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Cablegate: Gom Proposes 2010 Economic Plan

VZCZCXRO6423
RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #2709/01 2582137
ZNR UUUUU ZZH
R 152137Z SEP 09 ZDS
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 8236
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 MEXICO 002709

C O R R E C T E D C O P Y (TEXT IN PARAS 3 AND 4)

SENSITIVE
SIPDIS

STATE FOR WHA/MEX, WHA/EPSC, EEB
NSC FOR RESTREPO, FROMAN
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD
TREASURY FOR NANCY LEE, IA
ENERGY FOR WARD, LOCKWOOD AND DAVIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD ENRG ELTN EAIR PGOV SENV MX
SUBJECT: GOM PROPOSES 2010 ECONOMIC PLAN

REF: A. MEXICO 2639
B. MEXICO 2537

MEXICO 00002709 001.2 OF 003


1. (SBU) SUMMARY. On September 8, the GOM submitted its 2010
budget and fiscal reform proposals to Congress following
weeks of market speculation about what the GOM would propose.
The speculation follows looming risk of Mexico's possible
credit downgrade. Plunging revenues (due to falling oil
production/prices and economic recession), and public
expenditure that grew in tandem with skyrocketing oil
revenues from 2002-08, have caused a fiscal gap. To close the
gap, the GOM sent Congress tough revenue and spending
proposals aimed first and foremost at stabilizing the economy
and preventing a credit-rating downgrade. While many analysts
agree that the GOM has delivered a credible budget that
responsibly attempts to address Mexico's fiscal limitations,
the challenge remains pushing the ambitious package through a
new opposition-dominated Congress. The 2010 economic package
represents a new challenge to Calderon's negotiating skills
and resolve. (See reftels.) END SUMMARY.

2.(U) Below please find the key figures and projections for
the budget. The underlying assumptions use consensus numbers.

-------------------------
Macroeconomic Assumptions
-------------------------

3.(U) Table 1: Underlying Assumptions and Macroeconomic
Projections
2009 2010

Real GDP growth -6.8 3.0
Inflation (yoy) 4.3 3.3
Nominal Exchange Rate 13.6 13.8
Real Interest Rate 1.2 1.2
Current Acct (% of GDP) -1.6 -1.8

US GDP growth -2.6 2.3
Oil Price (US$/barrel) 51.0 53.9
Avg Oil Exports (mb/d) 1.23 1.11
Oil Production (mb/d) 2.62 2.50

-------------------
The Proposed Budget
-------------------

4. (U) Table 2: Public Finance 2009-2010 (% of GDP)

2009 2010 Real Gwth

Total Revenues 22.4 22.1 1.4
o/w tax rev. 9.3 10.8 19.6
o/w oil-related rev. 6.6 6.9 7.0

Total Expenditures 24.6 24.6 3.2
(Incl. Interest)

Public Sector -
Financing Costs 2.4 2.4 -0.7
Primary Balance 0.3 -0.2
Overall Balance -2.1 -2.5 22.8


The Public Sector Deficit
--------------------------

5.(U) For the first time since the passage of the 2006
Fiscal Responsibility Law (which incorporates a balanced
budget rule), the GOM will invoke the exception clause that
allows it to propose a deficit &under exceptional
circumstances.8 The 2010 targeted overall balance is -2.5%
of GDP (including Pemex infrastructure investment (-2.0%))
verses -1.8%, all of which is Pemex capital expenditure, in
2009. The targeted 2010 Public Sector Borrowing Requirement
(PSBR), which is the budget deficit plus the balances of

MEXICO 00002709 002.2 OF 003


off-budget entities and programs, is 3.1% of GDP.

6. (U) The GOM projects a budget shortfall in 2010 of
MX$374bn (3% of GDP), of which MX$219bn stems from a
permanent decline related to the drop in oil proceeds and
MX$155bn from a cyclical fall in revenue. To absorb the
former, the GOM has proposed a combination of tax increases
and expenditure cuts. To absorb the later, the GOM will draw
MX$95bn from its oil stabilization funds and other
non-recurring revenues and royalties, leaving a fiscal
deficit of MX$60bn (0.5% of GDP) to be financed largely from
external sources. The GOM projects the budget to be in
deficit in 2011 (MX$40bn) and eventually in balance by 2012.


Total Revenue
-------------

7.(U) Total revenue will rise (1.4%) in real terms in 2010,
but will fall slightly (0.3) as a percent of GDP. The
decrease will come mainly from lower non-oil, non-tax
revenue. Oil-related revenues are projected to increase in
real terms (7.0%) and as a percentage of GDP (0.3%) from
their 2009 level. Tax revenue is expected to increase 19.6%
in real terms and as a percent of GDP (1.5 percentage
points). These projections incorporate the GOM's proposed tax
reform and improvements in tax administration. The fiscal
reform proposal includes:

--A 2% sales tax on all products (i.e. a VAT), of which 36%
is for an anti-poverty program called &Oportunidades.8
--A 4% tax on telecommunications, except rural telephones.
--An increase in income tax from 28% to 30% at the top
bracket and similarly at lower brackets from 4 minimum wages
upwards ($494 per month).
--An increase in special taxes on beer, alcohol and tobacco.
--An increase in the tax on cash bank deposits from 2% to 3%
reducing the eligible deposit from MX$25,000 to MX$15,000 in
a month.
--The freezing of energy prices will be terminated, which
will be reflected in a steady monthly increase; in gasoline,
the price would jump by 17.1% in 2010. (Note: A similar
increase was responsible for the pick-up in inflation in
2008. End Note.)
--The suspension of credit allowances just authorized last
May between IETU (a minimum flat tax on businesses passed in
the 2006 fiscal reform) and the income tax. (See septel for a
more detailed summary/analysis of the proposed tax reforms.)


8.(U) Even though the expected oil and non-oil revenues for
2010 are higher than those observed for 2009, they will still
be below those used for the 2009 budget. This is due to
lower transitory non-oil revenues as economic activity will
be under its potential level, and lower oil revenues as
result of lower prices and the continuing downward trend in
oil production.


Total Expenditures
------------------

9.(U) Total expenditure will increase in real terms (3.2%)
but remain unchanged as a percentage of GDP. At the same
time, programmable expenditures will decrease as a percent of
GDP from 18.8 to 18.5%. The proposal contemplates public
spending reductions of MX$218 billion pesos (1.7% of GDP).
Current federal government spending cuts envisaged include a
freeze in salaries and new positions and reductions in
services such as communications and travel. (Note:
Reductions in administrative outlays and government
downsizing do not require congressional approval. End Note.)
The most politically spectacular, though relatively minor in
terms of money saved, will be the elimination of three
ministries:
-- Tourism will be merged into the Economy Secretariat.
-- Agrarian Reform absorbed into the Agriculture and Social
Development Secretariats.
-- The Public Function Secretariat reduced to federal
comptroller and absorbed into the presidential office.

10.(U) Spending policy will shift towards a greater focus on

MEXICO 00002709 003.2 OF 003


social development programs. To justify the name of the 2%
tax as a contribution against poverty, the GOM proposed a 50%
increase in subsidies to poor households through the program
&Oportunidades8 and an additional 20% increase in the
program People's Insurance, which is a limited medical
coverage with subsidized premiums.

------------------
Market Impressions
------------------

11.(SBU) The 2010 budget and economic guidelines have had a
mixed reception. Although the macroeconomic projections are
inline with the market consensus, there are concerns that the
GOM's 3% GDP growth target may be optimistic given the
possible recessionary impact of the fiscal austerity measures
proposed. Moreover, the 3.3% year-end inflation target may
be unachievable given the increase in energy and gasoline
prices proposed. Analysts also note potential external and
internal shocks to the economy (i.e. delayed recovery of the
U.S. economy, resurgence of the H1N1 pandemic) that should be
considered. There is also widespread doubt that many of the
fiscal reform measures will pass (see reftels). While some
economists we spoke to (who had been briefed by Carstens and
his team) praised the fiscal reform measures and efforts to
plug the deficit, many voiced concerns that the budget
package lacked a long-term vision of how Mexico could improve
its competitiveness and arrive at growth rates in the next
decade of over five percent.

----------
Next Steps
----------

12.(U) Congress will consider the GOM's budget submission in
two phases, evaluating the GOM's revenue proposal first,
followed by the expenditure proposal. In the second half of
September, the main economic commissions in the lower house
(budget and finance commissions) will be formed. The revenue
proposal must be approved by the lower house by October 20
and by the Senate October 31. The expenditure proposal must
be approved only by the lower house by November 15.


-------
Comment
-------

13.(SBU) Calderon has outlined an ambitious program for his
remaining three years in office. Clearly, fiscal stability
weighs heavier than reforms in this budget, but the GOM sees
a stable economy as the means by which future reforms can be
achieved. Past reform attempts have generally been watered
down. The 2010 economic package will be the first test of
Calderon's negotiating skills in an opposition-dominated
Congress. Although some observers believe the economic
package was pre-negotiated between the GOM and the leadership
of the PRI, many perceive the rank and file of the PRI as
reluctant to pass significant tax increases or subsidy
reductions. On September 10, the PRI issued a statement that
it would oppose a new 2% sales tax, applicable to all goods
and services -- including many that are currently exempt from
VAT (foodstuffs, medicines and health services). While the
GOM proposes that revenue from the new tax be used to reduce
poverty, the PRI argues that it would undermine the spending
power of those on low incomes, and particularly objects to
taxation of food and medicines. The party's lower house
leader, Francisco Rojas, has proposed creating a
congressional committee to examine companies' entitlement to
tax exemptions -- the PRI has criticized budget proposals for
not addressing such structural issues in the tax system.
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 /

PASCUAL

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