Cablegate: Scenesetter for Ex-Im Chairman Fred Hochberg

DE RUEHME #0690/01 0551758
R 241757Z FEB 10



E.O. 12958: N/A
SUBJECT: Scenesetter for Ex-IM Chairman Fred Hochberg

1. (SBU) Summary. Your visit comes at a crucial moment in our efforts to deepen our bilateral relationship with Mexico, our third largest trading partner after Canada and China. As we institutionalize our security agenda we will also need to give more attention to the economic and social agendas in a country whose economic and social well-being affects ours directly. The United States' global competitiveness depends increasingly on a more competitive Mexico. Efforts to strengthen our mutually beneficial competitiveness in 2010 will focus on spurring innovation, creating jobs on both sides of the border, building a modern 21st century border, encouraging the requisite regulations and infrastructure, and supporting a sustainable energy and environment agenda. All these are top priorities for the Calderon administration and offer huge potential for future U.S. investment and economic development. Mexico's and our economic recovery go hand in hand, and U.S. export-led successes depend increasingly on partnering with Mexico's lower-cost manufacturing capability. President Calderon is personally devoted to the issue of climate change and renewable energy, opening the possibility for trade and investment opportunities that benefit both countries. End Summary.

Political Context

2. (SBU) Present Calderon enters the last three years of his six-year term facing a complicated political and economic environment. His PAN party emerged seriously weakened from a dramatic 2009 mid-term election in which the opposition (PRI) gained control of the Mexican Congress. His popularity numbers have dropped 10-points since the beginning of last year, yet they still hover solidly over 50 percent. He is by no means a lame duck. Still, the opposition PRI party is in the ascendancy, cautiously managing its illusory unity in an effort to dominate the ten gubernatorial contests that are up in the coming year, and to avoid any missteps that could jeopardize its front-runner status in the run-up to the 2012 presidential elections. In addition, the public's deepening economic worries have begun to counterbalance their concern about security.

Economic Context

3. (SBU) Following the 2009 electoral setback, Calderon made creating jobs and eradicating poverty his top two priorities for 2010, sharing the agenda with security issues that have become acutely sensitive in the past weeks due to the persistent violence in Ciudad Juarez. It is important that Calderon succeed in making real progress on the economy and security in the last three years of his term. The economic and security agendas are time-sensitive and volatile, and the more momentum that can be achieved now, the greater the prospect for continuity into a new administration. However, the complexities of pushing viable economic reforms through an opposition Congress complicate advancing such an agenda. If Calderon is unable to strengthen Mexico's competitiveness in order to promote jobs and eradicate poverty, the United States will also feel the impact through immigration pressures and greater volatility in high-violence cities that have been the battleground for narco-traffickers. A stable and growing Mexico is in both our security and economic interests.

4. (SBU) The oil sector is a crucial component of Mexico's economy and is the largest source of export earnings for the country, accounting for 10 percent of all export earnings. However, Mexico's oil production has declined rapidly from a peak of 3.4 million barrels per day in 2004 to a projected 2.5 million barrels per day in 2010. Despite some optimistic GOM forecasts, there are no realistic options for reversing this decline in the short to medium term. Mexico has relied heavily on the Cantarell oil field, one of the largest in the world. Despite nitrogen injection and other enhanced oil recovery techniques, the Cantarell field has entered a stage of long-term decline with production falling by more than 70% from its peak of over 2 million barrels a day in 2004 MEXICO 00000690 002 OF 004 to less than 650,000 barrels per day in 2009.

5. (SBU) The Mexican government's reliance on oil revenue to finance over one third of the federal budget has deprived Mexico's state owned oil company, PEMEX, of much needed capital for exploration, production, and infrastructure projects. As a result of decades of underinvestment, PEMEX today finds itself without alternative oil fields which could compensate for Cantarell's decline. PEMEX accelerated the development of the giant Chicontepec oil basin in 2009, investing $2 billion with the goal of increasing production from 29,000 to 90,000 barrels in 2009. With 750 new wells drilled over the past year, overall production remains stagnant and production per well has fallen dramatically. Although the Chicontepec fields are estimated to contain almost 9 billion barrels of reserves, Chicontepec is a complex reservoir which involves technical challenges and significant operational costs. Exploiting Chicontepec will require high-risk investments and the drilling of a large number of wells for relatively small returns. Many experts believe that even with substantial investments, PEMEX will have a difficult time reaching its 600,000 barrel a day production goal by 2021. Other fields Mexico is currently exploiting include Ku Maloob Zaap, which has reached peak production levels; Crudo Ligero Marino and other smaller fields in the south which are largely enhanced oil recovery projects will do little to reverse Mexico's production decline. U.S.

Exports to Mexico

6. (SBU) Mexico is the U.S.'s 3rd largest trade partner and 2nd largest export market for U.S. products. U.S-Mexico bilateral trade increased from USD 88 billion in 1993 to USD 301.87 (projected) in 2009. Mexico depends heavily on trade with the U.S. with the U.S. supplying as much as 60% of total Mexican imports.

National Infrastructure Plan (NIP)

7. (SBU) The National Infrastructure Program (NIP) was launched by Mexican President Calderon in July 2007 to dramatically increase infrastructure investment, in energy, transportation and the environment. The NIP is being financed using public-private partnerships, with significant Mexican public sector investment. The NIP aims to increase infrastructure investment by 50 percent that, if sustained, according to Mexican government officials could place Mexico in the world's top 20 countries for infrastructure competitiveness by 2030. Mexico currently ranks of 68 out of 125 countries worldwide in infrastructure.

8. (SBU) However, the economic crisis has impacted availability of financing and many projects have been delayed. In an effort to invigorate the program and generate interest among U.S. investors and exporters in key NIP projects, Mexico's Secretary of Finance, Agustin Carstens, (he is now President of the Central Bank) led a group of Mexican government officials including, BANOBRAS Director, Alonso Garcia, to New York in November 2009. The group made a formal presentation that included distribution of a list of priority infrastructure projects that Mexico is pursuing.


9. (SBU) BANOBRAS, Mexico's public works bank, provides financing and technical assistance for infrastructure projects or public services directly or through concessions, permits or operating MEXICO 00000690 003 OF 004 contracts with private companies. BANOBRAS financing reached approximately USD 5 billion in 2009. In 2010, it will be over USD 3 billion. FONADIN (Fond Nacional de Infraestructura) was established in February 2008, by the decree of President Calderon, for infrastructure development in communications, transportation, water, natural resources and tourism. FONADIN is attached to BANOBRAS, which in turn reports ultimately to the Secretariat of Finance.

Pension Funds and Capital Development Certificates --------------------------------------------- -------------------

10. (SBU) Institutional investors such as pension funds have recently entered the infrastructure project finance game with eased restrictions and the development of Capital Development Certificates (Cecades). In October 2009, President Calderon announced that this new debt instrument will make a total of USD 10 billion available for infrastructure projects by the end of his presidency in 2012. Soon after the announcement, Goldman Sachs Infrastructure Partners sold a 6.55 billion peso (USD 477.3 million) stake in a toll road concession to Mexican pension funds. The purchase made institutional investors a 32% stakeholder in Red de Carreteras de Occidente, or RCO, which operates four toll roads in central Mexico.

11. (SBU) Australian investment bank, Macquarie, followed with the creation of the Macquarie Mexican Infrastructure Fund with approximately USD 408 million in initial commitments from Mexican pension funds, FONADIN and Macquarie. This fund is the first peso-denominated fund solely focused on investment opportunities in Mexican infrastructure projects. FONADIN's current commitment to the fund is USD 80 million of the total.

12. (SBU) The involvement of pension funds (with USD 100 billion under management), is an important attempt by the Mexican government to stimulate investment in infrastructure given the shortfall in international financial markets. Ex-Im Bank's proposed Memorandum of Understanding comes as the Mexican government is aggressively pursuing financing sources.

USG support of the NIP

13. (SBU) Since the announcement of the NIP the U.S. Embassy in Mexico has coordinated USG resources including USTDA, EX-IM Bank, USDOC to name a few in support of NIP projects. Specifically, the U.S. Embassy has facilitated on-going discussions between Ex-Im Bank and FONADIN toward the establishment of a closer working relationship. The MOU that you will sign with BANOBRAS during your visit is a significant statement of USG support for Mexico's Infrastructure development.

14. (SBU) Overall, your visit comes at a critical time as project and export financing is needed to support the development and completion of the projects identified in the NIP. It is also important to keep in mind that increased investment in Mexico's infrastructure supports regional competitiveness and furthers economic development of both the United States and Mexico.

Renewable Energy

15. (SBU) Advancing bilateral cooperation on renewable energy, MEXICO 00000690 004 OF 004 energy efficiency and the environmental agenda has been a top priority for both President Obama and President Calderon since their first meeting January 2009. This agenda was formalized when the Bilateral Clean Energy and Climate Change Framework was announced during President Obama's April 2009 visit to Mexico. On January 25-26 a senior level working group met in Washington to discuss pragmatic steps to advance this collaboration. The working group agreed to establish a bilateral task force which will work to create a renewable energy market between Baja California and California. The task force will consider standards, transmission capacity, regulatory issues and financing. This pilot project could be able more broadly across the border, creating significant opportunities for U.S. companies to export green technology to Mexico. The January 25-26 meeting also helped advance cooperation on the Framework Convention on Climate Change 16th Conference of the parties (COP-16) which Mexico is hosting in late 2010.

16. (SBU) You could also stress President Obama's personal commitment to advancing a joint agenda on climate change and renewable energy. As well, your interlocutors would benefit from hearing the administration's commitment to use all available policy and financial tools, drawing on DOE, EPA, State, TDA, USAID, OPIC, Ex-Im, and USTR to create a viable renewable energy market between both countries.

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