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P 162153Z NOV 06
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 4284
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
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UNCLAS SECTION 01 OF 04 MEXICO 006516 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR A/S SHANNON 
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA 
STATE FOR EB/ESC MCMANUS AND IZZO 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/ARUDMAN 
USDOC FOR ITS/TD/ENERGY DIVISION 
TREASURY FOR IA (ALICE FAIBISHENKO) 
DOE FOR INTERNATIOANL AFFAIRS KDEUTSCH AND SLADISLAW 
STATE PASS TO USTR (EISSENSTAT/MELLE) 
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA) 
NSC FOR DAN FISK 
 
E.O. 12958: N/A 
TAGS: ECON ENRG ELAB EFIN PGOV PREL MX
SUBJECT: ECONOMIC TRANSITION NOTES, NOVEMBER 9-15, 2006 
 
 
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Summary 
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¶1.  (U) Fitch Ratings warned that MexicoQs credit rating 
could fall in the next three years if President-elect 
Calderon fails to pass reforms needed to encourage faster 
economic growth.  Calderon continued to publicly call for 
reforms, and promised to encourage financing for 
infrastructure; strengthen financial institutions and 
capital markets; increase security; and invest in human 
capital.  Bank of Mexico (BOM) Governor Guillermo Ortiz 
again called for more competition in the financial and 
telecommunications sectors, and for economic reforms. 
Reported discussions on the 2007 budget, however, indicate 
it will not include structural reforms.  Calderon and his 
transition team continue to publicly lay out their 
priorities including construction of 1 million houses a 
year, plus highways, railways, ports, and airports; and 
allowing PEMEX to enter into joint ventures for deep-water 
oil exploration and production. Some economic reforms are 
progressing.  The Finance Secretariat expects to authorize 
five new banks, including one by Wal-Mart de Mexico, within 
two weeks.  The Secretariat has also drafted a bill to make 
it easier for the government to recover assets when banks 
go into bankruptcy.  MexicoQs Federal Competition 
Commission blocked the merger of railroads Ferrosur and 
Ferromex.  Controvery over the Cell Phone QCalling Party 
PaysQ system continues, but authorities maintain that the 
new system will be implemented.  Consumer price inflation 
in Mexico rose to a 15-month high in October, but the BOM 
still maintains that inflation will drop below 4% by 
yearend.  Industrial production rose by a still-strong 5.0% 
year-over-year in September.  End Summary. 
 
Credit Rating Could Hinge on Economic Reform 
¶2.  (U) Shelly Shetty, Fitch RatingsQ Senior Director of 
Sovereign Ratings, said publicly that MexicoQs credit 
rating could fall in the next three years if President- 
elect Felipe Calderon fails to pass the fiscal, energy, 
labor, and educational reforms needed to encourage faster 
economic growth.  "Politics will define the trajectory of 
ratings in Mexico," Shetty said at a conference in Mexico 
City.  She said that Calderon must find a way to break the 
gridlock in Congress that prevented President Vicente Fox 
from passing much-needed economic reforms.  She noted that 
these reforms are particularly important because oil prices 
and U.S. demand will slacken next year. 
 
Central Bank Stresses Need To Strengthen Economy and 
Diversify Trade 
 
¶3.  (U) Deputy Central Bank (Bank of Mexico, BOM) Governor 
Guillermo Guemez said publicly that Mexico should 
strengthen its domestic market and diversify its trade to 
face an expected economic slowdown in the U.S.  Guemez said 
that the government should improve MexicoQs productivity so 
that it relies more on its domestic market than abroad. 
Guemez added that reforms are needed to improve the 
countryQs competitiveness. 
 
Ortiz and Calderon Discuss Economic Growth, Competition and 
Competitiveness 
 
¶4.  (U) BOM Governor Guillermo Ortiz spoke at the Mexican 
Foreign Trade CouncilQs (COMCE) annual conference on 
November 6.  As in previous speeches, Ortiz called for more 
competition in the financial and telecommunications 
sectors, and asserted that competitiveness is tightly 
linked with fair competition.  He criticized the large gap 
in the total annual cost for credit cards in Mexico and 
abroad.  He noted that while CitibankQs annual cost in the 
U.S. is 22.4%, its subsidiary Banamex charges 62.2%; HSBCQs 
annual cost in the U.K. is 21.7%, whereas in Mexico it is 
 
MEXICO 00006516  002 OF 004 
 
 
74.1%.  Noting that MexicoQs low economic growth rate shows 
a lack of competitiveness and low productivity, he stressed 
that Mexico is losing ground to Asian and Eastern European 
countries.  Ortiz recommended approving reforms to make the 
labor market more flexible, encourage innovation and 
technology, and open keys sectors of the economy to more 
competition.  He also called for more government investment 
in education, health care, and infrastructure. 
 
¶5.  (U) At the same conference, President-elect Calderon 
called for energy, fiscal, labor, and pension reforms and 
for the creation of export-oriented productive chains to 
regain market share and achieve sustained economic growth. 
Calderon promised to encourage financing for infrastructure 
to reduce logistical costs, and to strengthen financial 
institutions and capital markets to increase access to 
credit at competitive interest rates.  He also promised to 
increase security and invest in human capital through 
better educational and training programs. 
 
Infrastructure Will be a Calderon Priority 
 
¶6.  (U) Dionisio Perez Jacome, Deputy Coordinator of 
Economic Policy on CalderonQs transition team, said 
publicly that the incoming administration will make 
construction of highways, railways, ports, and airports a 
priority.  Regarding tourism, Perez said that the 
government will develop other tourism sites, so-called 
QIntegral Planned Centers,Q such as Nayarit, Palenque, 
Chiapas, and Chihuahua, and that it will consolidate a 
tourism project in the Mar de Cortes. In the housing 
sector, he said the incoming governmentQs goal is to 
construct 1 million houses a year. 
 
Planned Energy Reform To Include Joint Ventures for Deep 
Water 
 
¶7.   Perez also said the Calderon government will allow 
PEMEX to enter into joint ventures for deep-water oil 
exploration and production.  He said the incoming 
government will look for investment for refineries, natural 
gas, and petrochemicals; a new fiscal regime for PEMEX; a 
stronger Energy Regulatory Commission; and long-term 
contracts for major energy consumers and private producers. 
 
2007 Budget Will Not Include Structural Reforms 
 
¶8.  (U) Gustavo Madero, Chairman of the Senate Finance 
Committee, said publicly that the 2007 budget will not 
include structural reforms.  Agustin Carstens, the head of 
CalderonQs economic transition team, met with senators on 
November 13 to discuss the 2007 budget package.  Madero 
said that they discussed how oil production and revenues 
would probably be lower next year and the need for more 
resources to pay public pension liabilities and long-term 
infrastructure contracts (so-called Pidiregas debt). 
Madero said CalderonQs transition team will present a 
cautious budget this year in order to facilitate discussion 
on fiscal reform in the coming year.  Institutional 
Revolutionary Party Senator Jose Eduardo Calzada 
acknowledged CarstensQ willingness and openness to 
negotiate with all political parties. 
 
Outgoing Fox Administration Drafts Bankruptcy Law, Plans 
Other Reforms 
 
¶9.  (U) The Finance Secretariat (Hacienda) sent the Federal 
Commission for Regulatory Improvement (Cofemer) a draft 
bill that would make it easier for the government to 
recover assets when banks go into bankruptcy.  Guillermo 
Zamarripa, head of HaciendaQs Banking and Savings Unit, 
said Hacienda will leave the draft bill ready for the 
incoming administration to submit to Congress.  Zamarripa 
also said that before the end of the Fox administration on 
 
MEXICO 00006516  003 OF 004 
 
 
November 30, 2006, the Finance Secretariat will present 
reforms to create specialized banks, regulate outsourcing, 
and strengthen the National Banking and Securities 
Commission (CNBV). 
 
Wal-Mart To Get Banking License 
 
¶10.  (U) MexicoQs Finance Secretariat on November 15 said 
that it has given the green light for the opening of five 
new banks, including one by Wal-Mart de Mexico, and that it 
expects to give final authorization within two weeks.  The 
other banks that the Secretariat said it expects to approve 
applications for are Banco Facil, Banco Comercial Del 
Noreste, Bancoppel, and Prudential Bank -- bringing to 13 
the number of new banking licenses financial authorities 
have granted this year.  The entry of these banks into the 
financial services market will generate more competition in 
the sector and expand banking services to low-income 
Mexicans, a segment of the population that traditionally 
has not been served by MexicoQs large retail banks. 
 
Anti-trust Commission Rejects Rail Merger 
 
¶11.  (U) MexicoQs Federal Competition Commission on 
November 10 blocked the planned merger of Ferrosur and 
Ferromex.  This was the second time that the commission 
rejected the merger of these two companies, which would 
have created MexicoQs largest railroad firm.  The 
commission first rejected the plan in June, ruling that the 
merger would hurt competition.  The owner of Ferrosur said 
it may challenge the ruling in court. 
 
Controversy Continues Over QCalling Party PaysQ (CPP) 
 
¶12.  (U) The head of the Federal Telecommunications 
Commission (Cofetel) said last week that Cofetel will not 
allow companies that refused to implement CPP to Qaffect 
the majority.Q  His statement came after the fixed line 
telephone companies (including Mexican companies Alestra, 
Avantel, and Axtel) that had obtained an injunction against 
implementing CPP complained that calls from their customers 
to cell phones were being blocked.  Mobile companies 
countered that they were only alerting their customers with 
a phone message informing them of the charges they were 
about to incur before connecting calls from non- 
participating fixed line companies.  In response to the 
complaints, Cofetel decided that mobile phone companies 
were not violating the Federal Telecommunications Law 
because they were not blocking calls.  One of the 
commissioners stated that despite the injunctions against 
CPP, the system will be implemented.  The commissioner 
explained that mobile phone companies are only warning 
their customers that they will have to absorb the cost of 
the long distance calls coming from fixed line phone 
companies that have not implemented CPP, which Cofetel does 
not consider to be blocking calls. 
Inflation Climbs to 15-Month High 
¶13. (U) Consumer price inflation in Mexico rose to a 15- 
month high in October as the price of tomatoes, 
electricity, milk, and onions surged.  Prices climbed 0.44% 
in the month, bringing the annual inflation rate to 4.29% - 
- above the Bank of MexicoQs (BOM) target of 3% and outside 
the 2% - 4% band it considers acceptable.  The BOM still 
expects inflation to fall below 4% by yearend. 
 
Industrial Production Figures Still Strong 
 
¶14.  (U) Industrial output rose by 5.0% year-over-year in 
September, down from 5.6% the month before but still 
slightly above market estimates.  On a monthly basis, 
output rose by a seasonally adjusted 1.0%.  Growth is 
largely being led by a booming construction sector.  Most 
market analysts expect growth rates to continue to soften 
in the final quarter of the year and into 2007, in part due 
 
MEXICO 00006516  004 OF 004 
 
 
to the economic slowdown in the U.S. 
 
GARZA