VZCZCXRO5098
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #6424/01 3131947
ZNR UUUUU ZZH
P 091947Z NOV 06
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 4152
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEHNSC/NSC WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUEHC/DEPT OF LABOR WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 05 MEXICO 006424 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR A/S SHANNON 
STATE FOR WHA/MEX, WHA/EPSC, EB/ESC 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/ARUDMAN 
USDOC FOR ITS/TD/ENERGY DIVISION 
TREASURY FOR IA (ALICE FAIBISHENKO) 
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND SLADISLAW 
STATE PASS TO USTR (EISSENSTAT/MELLE) 
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA) 
NSC FOR DAN FISK, CYNTHIA PENDLETON 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ELAB ENRG ETRD PREL MX
SUBJECT: ECONOMIC TRANSITION NOTES, NOVEMBER 1-8, 2006 
 
REF: A. MEXICO 6313 
 
     ¶B. MEXICO 6362 
     ¶C. MEXICO 5810 
     ¶D. MEXICO 5343 
     ¶E. MEXICO 6217 
 
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Summary 
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¶1.  (U) Mexico's markets were unaffected by the November 6 
bombings. Market expectations are close to government 
economic predictions, including that the recent inflation 
spike is temporary and that the government will have its 
first budget surplus since 1996. The stock market boasted a 
record gain on November 1, but analysts are waiting to see 
whether it can remain at this high-level. The government 
expects to deliver its 2007 budget by December 1, while 
states are concerned over announced plans to cut their share 
of federal revenue. The Fox Administration has taken 
additional steps to improve competitiveness by further 
cutting tariffs and preparing to issue a new decree for the 
maquiladora sector. President-elect Felipe Calderon and 
others continued public calls for reform including in the 
fiscal system, pensions, infrastructure, energy, and 
increasing competition in the finance and telecommunications 
sectors.  The telecommunications regulator came under public 
criticism for its recent changes in cell phone charges and 
convergence.  Declining oil production forced PEMEX to cut 
supplies to the United States.  Meanwhile, PEMEX has launched 
a public tender for natural gas exploration.  Speculation 
continues about who will be on Calderon's economic team.  END 
SUMMARY. 
 
Markets Not Affected by Bombings 
 
¶2.  (U) Markets were not notably affected by the explosion of 
three bombs in Mexico City shortly after midnight on November 
6 (Ref A).  The peso lost ground in early trading on November 
6, but regained most of its losses during the day.  During 
the week ending November 7, the peso depreciated by 0.88% and 
the benchmark stock index gained 2.3%. 
 
Quarterly Report on Inflation 
 
¶3.  (U) On October 31, the Bank of Mexico (BOM) published its 
report on inflation for the third quarter of 2006. The report 
highlighted the positive performance of domestic consumption 
and investment as well as manufacturing and crude oil 
exports.  Inflation -- which was 4.09% during the 12-month 
period ending in September -- has risen in recent months due 
to shortages of sugar, unfavorable climate conditions that 
affected tomato harvests, and higher tortilla prices.  The 
BOM said that the price spike is temporary and forecast that 
inflation will be around 4.0% at yearend.  During this 
quarter, long-term interest rates fell and the yield curve 
flattened as domestic political uncertainty lessened and 
premium risk rates in international markets declined. 
 
Mexico To Post First Budget Surplus since 1996 
 
¶4.  (U) The Finance Secretariat has announced that President 
Fox plans to hand over an economy growing at its fastest pace 
in six years, with the first budget surplus since 1996, after 
record oil prices boosted revenue.  The government's surplus 
is forecast to be 0.2% to 0.3% of GDP because of additional 
revenue from oil exports and greater-than-expected tax 
collection.  (Note: this measure of the budget balance 
excludes significant off-budget borrowing.  End Note.) 
 
Quarterly Report on Public Finances 
 
¶5.  (U) According to the Finance Ministry's quarterly report 
on public finance, the Finance Ministry expects the economy 
 
MEXICO 00006424  002 OF 005 
 
 
to grow 4.3% during the third quarter.  The report also says 
that 835,592 jobs were created in the formal sector during 
the first nine months of the year. Direct banking credit to 
the private sector rose at a real rate of 30% in August. 
Housing credit grew 82.3%, consumer credit rose 45.4%, and 
lending to businesses increased 11.4% in real terms.  The 
budget surplus during January to September was 32.4% higher 
in real terms than in the same period in 2005.  Government 
revenues increased 14% due to higher tax collection and 
revenues from petroleum.  Oil-related revenues accounted for 
36.6% of total revenues during the first nine months of the 
year.  Total net public debt (the BRHBPS) was 35.5% of GDP, 
with internal debt representing 24.5% of GDP and external 
debt representing 11.0% of GDP. 
 
Market Expectations Fairly Close to These GOM Forecasts 
 
¶6.  (U) According to a market expectations survey conducted 
by the BOM in October, real GDP growth will be 4.54% in 2006 
and 3.57% in 2007, while consumer price inflation will be 
3.97% in 2006 and 3.47% in 2007.  At year end, the 28-day 
CETES are expected to be 7.1%, and the exchange rate 10.99 
pesos to the dollar.  The survey also showed that analysts 
expect a budget surplus of 0.4% of GDP.  Foreign direct 
investment is expected to fall to USD 16.13 billion in 2006 
and USD 15.89 billion in 2007. 
 
Bolsa Breaks 23,000 Mark, Continues To Set New Records 
¶7.  (U) On November 1, the Bolsa index rose 676.86, or 3%, to 
23,046.95, the biggest gain since July 19.  Traders predicted 
that the market will now be looking to test whether the index 
can stay above 23,000.  The Bolsa had fallen 4.4% from an 
Oct. 25 record on reports the U.S. economy grew less than 
forecast in the third quarter.  The rally had the 
characteristics of a "technical rebound," in which investors 
buy after shares fall below levels determined by mathematical 
models of price movements. The market also reacted to 
Calderon's public comment that the Mexican Stock Market will 
have an important role in the country's growth through 
long-term financing for infrastructure projects, including 
the energy sector. Calderon had also promised to maintain the 
economic stability and the growth of financial markets. 
Fitch Releases Post-Electoral Update on Mexico 
¶8.  (U) On November 7, Fitch Ratings published a special 
report on Mexico that details some of the challenges 
confronting President-elect Calderon.  The report says that 
Calderon will have to unite the country behind him, secure 
governability by marginalizing the civil resistance movement 
led by former presidential candidate Andres Manuel Lopez 
Obrador, and build alliances on economic reforms.  Fitch is 
moderately optimistic that Calderon will be able to mobilize 
Congress in his favor, as his party did well in the election 
and the PRI performed poorly -- giving him flexibility to 
strike deals with other political parties.  Fitch says that 
Calderon's main economic challenges include:  maintaining the 
economic recovery; dealing with the prospect of falling crude 
oil prices and possibly falling oil production during the 
next six months; and addressing fiscal challenges stemming 
from the government's dependence on oil revenues. 
Unease Over Cuts in Federal Transfers to States 
 
¶9.  (U) On October 27, the Finance Secretariat announced it 
would cut funding to the program that allocates federal funds 
to state governments by 21%, the Program of Support for the 
Strengthening of Federal Entities (PAFEF).  The Finance 
Secretariat also decided that PAFEF funds are to only be used 
 
SIPDIS 
for infrastructure projects, debt relief, pensions, 
modernization of the tax system, and expansion of the 
taxpayer base.  This decision caused uneasiness among several 
governors and PRI deputies.  Legislators allege that the 
total cut to states will be almost USD 2.5 million.  The 
Finance Ministry justified the measure by saying it will 
create a reserve for the Mexican Social Security Institute 
(IMSS), but governors say that the decision was made to give 
 
MEXICO 00006424  003 OF 005 
 
 
priority to programs from the Executive at the expense of 
those promoted by Congress.  (Comment:  Mexico's constitution 
leaves states with minimal sources of revenue other than 
their federal allocation.  End Comment.) 
 
2007 Budget Will be Delivered on Time 
 
¶10.  (U) The Fox administration is working closely with the 
transition team to deliver the 2007 Budget to Congress on 
time.  Guillermo Bernal, Chief of the Budgetary Policies 
Unit, told the press that it was very possible the budget 
will be ready to be sent to Congress by December 1.  The 
budget is expected to be similar to last year's. Economic 
transition team leader Agustin Carstens met in private with 
legislators of all political parties (including PRD) about 
the 2007 budget.  Carstens warned about the expected fall in 
revenues due to lower energy prices, and noted pension 
problems, and the need for strengthening public finances to 
depend less on crude oil revenues.  According to the 
legislators, Carstens' priority for next year's budget will 
be to combat poverty. 
 
Maquila Decree Aims to Increase Mexican Competitiveness 
 
¶11.  (U) The new Maquila Decree, to be effective November 13, 
aims to encourage investment and increase Mexico's 
competitiveness in the global economy.  Among other changes, 
the decree simplifies administrative procedures and lays the 
groundwork for the export of services under the Maquila 
program (See Ref B). 
 
More Tariff Reductions 
 
¶12.  (U) Under Secretary of Industry and Commerce Rocio Ruiz 
announced that the Secretariat for the Economy had negotiated 
with the textile industry to reduce 48 tariffs on textiles, 
both for artificial and natural fibers.  This reduction will 
include inputs that are still produced in Mexico.  On 
average, tariffs will be reduced from 9% to zero. These 
reductions were in addition to broader tariff cuts enacted in 
September 2006 (Ref E). 
 
Calderon Promises to be an Ally for Competitiveness 
 
¶13.  (U) During the conference "Investment and Technology" 
organized by the Mexican Trade Export Council (COMCE), 
Calderon told businessmen his government will be an ally for 
the Mexican export and business sectors in the effort to 
improve competitiveness and increase market share in order to 
generate more and better paid jobs.  Calderon said that 
companies established in Mexico need to compete with equal 
fiscal, financial, and energy conditions as in other 
countries.  He acknowledged that financial costs in Mexico 
were very high, and that businesses in Mexico need more 
access to financing at competitive prices. 
 
Finance Secretary Calls for Structural Reforms 
 
¶14.  (U) This week, Finance Secretary Francisco Gil Diaz 
publicly warned that a slowdown in the U.S. economy and the 
decline of crude oil prices will have a negative impact on 
the Mexican economy.  With this in mind, he called for 
implementation of structural reforms (fiscal, education, 
labor, energy, pension, and telecommunications) to improve 
Mexico's international competitiveness.  He noted that 
economic stability is not enough to reduce widespread 
poverty.  Gil Diaz added that the pension system puts 
significant pressure on public finances. 
 
Improving Pension Funds in the Long Term? 
 
¶15.  (U) Adolfo Albo Chief Economist of the BBVA Bancomer's 
bank announced that the bank is performing a study on the 
Mexican pensions system to be published in January 2007. 
 
MEXICO 00006424  004 OF 005 
 
 
In order to resolve the pensions system's current problems, 
Albo said that there should be a National Pensions System, 
which includes all of the existing public systems (Pemex, 
CFE, universities, IMSS, ISSSTE, etc.) BBVA has elaborated 
five proposals to improve the system, including an increase 
in obligatory contributions from 6.5 to 9% of the worker's 
salary. 
 
Proposals To Improve Competitiveness in the Financial Sector 
 
¶16.  (U) Experts from the IMF and the World Bank made several 
recommendations to improve the financial sector's 
competitiveness.  Their proposals include providing more 
autonomy to the Banking and Securities National Commission, 
inspecting foreign banks more closely, constantly monitoring 
operations of development banks and sofoles (non-bank banks), 
and establishing a plan for mortgage sofoles.  They also 
recommended promoting more competition in yields paid to 
customers of private pension funds.  They said that 
authorities should more closely monitor risks associated with 
consumer credit and mortgages. 
 
Mexico's Public Accountants Urge Fiscal Reform 
 
¶17.  (U) During the Mexican Public Accountant Institute's 
annual convention, Jorge Chavez Presa, a former economic 
advisor to Roberto Madrazo, said that special regimes, 
differentiated taxes, high fiscal concentration, pervasive 
tax evasion, and insufficient incentives for states to 
collect taxes are the most important challenges to address in 
a fiscal reform.  He said that special regimes generate 
losses equivalent to 5% of GDP.  Another significant problem 
is that the federal government collects 98.7% of taxes, while 
the states and municipalities only collect 1.3%.  Chavez 
added that Mexico also needs to simplify the tax system and 
expand the taxpayer base. 
 
PEMEX Cancelled Shipments to the U.S. 
 
¶18.  (U) As reported Ref C, as a result of the declining 
production from the Cantarell field, Mexican Gulf Coast crude 
deliveries were short 86,000 B/D during the third quarter of 
¶2006.  Crude oil production during that period averaged 3.24 
million barrels per day, 1% less than during the same period 
of 2005.  For 2007 and 2008, PEMEX estimates are even lower: 
1.68 million barrels and 1.43 million barrels daily. 
 
New Contracts to Extract Natural Gas 
 
¶19.  (U) According to press reports, PEMEX has launched a 
public tender to explore and exploit natural gas reserves on 
a fee-for-service basis.  The expected investment is USD 1 
billion.  Repsol, Petrobras, Techint, Grupo R, and Diavaz 
will participate in the tender.  These companies will present 
their technical offers in January 2007, and the decision will 
be made almost immediately.  The fields are located in 
Coahuila, Tamaulipas, and Nuevo Leon.  PEMEX publicly claims 
that natural gas production will increase by 300 million 
cubic feet daily with this tender. 
 
Calderon Receives Long-Term Infrastructure Plan 
 
¶22. (U) The Mexican Construction Chamber has given Calderon 
their long-term infrastructure plan.  This "Great Vision 
Project" is the result of a list of proposals derived from 
five regional forums organized by the Chamber.  In receiving 
the document, Calderon promised his administration will be 
the "government of infrastructure" because he believes that 
the investment in infrastructure is the best way to achieve 
equity and social justice. 
 
Calderon Pledges To Increase Competition in Telecommunications 
¶23.  (U) On November 2, Calderon publicly pledged to boost 
competition within the Telmex-dominated telecommunications 
 
MEXICO 00006424  005 OF 005 
 
 
industry.  Calderon said it was "indispensable that Mexico be 
able to integrate its citizens into a society of information 
and knowledge."  A 2006 OECD report says that 
telecommunication costs in Mexico are among the highest in 
the OECD.  Telephone coverage is inadequate, with internet 
and fixed-line phone service still unavailable in many rural 
areas. 
 
Suspension to "Calling Party Pays" (CPP) System 
 
¶24.  (U) Mexican telecommunications companies Alestra, Axtel, 
Avantel, Marcatel, and Maxcom have filed legal injunctions to 
suspend long distance CPP.  All companies except for Marcatel 
obtained a temporary suspension from Mexican judges.  In 
addition, Axtel and Marcatel will file a complaint with the 
Federal Telecommunication's Commission (Cofetel).  Marcatel's 
CEO said that Cofetel is obliging companies to accept the 
measure rather than creating a positive environment for 
negotiation.  (Note:  Despite the injunctions, CPP went into 
effect in Mexico on November 4. Telmex, which provides 95% of 
fixed line services in Mexico, implemented CPP, as did mobile 
phone companies.  End Note.) 
 
Injunctions Denied Against Convergence in Telecommunications 
 
¶25.  (U) Six cable TV companies filed injunctions against the 
Convergence Agreement (Ref D) published on October 3,  but 
none of the judges decided to temporarily suspend the 
agreement, and only one of injunctions was accepted by the 
judge. 
 
Speculation on Carstens' Finance Team 
 
¶26.  (U) According to the press, Carstens asked Alejandro 
Werner, current Chief of the Economic Planning Unit in the 
Secretariat for Finance, to become his Under Secretary of 
 
SIPDIS 
Expenditures. Jose Antonio Meade from the Rural Finance 
Division would be Carstens' coordinator of advisors. 
 
 
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