firms in the telecom sector. Energy committee chair
Labastida called for less government control over Pemex. End
summary.

Reaction Mixed to Tax Measures
------------------------------

2. (U) Reaction to the Administration's release of its
fiscal reform proposal was mixed. The proposal introduces an
alternative minimum tax on businesses and individuals, adds a
2% "informal economy" tax on cash bank deposits over about
USD 1800 per month, and a 20% tax on gambling winnings.
Additionally, to gain support from opposition parties, the
proposal allows for the creation of state taxes on products
including gasoline and alcohol. Administration experts
expect the measures will increase collection from 10% of GDP
to 13% by 2012. The state tax provisions as well as the
omission of taxes on consumption will help win support from
PRI and PRD legislators. Local markets remained
unenthusiastic about the new measures, dropping 1.6% the day
after it was announced. Business organizations called the
measures insufficient. Finance Secretary Carstens offered a
mild defense of the measures calling them "not incomplete."
The government hopes the measure will be approved this summer
during an extraordinary session of Congress so the measures
can be included in the President's 2008 federal budget
proposal, which is due to the Chamber of Deputies on
September 8. (See Mexico 3246)

May Inflation Fell
------------------

3. (U) Consumer price inflation fell 0.49% in May, resulting
in a reduced annual inflation rate of 3.95%. A Bank of
Mexico report said that the prices of electricity, onions,
and limes dropped reducing overall consumer prices. Some
analysts believe that the decline in the annual inflation
rate damped speculation that the central bank will raise
interest rates for a second time this year. Yet, there is
still concern that inflation will rise due to worldwide rises
in interest rates, thereby making emerging market assets like
Mexican stocks and bonds less attractive to investors. Core
inflation in Mexico for May rose 0.22% to reach an annual
rate of 3.73%.

Economist Worried About Competitiveness, Not NAFTA
--------------------------------------------- -----

4. (SBU) At an AmCham briefing on whether the full NAFTA
opening of corn, bean, milk and sugar markets scheduled for
January 2008 presented a threat or an opportunity to the
Mexican countryside, Dr. Ken Shwedel, the Director of

MEXICO 00003266 002 OF 004


Analysis for the Dutch agro-industrial bank Rabobank,
downplayed the potential for negative economic impact on
Mexico's farmers. Shwedel pointed out that many of the
country's communal producers (generally the poorest of
Mexico's farmers, and the ones NAFTA critics predict will be
hardest hit by the full liberalization of corn and beans) no
longer depend on agriculture for the majority of their
income, with those from the smaller communes (less than 5
farmers) reliant on non-agricultural economic activities and
remittances for well over half of their income. He also
pointed out that most communal farmers grow food for their
own (or very local) consumption and are not linked to
national, let alone international, markets. At the same
time, Mexican agricultural imports and exports have grown
steadily, helping keep food prices down and fostering
competition for products like avocadoes, tomatoes, and
processed foods and beverages.

5. (SBU) Nonetheless, Shwedel noted that Mexico's
agricultural sector as a whole (i.e., including both the
relatively efficient producers tied to domestic and
international markets and the relatively backward small and
communal producers more engaged in subsistence farming) has
grown slower than the rest of the Mexican economy over the
past dozen years, foreign investment in the sector has
dropped off, and productivity growth has lagged behind that
of neighbors like the U.S., Colombia, Costa Rica, and Chile.
Even more worrying, despite overall growth in agricultural
exports to the U.S., since 2002 Mexico has fallen behind
China in terms of produce exports to the U.S. market.
Shwedel then asserted that Mexico's corn market is in fact,
if not in name, already open, and that U.S. corn crops will
be more likely to end up as ethanol than to be exported to
Mexico next year. Similarly, he predicted very little
economic shock to Mexico's bean and dairy sectors resulting
from final NAFTA opening. Shwedel concluded that Mexican
farmers have very little to fear in economic terms on January
1, 2008. What they should be concerned about is the failure
to use the long phase-in periods provided by NAFTA to raise
competitiveness in the sector. A follow-on speaker, Lynch
Grattan of a local logistics firm, identified the poor state
of Mexico's road system and the legal challenges of investing
in communal areas as just two obstacles to developing a more
modern agricultural sector.

Is the CROC Preparing to Split from the PRI?
--------------------------------------------

6. (SBU) According to a press report from the northern
Mexican State of Coahuila, the CROC labor union
(Revolutionary Confederation of Workers and
Peasants/Farmers), the third largest national level labor
federation in Mexico, has begun to establish municipal
political action type committees in various parts of the
country. CROC began as one of the various unions linked to
Mexico's former ruling party, the PRI (Institutional
Revolutionary Party) and the media report speculated that the
newly formed committees are part of the CROC's ongoing
efforts separate from the PRI and perhaps ultimately form its
own political party. A CROC official in Mexico City denied
that the union was planning to leave the PRI and told post's
Labor Counselor that the committees were a part of the CROC's
long standing endeavor to enhance its ability to play an
effective role in Mexican politics. The media speculation
that the CROC might be leaving the PRI is not outside the
realm of possibility given that in Mexico's 2006 presidential
election, the union's national leader openly supported the
candidate of what is now the country's main opposition party,
the PRD (Party of the Democratic Revolution). Since then,
the CROC has apparently returned to its PRI roots but
speculation generated by the union's brief alliance with the

MEXICO 00003266 003 OF 004


PRD continues to show up in the press and in various labor
circles.

Film Industry Committee Discuss Quotas, Piracy
--------------------------------------------- -

7. (SBU) U.S. and Mexican motion picture business
representatives, together with a handful of Mexican officials
and legislators, met June 18 for the 17th Meeting of the
Bi-national Committee for Promotion of the Film Industry.
One of the principal points of discussion was the fact that
Mexican-made movies have a hard time finding space on the
silver screen and store shelves even in Mexico. A number of
Mexican producers and directors attributed this problem to
the fact that the major distributors -- all affiliates of the
big U.S. studios -- and theater owners -- are unwilling to
give local flicks a shot and instead cede the vast majority
of screen and shelf space to foreign, and in particular
American, movies. They applauded policies in France,
Argentina, and Canada that reserve a certain number of
screens for domestic films. Representatives of the
distributors and theater owners replied that quotas are
economically unsustainable, asserted that they have no
prejudice against Mexican films, and added that they make
decisions based solely on what consumers are willing to pay
to see. They pointed out that many Mexican film makers have
little idea about the business side of the industry, and
offered to put together training seminars to help sensitize
them. A number of the major U.S. studio representatives also
pointed out that they are co-producing films here in Mexico.

8. (SBU) One issue on which nearly everyone in the room
agreed was the horrible impact of piracy on the industry.
Both Mexican movie makers and a representative of U.S.
independent films stressed to econoff that their constituents
are hit even harder by piracy than the big Hollywood studios,
since in a shrinking legitimate market the available
investment tends to flow to sure-fire blockbusters, leaving
less to fund smaller, riskier projects. Industry
representatives from both countries took advantage of the
presence of Mexican legislators at the meeting (including
Maria Rojo, the chair of the Senate Culture Commission from
the leftist opposition party PRD) to lobby for stronger IPR
laws. A U.S. participant told econoff after the meeting that
the American film companies might support (albeit
reluctantly) Senator Rojo's proposal for a one peso tax
(about a dime) on box office tickets to help support Mexican
film producers if that would help win her support on passing
legislation to stiffen IPR enforcement.

Number Portability Comes To Mexico
----------------------------------

9. (U) Cofetel, the Mexican telecom regulator, published
rules that will allow both fixed and wireless Mexican telecom
users to switch providers while retaining the same phone
number. Cofetel has up to 90 days to publish the technical
specifications for the project in the Diario Official,
followed by a 60 day period in which to hire a company to
manage the number portability database. Operators will pass
some of the costs of the change to users. Cofetel has also
published quality guidelines that telecom operators must
follow during the procedure. Cofetel expects the system to
be fully operational by the first quarter of 2008. At a
recent industry conference, Cofetel President Hector Osuna
highlighted the announcement as evidence of the regulator's
commitment to increasing telecom competition.

Proposal to Open Telecom Sector to FDI
--------------------------------------


MEXICO 00003266 004 OF 004


10. (SBU) Legislators from the PRI and "Convergencia"
parties sent a proposal to the Economics Committee of the
Chamber of Deputies that would allow 100% foreign ownership
in Mexico's telecom sector, assuming the investors' country
offers the same possibility to Mexican companies. According
to an industry expert, foreign investors would likely seek to
acquire existing companies rather than deploy their own
networks. Using this logic, Axtel would become an attractive
candidate for Spanish firm Telefonica, which has been trying
to enter the Mexican fixed line market for many years. The
National Chamber of the Cable Television Industry (Canitec)
and the Federal Competition Commission (CFC) have applauded
the proposal indicating that increased competition in the
sector would benefit Mexican consumers.

Senate Energy Committee Chair on Reform
---------------------------------------

11. (U) At a June 13 Tec de Monterrey-sponsored seminar on
Mexican energy reform, the chair of the Senate Energy
Committee, Francisco Labastida told the audience that it was
a mistake for the GOM to mandate oil production increases to
boost government revenue, rather Pemex and the federal
government must build petroleum infrastructure and improve
technology. Labastida also called for the creation of an
autonomous oil and gas regulator. The Senator is currently
developing a first pass at energy reform legislation in
cooperation with the Calderon Administration.


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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