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Cablegate: Mexico Economic Notes, October 19-26, 2007

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PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #5614/01 2992047
ZNR UUUUU ZZH
P 262047Z OCT 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 9334
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEHRC/DEPT OF AGRICULTURE WASHDC PRIORITY
RHMFIUU/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 03 MEXICO 005614

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/ARUDMAN
USDOC FOR ITS/TD/ENERGY DIVISION
TREASURY FOR IA (ALICE FAIBISHENKO, ANNA JEWEL)
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND RDAVIS
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (ANDREA RAFFO)
NSC FOR RICHARD MILES, DAN FISK

E.O. 12958: N/A
TAGS: ECON ECPS EFIN ELAB MX PGOV PREL
SUBJECT: MEXICO ECONOMIC NOTES, OCTOBER 19-26, 2007


1. (SBU) SUMMARY: The Chamber of Deputies on October 23
approved the 2008 Revenue Bill for a total of 2.57 trillion
pesos (USD 236 billion). A PRD proposal to include in the
Revenue Bill a provision to establish a government body to
control imports and exports of sensitive agricultural
products like corn and beans was defeated in the Chamber of
Deputies, and thus not sent forward to the Senate for
consideration. The Revenue Bill will now move to the Senate
for approval by the end of the month, while the Chamber turns
its attention to the Expenditure Bill. The government on
October 25 announced a few changes to the Foreign Direct
Investment Law, which include increasing sanctions for
companies that fail to report their investments on time and
allowing the use of internet and other technological tools to
submit reports. The Bank of Mexico (BOM) on October 26
lifted the benchmark interest rate by 25 basis points to
7.50%, to the surprise of many market analysts. Simultaneous
with announcements made in Washington and other capitals,
Mexico announced on October 23 that it would join with the
U.S., Japan, Canada, the EU, and Switzerland in negotiating
an Anti-Counterfeiting Trade Agreement (ACTA). Experts
expect a wave of court injunctions to be filed against the
recently passed fiscal reform once it takes effect on January
1. A major energy research firm calls Mexican production
declines following 2011 unstoppable. END SUMMARY.

Lower House Approves Revenue Bill
---------------------------------

2. (U) After having approved the revenue chapter of the
budget "in general" on October 18, the Chamber of Deputies
(lower house) approved remaining articles of the 2008 Revenue
Bill on October 23. The plan allows for 2.57 trillion pesos
(USD 236 billion) in spending, 152.5 billion pesos more than
initially proposed by the Calderon government. Approximately
119.0 billion pesos of this extra revenue comes from the tax
overhaul legislation approved on September 14, 17.9 billion
pesos from increasing the oil price estimate from USD 46.60
per barrel to USD 49.00 a barrel, and the rest from other
taxes. Hacienda has said that much of these additional
resources will be channeled to infrastructure projects. The
bill will now move to the Senate for approval by the end of
the month, while the Chamber turns its attention to the
Expenditure Bill, which has to be approved by November 15.

Protectionist Proposal Rejected
-------------------------------

3. (SBU) A proposal by the main leftist opposition party to
include in the federal revenue bill for 2008 a provision to
establish a government body to control imports and exports of
sensitive agricultural products like corn and beans was
defeated in the Chamber of Deputies, and thus not sent
forward to the Senate with the rest of the revenue package.
Embassy Foreign Agricultural Service and Economic officers
had alerted relevant congressional offices of U.S. concerns
that such a body would constitute a violation of Mexico's
NAFTA commitments. Post will continue to track this issue as
the Senate considers the revenue bill.

Planned Investment Law Changes Mostly Administrative
--------------------------------------------- -------

4. (SBU) Under Secretary of Foreign Investment and
International Trade Practices Carlos Arce on October 25
announced planned changes to the Foreign Direct Investment
Law. While, during previous meeting with Econoff, Economia
had expressed an interest in making deeper changes, the
planned amendments only increase sanctions for those
companies that fail to report their investments on time, and
allow the use of internet and other technological tools to
submit reports. Arce used the announcement of updated

MEXICO 00005614 002 OF 003


investment figures for the first half of 2007 -- USD 14.6
billion, over USD 1.3 billion more than the investment that
was reported on time -- as proof that companies need stricter
penalties for late reporting. There are no planned
modifications to allow more foreign investment in restricted
sectors such as telecommunications, energy or transportation,
but the government acknowledges that the opening of these
sectors could attract more investment. Arce said that
Economia continues to expect over USD 23 billion in foreign
direct investment (FDI) flows to Mexico for CY 2007 and that
the increase in FDI over the previous few years reflects the
confidence investors have in the country and its strategic
geographical location.

Central Bank Hikes Interest Rates
---------------------------------

5. (U) The Bank of Mexico (BOM) on October 26 lifted the
benchmark interest rate by 25 basis points to 7.50%, to the
surprise of many market analysts. In its press release, the
BOM said the move was intended to help prevent the
"contamination" of wages and other prices and to stem
inflation expectations. The central bank also announced that
inflation will not drop to 3 percent (its target inflation
rate) until the end of 2009, a year later than was forecasted
only a couple of months ago. While headline inflation came
in less than expected for the first half of October, the core
inflation result was disappointing, due in part to higher
prices for pasteurized milk and tobacco. Core prices rose
0.21% during this time period -- more than the median
estimate of 0.15% in a Bloomberg survey of 18 economists.

Mexico Joins ACTA Initiative
----------------------------

6. (SBU) Simultaneous with announcements made in Washington
and other capitals, Mexico announced on October 23 that it
would join with the U.S., Japan, Canada, the EU, and
Switzerland in negotiating an Anti-Counterfeiting Trade
Agreement (ACTA). Gilda Gonzalez of the Mexican Institute of
Industrial Property (IMPI, rough equivalent of U.S. PTO) said
that IMPI would lead the Mexican negotiating team, which
would also include representatives of the Office of the
Attorney General of the Republic, the Mexican National
Copyright Institute, and Customs. Gonzalez noted that the
goal of the ACTA was for member nations to commit to stronger
enforcement of intellectual property rights, though she
emphasized that the agreement should focus on technical
assistance and cooperation with the private sector over
establishing penalties regime for non-compliance.

Fiscal Reform Likely to be Challenged
-------------------------------------

7. (SBU) Experts expect a wave of court injunctions to be
filed against the recently passed fiscal reform once it takes
effect on January 1. Some law experts have argued that parts
of the legislation are unconstitutional because they are
"unequal." These "a la carte" injunctions will be tied to
the impact the new tax regime has on each taxpayer. In the
past, lawsuits filed by a group of people were used to
challenge tax regulations, but this time around companies and
lawyers will have to modify their strategy, as the Single
Rate Corporate Tax (IETU) affects taxpayers differently. The
new Tax on Cash Deposits (IDE) could also be challenged in
the courts. No precedence exists on the IETU and IDE because
they are new taxes.

Consultants Call Mexican Production Decline Unstoppable
--------------------------------------------- ----------

8. (SBU) In analysis prepared for clients, and shared with

MEXICO 00005614 003 OF 003


the Embassy, energy consultants Cambridge Energy Research
Associates (CERA) called 2008 budget changes reducing
effective taxes on Pemex from 79 percent of income in 2006 to
71.5 percent in 2012 insuffiicent to stem declining
production. The firm suggests that the lion's share of Pemex
reserves are associated with marginal fields and rapidly
declining producing assets. Even if future exploration
efforts bear fruit, CERA believes that it will be impossible
for Pemex to contain Mexican production decline after 2011.

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 /
BASSETT

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