Cablegate: Mexico's Economy Hit by Global Crisis; Plane Crash

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PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #3340/01 3152313
ZNR UUUUU ZZH
P 102313Z NOV 08 ZFR
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 3926
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RHMFIUU/HQ USNORTHCOM
RHMFISS/CDR USSOUTHCOM MIAMI FL
RHEHAAA/NSC WASHINGTON DC

UNCLAS SECTION 01 OF 08 MEXICO 003340

SENSITIVE, SIPDIS

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)
DOE FOR INTERNATIONAL AFFAIRS (KDEUTSCH AND ALOCKWOOD)
NSC FOR DAN FISK
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA)

E.O. 12958: N/A
TAGS: ECON EFIN ENRG EINV PGOV MX
SUBJECT: MEXICO'S ECONOMY HIT BY GLOBAL CRISIS; PLANE CRASH
EXACERBATES FINANCIAL MARKETS' NERVOUSNESS

MEXICO 00003340 001.2 OF 008

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1. (SBU) Summary: Jitters over the depth of the global economic
downturn, the drop in oil prices, and foreign investors' flight to
quality have hurt domestic financial markets. The financial crisis
and the downturn of the U.S. economy is adversely affecting the
Mexican economy, reflected in a decline in manufacturing exports, a
slump in remittances sent by Mexicans abroad, an expected drop in
tourism and FDI flows, a lower demand for Mexican oil exports, and
unemployment. The government has implemented a series of measures
to help relieve liquidity pressures, stabilize the main economic
variables, offset the oil revenue shortfalls, and boost the economy.
The timing and effectiveness of the government's countercyclical
measures, especially the National Infrastructure Plan (NIP), and the
passage of other economic reforms or will determine how effectively
Mexico will weather the economic recession. The November 4 plane
crash that killed the Secretary of Interior, a close friend and
advisor to President Calderon, has contributed to a sense of
uncertainty. While it is premature to speculate on the causes of
this tragic event, the impact has shaken policy makers and markets.
End Summary.
REACTION TO SECRETARY OF INTERIOR'S SUDDEN DEATH
--------------------------------------------- ---
2. (SBU) The Mexican stock market's index, the IPC, fell 5.05% and
the peso depreciated 0.96% to 12.60 pesos to the dollar a day after
the U.S. elections and the plane crash which killed Secretary of the
Interior Juan Camilo Mourino. Government officials and analysts had
expected some relief in financial markets after the U.S. elections,
but poor economic data in the U.S., rising jitters on the depth of
the global economic recession, and what analysts have called a
healthy profit-taking after a weekly gain of 28% had negative
effects on the stock market.
3. (SBU) Finance Secretary Agustin Carstens and the Chairman of the
Stock Market Guillermo Prieto maintained that it was premature to
speculate on the cause of the crash which killed Mourino and on the
long term impact on the economy. Both asserted that Mexico's
economic fundamentals were solid and unaltered after the tragedy.
The government has been implementing a series of measures to help
relieve liquidity pressures and stabilize the main economic
variables. Carstens noted that Mexican financial markets are
"functioning adequately and will continue to". Prieto acknowledged
speculation about possible sabotage of Mourino's airplane as a
response to the government's ongoing war against drugs, but stressed
that until the government releases the results of the investigation,
"investment plans and financial markets should not be affected."

PLANE CRASH BRINGS BACK MEMORIES OF 1994
----------------------------------------
4. (SBU) The government's war against drugs, surging insecurity
levels and the Secretary of the Interior's sudden death brought back
unpleasant memories of the assassination of Revolutionary
Institutional Party's (PRI) presidential candidate Luis Donaldo
Colosio in 1994 and the financial ("Tequila") crisis that ensued.
Most experts consider these fears to be premature, and speculation
before the government announces the real cause of the plane crash,
could be risky. The government has undertaken a thorough
investigation of the crash, inviting aviation experts from the U.S.
and the U.K. to assist. The government's communication strategy on
the incident, informing the media and the public step-by-step on the
process of the investigation and the level of cooperation with
foreign governments including the U.S., as well as President
Calderon's commitment to investigate the case thoroughly have helped
soothe concerns. While the investigation is ongoing and may not be
completed until eleven months from now, all evidence uncovered to
date points to the crash being the result of an accident and non/not
sabotage.
ANALYSTS THINK GOM FUNDAMENTALS ARE SOLID
-----------------------------------------
5. (SBU) Banamex-Citigroup's chief political and economic analyst
Sergio Kurczyn told us that if the investigation concluded that
sabotage was the cause of the plane crash, financial variables would
undoubtedly be affected. But, more than these variables the
strongest impact would be on the credibility and strength of the
country's institutions. Kurczyn said he thought the pillars of
public institutions had already been weakened by the tight 2006
presidential election and Andres Manuel Lopez Obrador's protests
claiming electoral fraud, as well as the removal of the Federal

MEXICO 00003340 002.2 OF 008

1. (SBU) Summary: Jitters over the depth of the global economic
downturn, the drop in oil prices, and foreign investors' flight to
quality have hurt domestic financial markets. The financial crisis
and the downturn of the U.S. economy is adversely affecting the
Mexican economy, reflected in a decline in manufacturing exports, a
slump in remittances sent by Mexicans abroad, an expected drop in
tourism and FDI flows, a lower demand for Mexican oil exports, and
unemployment. The government has implemented a series of measures
to help relieve liquidity pressures, stabilize the main economic
variables, offset the oil revenue shortfalls, and boost the economy.
The timing and effectiveness of the government's countercyclical
measures, especially the National Infrastructure Plan (NIP), and the
passage of other economic reforms or will determine how effectively
Mexico will weather the economic recession. The November 4 plane
crash that killed the Secretary of Interior, a close friend and
advisor to President Calderon, has contributed to a sense of
uncertainty. While it is premature to speculate on the causes of
this tragic event, the impact has shaken policy makers and markets.
End Summary.
REACTION TO SECRETARY OF INTERIOR'S SUDDEN DEATH
--------------------------------------------- ---
2. (SBU) The Mexican stock market's index, the IPC, fell 5.05% and
the peso depreciated 0.96% to 12.60 pesos to the dollar a day after
the U.S. elections and the plane crash which killed Secretary of the
Interior Juan Camilo Mourino. Government officials and analysts had
expected some relief in financial markets after the U.S. elections,
but poor economic data in the U.S., rising jitters on the depth of
the global economic recession, and what analysts have called a
healthy profit-taking after a weekly gain of 28% had negative
effects on the stock market.
3. (SBU) Finance Secretary Agustin Carstens and the Chairman of the
Stock Market Guillermo Prieto maintained that it was premature to
speculate on the cause of the crash which killed Mourino and on the
long term impact on the economy. Both asserted that Mexico's
economic fundamentals were solid and unaltered after the tragedy.
The government has been implementing a series of measures to help
relieve liquidity pressures and stabilize the main economic
variables. Carstens noted that Mexican financial markets are
"functioning adequately and will continue to". Prieto acknowledged
speculation about possible sabotage of Mourino's airplane as a
response to the government's ongoing war against drugs, but stressed
that until the government releases the results of the investigation,
"investment plans and financial markets should not be affected."

Electoral Institute's counselors by the Congress.
6. (SBU) Banamex analyst Kurczyn told us he did not think Mexico
would relive the political and economic crisis of 1994 and 1995.
Echoing the government's views on the economic and financial
situation, he noted that the economic and financial conditions are
very different now from what they were more than a decade ago:
Mexico has lower foreign debt (equivalent to 2.4% of GDP), high
foreign reserves, a fixed exchange rate, a low inflation rate
compared to other countries, well-capitalized banks, a lack of risky
structured instruments, low private sector leverage, etc. Moreover,
the financial crisis did not originate in Mexico this time. For
Kurczyn, international confidence in Mexico's fundamentals was
reflected in the Federal Reserve Bank's recent 30-billion swap line
to the Bank of Mexico and the International Monetary Fund's decision
to double borrowing limits for emerging-market countries. Goldman
Sachs Director General in Mexico and former Finance Under Secretary,
Martin Werner echoed Kurczyn's confidence in the strength of the
financial institutions saying that Mexico learned its lesson and
that banks are stronger. The only impact on financial institutions
would be the cut in annual profits because they will be forced to
increase their preventive reserves to face the rising non-performing
consumer loans.
7. (SBU) Financial authorities and Hacienda officials have
repeatedly denied the risk of a collapse of the banking system
thanks to the regulations implemented since the 1994-1995 so-called
"Tequila crisis", which have strengthened financial institutions.
Banks have dramatically changed the way they report their accounting
and their balance sheets are available to investors' scrutiny. An
exception though was the exposure of some companies to foreign
exchange derivatives, which made the peso depreciate to over 14
pesos to the dollar in October. The peso depreciation led to the

MEXICO 00003340 003.2 OF 008

1. (SBU) Summary: Jitters over the depth of the global economic
downturn, the drop in oil prices, and foreign investors' flight to
quality have hurt domestic financial markets. The financial crisis
and the downturn of the U.S. economy is adversely affecting the
Mexican economy, reflected in a decline in manufacturing exports, a
slump in remittances sent by Mexicans abroad, an expected drop in
tourism and FDI flows, a lower demand for Mexican oil exports, and
unemployment. The government has implemented a series of measures
to help relieve liquidity pressures, stabilize the main economic
variables, offset the oil revenue shortfalls, and boost the economy.
The timing and effectiveness of the government's countercyclical
measures, especially the National Infrastructure Plan (NIP), and the
passage of other economic reforms or will determine how effectively
Mexico will weather the economic recession. The November 4 plane
crash that killed the Secretary of Interior, a close friend and
advisor to President Calderon, has contributed to a sense of
uncertainty. While it is premature to speculate on the causes of
this tragic event, the impact has shaken policy makers and markets.
End Summary.
REACTION TO SECRETARY OF INTERIOR'S SUDDEN DEATH
--------------------------------------------- ---
2. (SBU) The Mexican stock market's index, the IPC, fell 5.05% and
the peso depreciated 0.96% to 12.60 pesos to the dollar a day after
the U.S. elections and the plane crash which killed Secretary of the
Interior Juan Camilo Mourino. Government officials and analysts had
expected some relief in financial markets after the U.S. elections,
but poor economic data in the U.S., rising jitters on the depth of
the global economic recession, and what analysts have called a
healthy profit-taking after a weekly gain of 28% had negative
effects on the stock market.
3. (SBU) Finance Secretary Agustin Carstens and the Chairman of the
Stock Market Guillermo Prieto maintained that it was premature to
speculate on the cause of the crash which killed Mourino and on the
long term impact on the economy. Both asserted that Mexico's
economic fundamentals were solid and unaltered after the tragedy.
The government has been implementing a series of measures to help
relieve liquidity pressures and stabilize the main economic
variables. Carstens noted that Mexican financial markets are
"functioning adequately and will continue to". Prieto acknowledged
speculation about possible sabotage of Mourino's airplane as a
response to the government's ongoing war against drugs, but stressed
that until the government releases the results of the investigation,
"investment plans and financial markets should not be affected."

bankruptcy of a major Mexican retail store and left other major
Mexican corporations shaky. The Finance Secretariat asserted that
the demand for dollars has been supplied and that most of these
operations had been closed.
8. (SBU) Corporations' failure to disclose their exposure to such
operations made authorities realize the need for stricter
supervision. The National Banking and Securities Commission (CNBV)
stepped up by conducting an investigation on the companies'
compliance to their obligation to report significant financial
information. Lawmakers are preparing an initiative to increase
disclosure of derivative positions and their potential risk. The
Finance Secretariat is currently working on a specific bankruptcy
law and is also looking into incorporating further controls based on
the U.S. subprime experience.
CREDIT CARDS AND CONSUMER LOANS
--------------------------------
9. (SBU) The increase of non-performing consumer loans, in
particular credit cards, has raised concerns about bank solvency.
The National Banking and Securities Commission (CNBV) reported that
the delinquency index, which measures delinquent loans as a
percentage of total loans, rose from 2.82% to 3.03% during the third
quarter of the year. This figure is still low compared to 16.3% in
2001. The delinquency index in consumer loans, including credit
cards and automobile loans, rose from 6.92% to 7.69%. Within it,
the delinquency index for credit cards grew from 8.18% in the second
quarter to 9.41% in the third quarter, and from 3.9% in December of
2005. The delinquency index for housing and business loans rose
from 3.05% to 3.34% and from 1.05% to 1.09%, respectively.
10. (SBU) Banks have raised their preventive reserves due to the
increase in credit cards' overdue payments. Currently, coverage for
non-performing loans is 157%, which means that for each peso owed,

MEXICO 00003340 004.2 OF 008

1. (SBU) Summary: Jitters over the depth of the global economic
downturn, the drop in oil prices, and foreign investors' flight to
quality have hurt domestic financial markets. The financial crisis
and the downturn of the U.S. economy is adversely affecting the
Mexican economy, reflected in a decline in manufacturing exports, a
slump in remittances sent by Mexicans abroad, an expected drop in
tourism and FDI flows, a lower demand for Mexican oil exports, and
unemployment. The government has implemented a series of measures
to help relieve liquidity pressures, stabilize the main economic
variables, offset the oil revenue shortfalls, and boost the economy.
The timing and effectiveness of the government's countercyclical
measures, especially the National Infrastructure Plan (NIP), and the
passage of other economic reforms or will determine how effectively
Mexico will weather the economic recession. The November 4 plane
crash that killed the Secretary of Interior, a close friend and
advisor to President Calderon, has contributed to a sense of
uncertainty. While it is premature to speculate on the causes of
this tragic event, the impact has shaken policy makers and markets.
End Summary.
REACTION TO SECRETARY OF INTERIOR'S SUDDEN DEATH
--------------------------------------------- ---
2. (SBU) The Mexican stock market's index, the IPC, fell 5.05% and
the peso depreciated 0.96% to 12.60 pesos to the dollar a day after
the U.S. elections and the plane crash which killed Secretary of the
Interior Juan Camilo Mourino. Government officials and analysts had
expected some relief in financial markets after the U.S. elections,
but poor economic data in the U.S., rising jitters on the depth of
the global economic recession, and what analysts have called a
healthy profit-taking after a weekly gain of 28% had negative
effects on the stock market.
3. (SBU) Finance Secretary Agustin Carstens and the Chairman of the
Stock Market Guillermo Prieto maintained that it was premature to
speculate on the cause of the crash which killed Mourino and on the
long term impact on the economy. Both asserted that Mexico's
economic fundamentals were solid and unaltered after the tragedy.
The government has been implementing a series of measures to help
relieve liquidity pressures and stabilize the main economic
variables. Carstens noted that Mexican financial markets are
"functioning adequately and will continue to". Prieto acknowledged
speculation about possible sabotage of Mourino's airplane as a
response to the government's ongoing war against drugs, but stressed
that until the government releases the results of the investigation,
"investment plans and financial markets should not be affected."

banks have 1.57% to cover it. Banks' current capitalization index
or the capital-to-asset ratio is 15%, which is way above the
required 8% by domestic and international standards. The private
sector's current leverage is equivalent to 22% of GDP - which
comparies favorably to 201% in the U.S. The recent increase in
credit card interest rates from an average of 34% to 42% is
worrisome, especially when there is a potential risk of a higher
unemployment rate in the coming months. To offset this risk, banks
have reduced the issuance of credit cards and are being more careful
with their credit origination procedures, both for credit cards and
mortgages. The Bank of Mexico, the Finance Secretariat, other
financial authorities, and banks have created a coalition to improve
financial education for consumers.
CENTRAL BANK ACTIONS TO ADDRESS THE CRISIS
-------------------------------------------
11. (SBU) To shore up the peso and tackle liquidity pressures, the
central bank has engaged in daily U.S. dollar sales (USD 13.1
billion of its $84 billion foreign exchange reserves) in an attempt
to break a dangerous cycle of currency weakness begetting turmoil.
Foreign exchange reserves continue to be high despite this dollar
injection (USD 76 billion). Other central bank policy actions
include: paying interest on dollar deposits held with the central
bank; repurchasing up to 150 billion pesos of Savings Protection
Bonds, which is expected to help in the sterilization process in
order to reduce the amount of dollars auctioned by the central bank;
establishing an interest rate swap mechanism via which local banks
will be able to exchange exposure to long-term fixed interest rates
for short-term variable rates; and, establishing a USD 30 billion
swap facility with the U.S. Federal Reserve.
12. (SBU) The government announced it will reduce the supply of its
long-term securities in its fourth quarter 2008 auction program and

MEXICO 00003340 005 OF 008

1. (SBU) Summary: Jitters over the depth of the global economic
downturn, the drop in oil prices, and foreign investors' flight to
quality have hurt domestic financial markets. The financial crisis
and the downturn of the U.S. economy is adversely affecting the
Mexican economy, reflected in a decline in manufacturing exports, a
slump in remittances sent by Mexicans abroad, an expected drop in
tourism and FDI flows, a lower demand for Mexican oil exports, and
unemployment. The government has implemented a series of measures
to help relieve liquidity pressures, stabilize the main economic
variables, offset the oil revenue shortfalls, and boost the economy.
The timing and effectiveness of the government's countercyclical
measures, especially the National Infrastructure Plan (NIP), and the
passage of other economic reforms or will determine how effectively
Mexico will weather the economic recession. The November 4 plane
crash that killed the Secretary of Interior, a close friend and
advisor to President Calderon, has contributed to a sense of
uncertainty. While it is premature to speculate on the causes of
this tragic event, the impact has shaken policy makers and markets.
End Summary.
REACTION TO SECRETARY OF INTERIOR'S SUDDEN DEATH
--------------------------------------------- ---
2. (SBU) The Mexican stock market's index, the IPC, fell 5.05% and
the peso depreciated 0.96% to 12.60 pesos to the dollar a day after
the U.S. elections and the plane crash which killed Secretary of the
Interior Juan Camilo Mourino. Government officials and analysts had
expected some relief in financial markets after the U.S. elections,
but poor economic data in the U.S., rising jitters on the depth of
the global economic recession, and what analysts have called a
healthy profit-taking after a weekly gain of 28% had negative
effects on the stock market.
3. (SBU) Finance Secretary Agustin Carstens and the Chairman of the
Stock Market Guillermo Prieto maintained that it was premature to
speculate on the cause of the crash which killed Mourino and on the
long term impact on the economy. Both asserted that Mexico's
economic fundamentals were solid and unaltered after the tragedy.
The government has been implementing a series of measures to help
relieve liquidity pressures and stabilize the main economic
variables. Carstens noted that Mexican financial markets are
"functioning adequately and will continue to". Prieto acknowledged
speculation about possible sabotage of Mourino's airplane as a
response to the government's ongoing war against drugs, but stressed
that until the government releases the results of the investigation,
"investment plans and financial markets should not be affected."

the weekly issuance of Savings Protection Bonds. The GOM will
temporarily permit financial institutions to buy and sell government
instruments from investment funds that are part of the same
financial group. The government is providing guarantees on
commercial paper via development and mortgage banks. The most
recent measure announced by the Finance Secretariat is the buy-back
of up to USD 3.2 billion of debt (bonds with maturities between 10
and 30 years) in an effort to drive down long-term yields. The
government expects liquidity pressures to stabilize during the first
quarter of 2009, but will extend these measures if needed.
13. (SBU) On Oct. 8th, President Calderon announced his Program for
Growth and Employment aimed at mitigating the impact of the global
economy's deterioration and credit crunch. The Program for Growth
and Employment focuses boosting the economy by increasing public
spending on infrastructure projects. The elimination of Pidiregas
(long-term debt for infrastructure projects), included in the
program will enable the government to convert Pidiregas liabilities
into public debt and exclude Pemex's capital expenditures from the
balanced budget. This measure will give the government an
additional USD 6 billion to spend on infrastructure. The initiative
will also allow Pemex to use its current stabilization fund of
approximately USD 923 million to build a refinery.
OIL PRICE AND THE RISK OF REVENUE SHORTFALLS
--------------------------------------------
14. (SBU) Due to the deterioration of the global economy, the
government had to submit revised economic projections to the
Congress. GDP growth, the Mexican oil mix price, the exchange rate
were revised downward from 3% to 1.8%, from USD 80.3 to USD 70 per
barrel, and from 11.20 pesos to the dollar to 11.70 pesos to the
dollar, respectively. The 1.8% GDP growth seems too optimistic
given the depth of the global financial crisis and the sharply

MEXICO 00003340 006 OF 008

1. (SBU) Summary: Jitters over the depth of the global economic
downturn, the drop in oil prices, and foreign investors' flight to
quality have hurt domestic financial markets. The financial crisis
and the downturn of the U.S. economy is adversely affecting the
Mexican economy, reflected in a decline in manufacturing exports, a
slump in remittances sent by Mexicans abroad, an expected drop in
tourism and FDI flows, a lower demand for Mexican oil exports, and
unemployment. The government has implemented a series of measures
to help relieve liquidity pressures, stabilize the main economic
variables, offset the oil revenue shortfalls, and boost the economy.
The timing and effectiveness of the government's countercyclical
measures, especially the National Infrastructure Plan (NIP), and the
passage of other economic reforms or will determine how effectively
Mexico will weather the economic recession. The November 4 plane
crash that killed the Secretary of Interior, a close friend and
advisor to President Calderon, has contributed to a sense of
uncertainty. While it is premature to speculate on the causes of
this tragic event, the impact has shaken policy makers and markets.
End Summary.
REACTION TO SECRETARY OF INTERIOR'S SUDDEN DEATH
--------------------------------------------- ---
2. (SBU) The Mexican stock market's index, the IPC, fell 5.05% and
the peso depreciated 0.96% to 12.60 pesos to the dollar a day after
the U.S. elections and the plane crash which killed Secretary of the
Interior Juan Camilo Mourino. Government officials and analysts had
expected some relief in financial markets after the U.S. elections,
but poor economic data in the U.S., rising jitters on the depth of
the global economic recession, and what analysts have called a
healthy profit-taking after a weekly gain of 28% had negative
effects on the stock market.
3. (SBU) Finance Secretary Agustin Carstens and the Chairman of the
Stock Market Guillermo Prieto maintained that it was premature to
speculate on the cause of the crash which killed Mourino and on the
long term impact on the economy. Both asserted that Mexico's
economic fundamentals were solid and unaltered after the tragedy.
The government has been implementing a series of measures to help
relieve liquidity pressures and stabilize the main economic
variables. Carstens noted that Mexican financial markets are
"functioning adequately and will continue to". Prieto acknowledged
speculation about possible sabotage of Mourino's airplane as a
response to the government's ongoing war against drugs, but stressed
that until the government releases the results of the investigation,
"investment plans and financial markets should not be affected."

downgraded outlook for the U.S. economy. In its World Economic
Outlook 2008, the IMF projects a GDP growth of 0.9% in 2009 from the
previous projection of 1.8%. There are growing concerns that lower
economic growth and the decline of international oil prices could
lead to a revenue shortfall next year.
15. (U) The Finance Secretariat assures that it will not have to cut
spending next year particularly in infrastructure projects,
security, and social development as it has a cushion of USD 4.3
billion in the Oil Stabilization Fund. The government is also
confident that a weaker peso will compensate for the oil price fall.
The stabilization fund would be sufficient if the Mexican oil price
falls from the USD 70 per barrel set in the budget to USD 60 per
barrel. However, the Mexican oil mix price keeps on falling and on
November 5 it closed at USD 43 per barrel. The government might
have already hedged a chunk of its oil exports, according to
analysts, although it is unlikely that the Finance Secretariat will
acknowledge this fact. The Finance Secretariat continues to
gradually eliminate the gasoline subsidy.
16. (SBU) The elimination of Pidiregas will allow the government to
have a fiscal deficit of 1.8% of GDP, which will help the government
funnel resources to countercyclical measures, such as the
development of infrastructure projects. Next year, the government
will spend USD 10.6 billion against the USD 18.5 billion disbursed
in 2008. The government also requested the Congress to increase its
indebtness levels and incur in foreign debt of USD 5 billion with
multilateral financial organizations. The Finance Secretariat is
confident that if required it will have access to those loans since
the Mexican government prepaid USD 9 billion of its foreign debt in
2006. Leftist economist Rogelio Ramirez de la O and other critics
strongly believe the government should cut its current expenses and
bureaucrats' salaries to help offset the revenue shortfalls.

MEXICO 00003340 007 OF 008

1. (SBU) Summary: Jitters over the depth of the global economic
downturn, the drop in oil prices, and foreign investors' flight to
quality have hurt domestic financial markets. The financial crisis
and the downturn of the U.S. economy is adversely affecting the
Mexican economy, reflected in a decline in manufacturing exports, a
slump in remittances sent by Mexicans abroad, an expected drop in
tourism and FDI flows, a lower demand for Mexican oil exports, and
unemployment. The government has implemented a series of measures
to help relieve liquidity pressures, stabilize the main economic
variables, offset the oil revenue shortfalls, and boost the economy.
The timing and effectiveness of the government's countercyclical
measures, especially the National Infrastructure Plan (NIP), and the
passage of other economic reforms or will determine how effectively
Mexico will weather the economic recession. The November 4 plane
crash that killed the Secretary of Interior, a close friend and
advisor to President Calderon, has contributed to a sense of
uncertainty. While it is premature to speculate on the causes of
this tragic event, the impact has shaken policy makers and markets.
End Summary.
REACTION TO SECRETARY OF INTERIOR'S SUDDEN DEATH
--------------------------------------------- ---
2. (SBU) The Mexican stock market's index, the IPC, fell 5.05% and
the peso depreciated 0.96% to 12.60 pesos to the dollar a day after
the U.S. elections and the plane crash which killed Secretary of the
Interior Juan Camilo Mourino. Government officials and analysts had
expected some relief in financial markets after the U.S. elections,
but poor economic data in the U.S., rising jitters on the depth of
the global economic recession, and what analysts have called a
healthy profit-taking after a weekly gain of 28% had negative
effects on the stock market.
3. (SBU) Finance Secretary Agustin Carstens and the Chairman of the
Stock Market Guillermo Prieto maintained that it was premature to
speculate on the cause of the crash which killed Mourino and on the
long term impact on the economy. Both asserted that Mexico's
economic fundamentals were solid and unaltered after the tragedy.
The government has been implementing a series of measures to help
relieve liquidity pressures and stabilize the main economic
variables. Carstens noted that Mexican financial markets are
"functioning adequately and will continue to". Prieto acknowledged
speculation about possible sabotage of Mourino's airplane as a
response to the government's ongoing war against drugs, but stressed
that until the government releases the results of the investigation,
"investment plans and financial markets should not be affected."

HOW THE CRISIS AFFECTS MEXICO'S REAL ECONOMY
--------------------------------------------
17. (SBU) Tourism, oil and trade. The financial crisis and the
downturn of the U.S. economy is having an adverse impact on the
Mexican economy through various channels: a decline in manufacturing
exports, a slump in remittances sent by Mexicans abroad, a drop in
tourism and FDI flows, a lower demand for Mexican oil exports, and
unemployment. About 85% of Mexico's foreign trade is tied to the
U.S. economy. The exports value of manufactured goods declined by
3.8% yoy in August. Non-oil exports to the U.S. fell by 6.6% and
with them, automobile sales to the U.S. dropped by 16.4%. From
January thru June, foreign direct investment dropped 24% and tourism
inflows are expected to slow next year.
18. (SBU) Migrants and remittances. The lower remittances will
likely have a negative impact on domestic consumption and housing
construction. From January thru September, remittances have fallen
by 3.7%. In July alone, they dropped by 7%. The potential return of
thousands of Mexicans who have lost their jobs in the U.S.
construction sector will put pressure on Mexico's job creation.
Mexico's official unemployment rate reached a record of 4.25%.
19. (SBU) Financial markets. Jitters on the depth of the global
economy, the drop in oil prices, and foreign investors' flight to
quality from peso-denominated bonds to U.S. Treasuries have hurt
Mexico's financial markets. The stock market's main index, the IPC,
has plunged and the peso has suffered a major depreciation against
the dollar during the past months. The peso has lost 33% from its
strongest level of 10 pesos to the dollar last July and the IPC has
fallen 31.5% during the year. The country-risk premium closed at
405 basis points on November 7 from 141 basis points in December
2007. The yield of the 30-year bond reached 11.30% on October 24
before the government's actions to address liquidity problems, but

MEXICO 00003340 008 OF 008

1. (SBU) Summary: Jitters over the depth of the global economic
downturn, the drop in oil prices, and foreign investors' flight to
quality have hurt domestic financial markets. The financial crisis
and the downturn of the U.S. economy is adversely affecting the
Mexican economy, reflected in a decline in manufacturing exports, a
slump in remittances sent by Mexicans abroad, an expected drop in
tourism and FDI flows, a lower demand for Mexican oil exports, and
unemployment. The government has implemented a series of measures
to help relieve liquidity pressures, stabilize the main economic
variables, offset the oil revenue shortfalls, and boost the economy.
The timing and effectiveness of the government's countercyclical
measures, especially the National Infrastructure Plan (NIP), and the
passage of other economic reforms or will determine how effectively
Mexico will weather the economic recession. The November 4 plane
crash that killed the Secretary of Interior, a close friend and
advisor to President Calderon, has contributed to a sense of
uncertainty. While it is premature to speculate on the causes of
this tragic event, the impact has shaken policy makers and markets.
End Summary.
REACTION TO SECRETARY OF INTERIOR'S SUDDEN DEATH
--------------------------------------------- ---
2. (SBU) The Mexican stock market's index, the IPC, fell 5.05% and
the peso depreciated 0.96% to 12.60 pesos to the dollar a day after
the U.S. elections and the plane crash which killed Secretary of the
Interior Juan Camilo Mourino. Government officials and analysts had
expected some relief in financial markets after the U.S. elections,
but poor economic data in the U.S., rising jitters on the depth of
the global economic recession, and what analysts have called a
healthy profit-taking after a weekly gain of 28% had negative
effects on the stock market.
3. (SBU) Finance Secretary Agustin Carstens and the Chairman of the
Stock Market Guillermo Prieto maintained that it was premature to
speculate on the cause of the crash which killed Mourino and on the
long term impact on the economy. Both asserted that Mexico's
economic fundamentals were solid and unaltered after the tragedy.
The government has been implementing a series of measures to help
relieve liquidity pressures and stabilize the main economic
variables. Carstens noted that Mexican financial markets are
"functioning adequately and will continue to". Prieto acknowledged
speculation about possible sabotage of Mourino's airplane as a
response to the government's ongoing war against drugs, but stressed
that until the government releases the results of the investigation,
"investment plans and financial markets should not be affected."

by November 4 it had fallen to 8.8%. Short-term yields' performance
will continue to depend on the inflation, which reached 5.78% in
October on higher gasoline and electricity prices. The central
bank's benchmark overnight lending rate is 8.25%. The Bank of
Mexico expects the inflation to begin to recede in the second
quarter of 2009. Foreign currency flows have also declined. The
Bank of Mexico is projecting a current account deficit of between
1.6% and 2% in 2009. One of the most pessimistic projections is
that from Banamex with a 2.8% deficit.
COMMENT
-------
20. (SBU) Comment: The government's war against drugs, the
deteriorating security situation and the Secretary of the Interior's
sudden death raised fears here that Mexico would experience another
"Tequila" crisis, much like the one which ensued after the
assassination of PRI presidential candidate Luis Donaldo Colosio in
1994. Experts, however, caution against jumping to such
conclusions. The government has made extraordinary efforts to
soothe worried investors by constantly referring to Mexico's
well-ordered finances and macroeconomic variables, but Mexico's
integration with the U.S. economy will undoubtedly impact the
country's economy. On the financial front, the Finance Secretariat
and the Bank of Mexico seem to have been reacting promptly to tackle
liquidity pressures and the financial crunch. The timing and
effectiveness of the government's countercyclical measures,
especially the National Infrastructure Plan, and the passage of
other economic reforms will determine not only how well Mexico
weathers the economic recession, but also how fast the country will
succeed in its insertion into the global economy. End Comment.
GARZA

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