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Cablegate: Mexico Economic Weekly - October 23

VZCZCXRO1818
RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #3094/01 3002310
ZNR UUUUU ZZH
R 272310Z OCT 09
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 8790
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE

UNCLAS SECTION 01 OF 05 MEXICO 003094

SIPDIS
SENSITIVE

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

E.O. 12958: N/A
TAGS: ECON EFIN ETRD ENRG ELTN EAIR PGOV SENV MX
SUBJECT: Mexico Economic Weekly - October 23

1. (U) The Mexico Economic Weekly supplements reporting
from Mission Mexico Consulates and the Embassy Mexico
Economic Section to provide a sense of ongoing trends.
Please contact Adam Shub (shubam@state.gov) or Sigrid
Emrich (emrichs@state.gov) for questions or comments
about this report.

2. (U) Table of Contents:

ECONOMY AND FINANCE:
--------------------

SENATE TO CONSIDER 2010 REVENUE BILL - MEXICO CITY

NUEVO LEON'S ECONOMY IS LOOKING UP AS EXPORTS INCREASE
AND JOBS MOVE SOUTH - Monterrey

TOURISM FOREIGN CURRENCY INFLOWS DROP - Mexico City

STEEL INDUSTRY HIT HARD BY THE ECONOMIC CRISIS, CRIME,
AND INTERNATIONAL COMPETITION - Monterrey

LABOR:
------

SINDICATO MEXICANO DE ELECTRICISTAS (SME): THE CONFLICT
LOSES ENERGY AS IT GRINDS ON - Mexico City

FORUM ON UNION AUTONOMY AND LABOR RIGHTS - Mexico City


TRADE AND INVESTMENT:
---------------------

CUSTOMS SEEKS TO STREAMLINE TRADE - Mexico City

GRUPO ALFA REPORTS STRONG THIRD QUARTER - Monterrey

BEST BUY'S EXPANSION INTO MEXICO OFF TO STRONG START -
Guadalajara

TRANSPORTATION AND INFRASTRUCTURE:
----------------------------------

QUARTERLY BAJA CALIFORNIA PORTS OF ENTRY BORDER LIAISON
MECHANISM (BLM) - Tijuana


ENERGY AND ENVIRONMENT:
-----------------------

MEMBERS OF CONGRESS CHALLENGE CONSTITUTIONALITY OF ENERGY
REFORM REGULATIONS - Mexico City

CFE TO TAKE OVER ELECTRICITY SERVICE IN MEXICO CITY -
Mexico City

SONORA SEEKS WATER TO MAINTAIN GROWTH - Hermosillo

-------------------
ECONOMY AND FINANCE
-------------------
3. (SBU) As rating companies consider downgrading Mexican
debt, the Senate now takes up the 2010 Revenue Bill that
the Mexican Chamber of Deputies amended and approved
October 20. While the Senate usually acts in a more
conservative manner, Senators are divided over whether to
accept the Chamber's increase in VAT taxes. The Chamber
made considerable changes to the Calderon
Administration's original proposal, modifying tax rates
and tax laws designed to strengthen public finances and
avert a credit rating downgrade. The Chamber scrapped
the GOM's proposed 2% anti-poverty sales tax, but
increased the VAT by 1% (to 16% and 11% at the border),
keeping a zero rate for food and medicine. The Chamber
also approved raising income taxes to 30%, up from 28%.
The forecast for the average export price of Mexican oil
was also increased to US$59/barrel (from US$53.9) and the

MEXICO 00003094 002 OF 005


on-balance sheet fiscal deficit was raised to 0.75% of
GDP (from 0.5%). The Revenue Bill must be approved by
the Senate by October 31. Although the arithmetic of the
Chamber's modified package adds up to cover the fiscal
gap anticipated for 2010, it raises the reliance on a
higher fiscal deficit and public debt issuance. The
modified revenue budget will be significantly weaker and
more ad-hoc than the GOM's original proposal. It is
doubtful that the measures are strong enough to avoid a
ratings downgrade as this version stops short of
providing a long-term solution to falling public revenue
and will not help generate alternative income sources to
replace the government's dependence on oil. (Mexico City)

4. (U) NUEVO LEON'S ECONOMY IS LOOKING UP AS EXPORTS
INCREASE AND JOBS MOVE SOUTH: Unlike previous economic
recoveries, where job creation in Mexico followed the
United States, Mexico, and Nuevo Leon in particular,
appear to be ahead of the US in creating new jobs in the
wake of the economic crisis. According to recent
statistics published by the state government, over 19,000
jobs were created in Nuevo Leon between June and
September, many of them at the expense of American jobs.
Manufacturers Whirlpool, Carrier, Ficosa and Navistar
have all recently relocated production lines from the
United States to Nuevo Leon, creating almost 2,000 new
jobs here, but closing production facilities or
eliminating jobs in Indiana, Texas, and Tennessee. Local
job recovery has dovetailed with an increase in exports
as the electronic, automotive, mineral, and electrical
appliance sectors all saw double digit increases in
exports from Nuevo Leon over the previous six-month
period. (Monterrey)

5. (U) TOURISM FOREIGN CURRENCY INFLOWS DROP: As a
result of the H1N1 flu and the economic crisis, Mexico
registered an accumulative loss of USD 1.76 billion in
tourism inflows (from January through August). The
government and the private sector expect total losses for
2009could reach USD 2 billion. The Bank of Mexico
reported October 14 that from January through August,
tourism inflows dropped 18.01% from USD 9.47 billion
during the same period of 2008 to USD 7.76 billion.
Average spending per person fell 10.83% from USD 153 to
USD 136.44. Miguel Torruco, president of the National
Tourist Confederation said Mexico will fall from 18 to
22in the global rankin of countries with the largest
tourism inflows. (Mexico City)


6. (U) STEEL INDUSTRY HIT HARD BY THE ECONOMIC CRISIS,
CRIME, AND INTERNATIONAL COMPETITION: The Mexican steel
industry has been deeply affected by the economic crisis,
with production only at 30% of capacity through this year
according to Jaime Martinez Gallegos, President of the
Association of Mexican Foundries' Western Region. .
Spokesman for Altos Hornos de Mexico, headquartered in
Monclova, Coahuila, have told Consulate officers that
after a disastrous 4th quarter 2008 and 1st semester
2009, sales of hot and cold roll products have picked up.
The States of Nuevo Leon and Coahuila, where 70% of
Mexico's foundries are located, have been particularly
affected because of the downturn in the automotive
industry and the increase in theft of scrap iron intended
for production. The Mexican steel industry consumes
about 900,000 tons of scrap iron per year, which is
recycled by foundries for various uses, including the
automotive industry, agriculture and domestic use. In
addition to theft of scrap iron en route by rail from the
United States, Gallegos said that his industry has been
hurt by competition from China and India, the fastest-
growing markets for scrap iron. (Monterrey)

-----
LABOR
-----

7. (SBU) SINDICATO MEXICANO DE ELECTRICISTAS (SME): THE
CONFLICT LOSES ENERGY AS IT GRINDS ON: The 150,000-
person march on October 15 was the last show of force the
SME will be able to make despite its calls for a national
strike, according to Embassy contacts. Question about

MEXICO 00003094 003 OF 005


the legality of the decree ending the power company Luz y
Fuerza del Centro (LFC) have been sent to committee by
the House of Deputies for discussion. One Laboff contact
believes this will release political pressure and provide
the majority parties in the Congress a means to end the
issue quietly. The government seems well prepared for
the risk it took in ending one of the strongest and
oldest unions in the country: severance packages are
being paid, service is still delivered, and the protests
are dying down. On its side, SME leadership is keeping
up the rhetoric of the oppressed workers and drawing some
attention from radical groups. There is, however, a
legitimate concern about union autonomy in part of this
process, and other powerful unions are watching
developments carefully. The manner in which this issue
is resolved will set a precedent for future union-
government relations, and it is in the government's
interest to see it finished well. (Mexico City)

8. (U) UNION AUTONOMY AND LABOR RIGHTS: Participants
at an AFL-CIO Solidarity Center and the Friedrich Ebert
Foundation conference on employer protection contracts
October 15 called for union solidarity to support new
organizing efforts, the miners' union (on strike now for
three years), and the electricians' union recently
dissolved by the federal government. The conference
presented a series of radical speakers interspersed with
case studies of young people who had become active in
organizing in their workplaces as a result of abuses,
real and perceived. The primary themes of the conference
were threats to union autonomy, the need for union
solidarity against the federal government and private
enterprise, and the sorry state of the employment
situation in Mexico. (Mexico City)


--------------------
TRADE AND INVESTMENT
---------------------

9. (U) STREAMLINING TRADE PROCEDURES: Through financing
from the World Bank for USD 10 million, Mexican Customs
is working to revamp its procedures and simplify trade
procedures. The simplification process is expected to
conclude in 2011. Through this process, importers and
exporters will be able to conduct their operations
through one government office. Customs is currently
drafting the bids for the companies that will develop the
software and conduct the re-engineering process. The
burdensome customs procedures increase trade costs, which
makes Mexican exporters less competitive than China.
According to the media, Mexican exporters are realizing
cheap labor costs are not enough to compete against China
and wish to take advantage of the fact that China is
losing its comparative advantage with the appreciation of
the yuan. (Mexico City)

10. (U) GRUPO ALFA REPORTS STRONG THIRD QUARTER:
Monterrey-based conglomerate Grupo ALFA reported third
quarter earnings (EBITDA) of $290 million dollars, a 14%
increase over the same period last year and 9% over the
second quarter of this year. Quarterly sales increased
by 9% to $2.2 billion dollars. Noting that this is the
second consecutive quarter with earnings at pre-crisis
levels, President Dionisio Garza Medina said it was
ALFA's strongest quarter as measured by EBITDA and that
he is confident ALFA will negotiate its way through the
economic crisis and be well-positioned for long-term
growth. ALFA is the world's leading manufacturer of
high-tech aluminum engine blocks and is a leading
petrochemical producer. Headquartered in Monterrey, it
is divided into four business groups: Alpek
(petrochemicals), Nemak (aluminum auto components), Sigma
(refrigerated food) and Alestra (telecommunications) and
has operations in 17 countries. (Monterrey)

11. (U) BEST BUY'S EXPANSION INTO MEXICO OFF TO STRONG
START: The American electronics store Best Buy opened
its first store in Jalisco just over two weeks ago, but
its unexpectedly strong sales have already caused the
company to overhaul its logistics and restocking plans.
The opening on October 2 is Best Buy's second store in

MEXICO 00003094 004 OF 005


the country, following its launch in Mexico City last
year. The company sold a month and a half's worth of
goods in the store's first week, putting sales three
times higher than expectations. Best Buy will open its
second store in the Guadalajara area in early 2010 and
decided to expand its warehouse at that location to make
the stores less dependent on stocks in Mexico City. In
addition, the company plans to open three more stores in
the Mexico City area to have five by the end of this
year. (Guadalajara)

---------------------------------
TRANSPORTATION AND INFRASTRUCTURE
---------------------------------

12. (U) QUARTERLY BAJA CALIFORNIA PORTS OF ENTRY BORDER
LIAISON MECHANISM (BLM): The October 13-14 meetings
regarding the San Ysidro/El Chaparral Otay Mesa, Otay
Mesa East, and Mexicali/Calexico projects revealed the
usual frustrations over mismatched timelines (GOM wants
US to accelerate timelines, particularly for San Ysidro
and Otay East) and placement and number of pedestrian
crossings at San Ysidro /El Chaparral. On the latter,
the Mexicans have agreed to the U.S. request for two
south-bound pedestrian crossings, but the General
Services Administration (GSA) and its Mexican partner
agency, INDAABIN, are still working out technical issues
regarding their placement, and the U.S. denied Mexico's
request for "reciprocity" and will not create two
northbound crossings due to CBP staffing issues. Land
acquisition and right-of-way issues continue to be
problems on both sides of the border for San Ysidro and
both Otay projects. Calexico and Mexicali officials were
disappointed to find the timeline for that project pushed
back another year, and the number of southbound vehicle
lanes reduced to five, though GSA says studies suggest
this will not create traffic backups in Calexico. The
BLM is beginning to discuss moving forward on a Port of
Entry renovation project in Tecate, though CBP was not
available at the meeting, limiting discussion. (Tijuana)


----------------------
ENERGY AND ENVIRONMENT
----------------------

13. (SBU) MEMBERS OF CONGRESS CHALLENGE
CONSTITUTIONALITY OF ENERGY REFORM REGULATIONS: The
Mexican Chamber of Deputies (with a majority of
opposition PRI and PRD members) has presented before the
Supreme Court a constitutional challenge against the
implementing regulations of the energy reform bill which
were released by the Calderon Administration in
September. PRI and PRD deputies are challenging the
articles in the regulations which would allow the
administration to pay service contracts based on
productivity, capacity and production. The Secretariat
of Energy and Pemex have been working to develop the new
performance based service contracts for exploration and
production with this regulation being a key to attracting
interest from international oil companies, and increasing
Pemex' flexibility and efficiency. Pemex had hoped to
issue the first round of bids under the new service
contracts early in 2010. Embassy contacts expect the
appeal could delay that process by six to eight months.
This is a sobering development for the Calderon
Administration which had hoped to use the new performance
based contracts to enhance exploration and development
activities in the deepwater of the Gulf of Mexico.
(Mexico City)

14. (U) CFE TO TAKE OVER ELECTRICITY SERVICE IN MEXICO
CITY: The Energy Ministry (SENER) said it will leave the
state-run Federal Electricity Commission (CFE) in charge
of power distribution in and around Mexico City following
the recent shutdown of the Luz y Fuerza del Centro
utility (LFC). SENER said the decision by President
Calderon guarantees that electricity service will remain

MEXICO 00003094 005 OF 005


in state hands. Citing annual losses running into USD
billions and lack of efficiency, Calderon decreed the
shutdown of LFC, which distributed electricity in Mexico
City and parts of the central states, but stressed that
electricity will not be privatized. The government
previously had been considering creating another state
company to replace LFC, which employed 44,504 people.
(Mexico City)

15. (U) SONORA SEEKS WATER TO MAINTAIN GROWTH: Governor
Padres announced on Tuesday, October 20 a historic budget
proposal of 2.43 billion pesos to invest in exploration
of new water sources, which is a 291 percent increase
from the previous year. According to an August report by
CONAGUA, current reservoirs are 71 percent of capacity
due to increased population growth in the cities and less
than average rainfall over the last decade. State
officials are concerned about sustainable development as
Sonora relies on its heavily irrigated agricultural
industry as the backbone of its economy. (Hermosillo)

FEELEY

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