Cablegate: New Finance Secretary Meets with Ambassador, Nsc

VZCZCXRO5116
RR RUEHCD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #0198/01 0211836
ZNR UUUUU ZZH
R 211835Z JAN 10
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 0126
INFO ALL US CONSULATES IN MEXICO COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 MEXICO 000198

SENSITIVE
SIPDIS
SIPDIS
STATE FOR WHA/MEX, WHA/EPSC, EEB
NSC FOR RESTREPO, FROMAN, LIPTON
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: NEW FINANCE SECRETARY MEETS WITH AMBASSADOR, NSC

REF: A. 2639, B. 2537, C. 2709

1. (SBU) Summary. Ambassador Carlos Pascual and NSC Senior
Director David Lipton met with newly appointed Secretary of Finance
and Public Credit (SHCP) Francisco Cordero and Deputy SHCP
Secretary Alejandro Werner. They discussed the current state and
outlook of Mexico's economy, the importance of bilateral
cooperation in the context of the G-20, climate change issues, and
opportunities for mobilizing capital to municipalities such as
Ciudad Juarez and Tijuana. End Summary.

2. (SBU) On January 13, the Ambassador, NSC Senior Director
David Lipton, Evensen Dodge International Senior Vice President
Fernando Gama (a USAID contractor), and Emboffs met with newly
appointed SHCP Secretary Francisco Cordero, SHCP Deputy Secretary
Alejandro Werner, and SHCP Coordinator of State and Municipalities,
Jose Antonio Gonzalez.

Economic Outlook

----------------------

3. (SBU) SHCP Deputy Secretary Alejandro Werner provided an
overview of Mexico's economic recovery and outlook for 2010. In
2009, the economy contracted an estimated 6.8 percent due to a drop
in industrial production and the H1N1 outbreak. The recovery began
in the third quarter of last year and is attributed to growth in
industrial and services sectors, as well as an improvement in
aggregate demand. Hacienda expects the economy to grow 3 percent
this year. Werner said this was a conservative projection since
actual growth is subject to U.S. economic performance. SHCP
estimates that the recently passed fiscal reform will generate one
percent of GDP in additional revenue. Moreover, the increased
autonomy of Pemex (as an outcome of the last energy reform) and the
liquidation of the electric parastatal Luz y Fuerza del Centro
should also help public finances. Nevertheless, he said more
needed to be done to strengthen the non-oil tax base,
competitiveness, and domestic sources of growth. This year, the
GOM will focus on the political reform agenda, infrastructure and
other initiatives to help strengthen the country's competitiveness.

G20 Cooperation

--------------------

4. (SBU) NSC Senior Director David Lipton underscored the
importance of U.S.-Mexico bilateral and multilateral cooperation in
the context of the G-20. He said the U.S. and Mexico have mutual
interests and should develop better mechanisms for cooperation that
are ongoing and not just reactive. Given the challenges from China
and other emerging economies, it is essential for Mexico and the
U.S. to align views in order to establish a framework for
sustainable growth. Lipton underlined that success in this year's
G-20 Summit was critical and should not deteriorate into a U.S.
verses China forum; China's exchange rate issue impacts other
countries as well, not just the U.S. Cordero agreed that Mexico
has shared interests and positions with the U.S. on China.

Climate Change

-------------------

5. (SBU) Recognizing that Mexico will host the COP 16 in

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November-December, Lipton suggested a complementary focus on the
financial aspect of climate change and recommended a dialogue with
Mexico on this matter. Given European doubts about the usefulness
of the Copenhagen Accord, the Ambassador stressed that it is key
for the U.S. and Mexico to be on the same page. Lipton noted that
Cordero could discuss this issue, as well as trade,
competitiveness, and financial reform issues in his meeting with
Secretary Geithner on January 20.

6. (SBU) Secretary Cordero agreed on the need to strengthen
cooperation and communication with the Embassy and Treasury on the
issues raised by Lipton and the Ambassador. He said the topic of
climate change is a priority in the Calderon Administration and
underscored the importance of engaging SHCP in this discussion.
Gonzalez added that SCHP has had informal discussions with Treasury
on initiatives to develop a North American carbon market and
suggested that such a proposal might be appropriate if there is no
agreement at COP-16 on a global carbon market. The Ambassador and
Lipton underscored that any progress on carbon markets will need to
take into account progress on U.S. energy reform legislation. They
informed Cordero of the first meeting of the US-Mexico Bilateral
Framework on Clean Energy and Climate Change in Washington on
January 26, which will deal with our bilateral agenda on climate
change, energy and the potential market for renewables. The
Ambassador said he would like to see a broader, more positive
bilateral agenda, rising above trade disputes to discuss
opportunities such as developing a regional renewable energy
market. Werner highlighted the need for careful interagency
coordination as there are many GOM elements responsible for energy
and climate change issues.

7. (SBU) Lipton alerted Cordero of the USG's plans to eliminate
the subsidies on fossil fuels within a year and asked if Mexico
would join and say something on eliminating these subsidies - not
necessarily with a timeframe for action - within the next 4 to 5
months. Cordero was non-committal, explaining that it was a
complicated political issue. However, he agreed that Mexico needs
to move away from price subsidies toward targeted subsidies for the
poor. He cited fuel price increases already implemented at the end
of 2009.

USAID-Evensen Dodge Project

-------------------------------------

8. (SBU) The Ambassador mentioned that he was going to the border
on January 14th and 15th to look at possible models of security and
socio-economic cooperation in Ciudad Juarez (CJ) and Tijuana. He
noted that the Embassy - through USAID - is partnering with a U.S.
private firm, Evensen Dodge, that has decades of experience
advising local governments on public finance and debt. Fernando
Gama, Evensen Dodge Senior Vice President, gave Cordero an overview
of the project and explained how Evensen Dodge is developing
financing models to help mobilize private capital for Mexican
subnational governments that work within the legal and policy
parameters established by SHCP and the CNBV. Through this project,
the states of Michoac????n, Hidalgo, and Quintana Roo have borrowed
over USD 1 billion in private capital for infrastructure and other
productive purposes, at the most favorable rates available in
Mexico.

9. (SBU) Werner and Gonzalez expressed interest and questions,
noting that some states and most municipalities have limited
borrowing capacity. Gonzalez also explained that the issue of
"participaciones" (the part of the federal budget that belongs to
the states by law) was currently highly politicized in Congress.
Cordero said it was a good idea, but noted the existence of
borrowing restrictions on subnationals. With respect to CJ,

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Cordero cited efforts undertaken while he was Secretary at the
Social Development Ministry to adapt the "Medellin model" to CJ
through the GOM program "Limpiemos Mexico." They are also exploring
alternative models and solutions, but he noted budget constraints
and the huge local and social investment that would be required to
achieve results. The Ambassador noted that one advantage of the
proposed financing model is that it allows for joint financing with
the private sector and development banks. Without such a model for
subnational finance, most of the GOM's ideas for intensive
municipal infrastructure and job creation projects will remain
ideas on paper.
FEELEY

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