VZCZCXRO0538
RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #3302/01 1661750
ZNR UUUUU ZZH
R 151750Z JUN 06
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 1660
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 02 MEXICO 003302 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/MEX, WHA/EPSC 
STATE PASS USAID FOR LAC:MARK CARRATO 
TREASURY FOR IA MEXICO DESK: JASPER HOEK 
COMMERCE FOR ITA/MAC/NAFTA: ANDREW RUDMAN 
ENERGY FOR INTERNATIONAL AFFAIRS KHARBERT AND KDEUTSCH 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV PINR MX
SUBJECT: AMLO ANNOUNCES A SUBSIDIES PROGRAM 
 
 
 Sensitive but unclassified, entire text 
 
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SUMMARY 
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¶1. (SBU) On May 30, Democratic Revolutionary Party (PRD) 
candidate Andres Manuel Lopez Obrador (AMLO) announced on 
national TV  some details of a comprehensive subsidies 
program aimed at increasing Mexican families' income and 
their purchasing power by up to 20%.  AMLO expects the plan 
would spur economic growth, employment and productivity by 
increasing income and consumption through a set of economic 
supports for the elderly and a reduction of energy rates. 
Many local analysts note that without fiscal reform, AMLO's 
proposal is not feasible.  End summary. 
 
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AMLO ANNOUNCES A "NEW" ECONOMIC/SOCIAL PROGRAM 
--------------------------------------------- - 
 
¶2. (SBU) On May 30, six days before the last debate, AMLO 
announced an economic-social program aimed at increasing 
Mexican families' income and their purchasing power.  In a 
two-minute message on national television networks, the PRD 
candidate promised to increase income and purchasing power by 
an average of 20% for all Mexicans earning less than MP 9,000 
(USD 790) per month.  AMLO's plan, which he proposes 
implementing immediately upon taking office, includes lower 
energy rates and other economic supports.  A day after its 
announcement, AMLO's economic advisor Rogelio Ramirez de la O 
held a press conference to explain the proposal in more 
detail.  The announcement also provided some new, albeit 
limited, specificity to a proposal that has been a 
fundamental piece of his campaign - a promise to cut 
government expenditures by 1% of GDP in order to increase 
social spending. 
 
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ECONOMIC IMPACT ON FAMILY INCOME 
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¶3. (SBU) Ramirez de la O explained that AMLO's plan to reduce 
energy fees and expand the economic support system for the 
elderly would have a positive impact on the income of 18 
million families.  AMLO's economic team calculated the impact 
this comprehensive subsidy program would have on families' 
income as a function of their monthly earning: 
- For families with a MP 2,500 (USD 219) monthly income, the 
impact would be up to 23% 
- For families with a MP 5,000 (USD 438) monthly income, the 
impact would be up to 17% 
- For families with a MP 9,000 (USD 790) monthly income, the 
impact would be up to 14% 
Ramirez de la O calculates that the average impact of AMLO's 
social programs would be a 20% increase in income.  He added 
that the promised reduction in electricity fees would have a 
cascading effect on other prices, which would  benefit all 
consumers. 
 
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PROJECTED COST OF THE SOCIAL PROGRAM 
------------------------------------ 
 
¶4. (SBU) This comprehensive subsidy program would represent 
MP 100 billion (USD 8.7 billion) more in higher income for 
families.  The total fiscal cost would be MP 80 billion (USD 
7 billion) distributed as follows: MP 10 billion for the 
reduction of electricity fees, both for individuals and 
businesses; MP 15 billion for the reduction of gasoline 
prices; MP 35 billion for the economic support program for 
elderly; and MP 20 billion for free school materials.  The 
other MP 20 billion (USD 1.7 billion) would be obtained 
through the reduction of other prices as a result of the 
lower energy rates.  According to Ramirez's projections, the 
AMLO administration would obtain the needed resources through 
rigorous budget management and a change in the government's 
spending culture. 
 
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INFEASIBLE PROPOSAL WITHOUT FISCAL REFORM 
----------------------------------------- 
 
 
MEXICO 00003302  002 OF 002 
 
 
¶5. (SBU) Many local analysts agree that AMLO's proposal to 
increase spending on subsidies is not feasible without 
improving tax collection.  The social program proposed by the 
PRD candidate represents 1% of GDP, which in addition to the 
current tax evasion rate of 1.3% of GDP, would increase the 
fiscal deficit and public debt.  Ramirez de la O explained 
that this would not be the case because the AMLO 
administration would cut some budget items.  However, AMLO's 
proposed reduction in government officials' salaries and 
other administrative costs to offset the cost of the 
subsidies could prove difficult in practice.  Moreover, a 
reduction of prices in basic services would create 
distortions to real costs.  According to Ramirez de la O, the 
PRD's subsidies program would translate into higher income, 
triggering more consumption.  But, some analysts worry that 
higher consumption would create inflationary pressures.  The 
inflationary problem could be mitigated if the central bank's 
autonomy to manage inflation by manipulating the corto is 
respected.  However, on several occasions AMLO has said that 
the Bank of Mexico's main objective should not only be 
controlling inflation, but promoting economic growth and 
employment. 
 
¶6. (SBU) Throughout the campaign, critics have charged that 
AMLO disregards economic fundamentals.  Ramirez de la O 
explains that AMLO's government would spend MP 35 billion in 
the economic support program for the elderly.  Currently, 
there are approximately 5.15 million citizens over 65 
years-old.  In order to give the elderly a monthly allowance 
of MP 650, AMLO would have to budget MP 40 billion in 
addition to the costs for administering the program; bringing 
the total estimate for the first year to MP 60 billion. 
Given that Mexico's population over 65 years is growing at an 
annual rate of 4%, revenues would have to grow very quickly 
to sustain the program. 
 
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COMMENT 
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¶7. (SBU) AMLO's announcement of his subsidies program at the 
end of May could be his last official economic proposal 
before the elections.  In advance of the June 6 debate, it 
was an effective publicity strategy and may have regained 
support he lost after publicly calling President Fox a 
"pelele," or weakling .  Most polls place AMLO at least 2 
points ahead of Felipe Calderon from the National Action 
Party (PAN).  Only two weeks before July 2, both front-runner 
candidates are more likely to focus more on accusations and 
attempts to discredit their opponent, than proposing any more 
new proposals. 
 
¶8. (SBU) Ramirez de la O acknowledged that similar social 
programs have existed for years.  Former PRI president Carlos 
Salinas de Gortari called his program "Solidaridad", the 
ruling party PAN re-named it "Oportunidades", and all have 
made good use of the programs during the campaign. 
Nonetheless, AMLO's failure to provide more details on how 
the cost of this program would be offset, and his inflated 
expectations of a MP 100 billion budget savings have raised 
concerns among some analysts. End comment. 
 
 
Visit Mexico City's Classified Web Site at 
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GARZA