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FM AMEMBASSY MEXICO
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RUEHRC/DEPT OF AGRICULTURE WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEHC/DEPT OF LABOR WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
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RHMFIUU/CDR USNORTHCOM PRIORITY
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UNCLAS SECTION 01 OF 06 MEXICO 007032 
 
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 INTERNATIONAL 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 ECPS ELAB EFIN PGOV PREL MX
SUBJECT: MEXICO ECONOMIC NOTES, DECEMBER 14 - DECEMBER 20 
2006 
 
 
Summary 
------- 
 
¶1. (U) The revenue portion of the budget was first approved 
by the Chamber of Deputies and then the Senate though the 
Senate rejected the specific provision regarding the soft 
drink tax.  However, this will probably not prevent the 
elimination of the discriminatory 20 percent tax on beverages 
sweetened with anything other than cane sugar.  The Senate 
also modified the portion on tax deductions for new autos. 
Finance Secretary Augustin Carstens defended the new taxes, 
saying they are necessary to avoid future fiscal deficits. 
Secretary of Communication and Transportation Luis Tellez 
 
SIPDIS 
announced that the majority of SCT's budget will go to 
infrastructure development. More fixed line phone providers 
have agreed to join the calling party pays program.  Cofetel 
has announced advances bringing Mexico closer to services 
allowed for in the Convergence Accord.  Public debate 
continues over a possible third television channel in Mexico. 
 China has surpassed Mexico as America's second largest 
trading partner.  Japanese companies are looking to increase 
investments in Mexico.  The high level appointment of a 
relative of the teachers' union president has drawn 
criticism.  The peso fell as remittances from the U.S. 
decreased. End Summary. 
 
-------------- 
Budget Battles 
-------------- 
 
Chamber of Deputies Approves Revenue Law 
---------------------------------------- 
 
¶2. (U) The lower house of Congress approved the income side 
of the 2007 federal budget December 18, unanimously adopting 
a MXP 2.264 trillion (about USD 208 billion) package that 
included a new 5 percent tax on soft drinks and a gradually 
escalating tobacco tax.  The Chamber of Deputies approved the 
same government income figure sent up by its Finance 
Committee.  This amount was MXP 30.7 billion (USD 2.8 billon) 
more than that called for in President Felipe Calderon's 
proposed budget. The increase could facilitate the 
restoration of education funding that Calderon had sought to 
cut.  Income and sales taxes will account for about MXP 1.5 
trillion of the revenue flowing into the government treasury 
next year, including from taxes on gasoline, alcoholic 
beverages, tobacco products and vehicle ownership.  Another 
MXP 700 billion will come from non-tax sources, mostly social 
security premiums and profits from PEMEX. The PEMEX income 
estimate is based on a barrel price of USD 42.80.  The bill 
passed 425 to 0 with one abstention. The unanimous vote came 
17 days after the top two political parties in the Congress - 
PAN and PRD - came to blows on the Chamber floor.  "This 
shows that the (current) legislature has the will to arrive 
at agreements that the country needs," said Chamber president 
Jorge Zermeno, a PAN member. 
 
Senate Rejects Soft-Drink Tax, Likely to Comply with WTO 
--------------------------------------------- ------------- 
 
¶3. (U) The Senate approved the Revenue Bill December 20 but 
rejected the 5 percent tax on soft drinks. PRI and PRD 
senators assembled 73 votes versus the PAN's 55 to defeat the 
proposal.  The beverage tax now returns to the lower chamber, 
where deputies have three options 1)negotiate with the Seane 
to keep the 5 percent tax (unlikely); 2) negotiate with the 
Senate a reduced rate of 2.5 or 3 percent, or 3) eliminate 
the proposed tax altogether.  The second and third options 
would mean that additional revenue would have to be found 
elsewhere.  A top staffer of the lower House Finance 
 
MEXICO 00007032  002 OF 006 
 
 
Committee assured Econoffs that, regardless of the final 
level of the soft drink tax, the discriminatory 20 percent 
tax on beverages sweetened with anything other than cane 
sugar (e.g., high fructose corn syrup or beet sugar) would 
certainly be repealed, in keeping with Mexico's WTO 
obligations.  In fact, the Senate hold on the beverage tax 
provision made no mention of the elimination of the 
discriminatory 20 percent tax, indicating that at present 
this is not a point of contention between the two Chambers. 
This could change during negotiations, but right now the 
outlook is good. 
 
Senate Modifies New Tax Deduction Limits Amid Complaints for 
Auto Industry 
--------- 
 
¶4. (U) As part of their revisions to the revenue bill, the 
Senate modified the provision that decreased the value limit 
for which income tax deductions could be claimed for new car 
purchases.  The original modification, included by the 
Secretariat of Finance in the 2007 budget, lowered the 
 
SIPDIS 
deduction restriction to cars valued at more than 150,000 
MXP, from the previous level of 300,000 MXP.  The Senate plan 
raised the restriction limit to vehicles valued at more than 
175,000.  Last week, the Presidents of the Mexican Dealers 
Association (AMDA) and the Mexican Automobile Industry 
Association (AMIA) met with Jorge Estefan, Chair of the 
Finance Committee of the Chamber of Deputies to express 
concerns regarding the restriction on income tax deductions 
for new vehicle purchases.  AMIA and AMDA reported 53 percent 
of the vehicles sold in Mexico are valued within the 150,000 
to 3000,000 MXP range and that the average value of 
domestically produced vehicles is 150,000 MXP since more 
expensive care are usually imported. The organizations 
alleged that the provision would result in diminished demand 
and necessitate a 20 percent decrease in national production. 
 
Carstens: Reform or Deficit 
--------------------------- 
 
¶5. (U) Speaking at a conference in Mexico City, Finance 
Secretary Agustin Carstens said 2006 was an "extraordinary" 
 
SIPDIS 
economic year because oil prices exceeded budget estimates. 
He stressed that new taxes and better tax collection are 
needed to make up for lost oil revenue, and waning demand for 
Mexican exports as the U.S. economy slows.   Carstens is 
seeking support for new taxes and better collection after 
industry groups have said they would block such measures. "In 
Latin America, only Guatemala has lower tax revenue than 
Mexico," Carstens said. "It is going to be a priority of this 
administration to make an effort to increase tax revenue in 
order to reduce our vulnerability on oil revenue and 
establish a base for development." Carstens said the 2007 
budget's 50 percent increase in security spending is 
justified because it helps lure investment, which boosts 
employment. Mexico's need to diversify away from oil revenue 
will increase during 2007 as prices for the country's crude 
mix falls and production declines. The country's 2006 budget 
plan estimated Mexico's crude mix would average USD 36 per 
barrel. The average for the year will probably reach USD 53 
per barrel, Carstens said.  The 2007 budgets estimates an 
average Mexican crude price of USD 5.5 lower than USD 48 
suggested by futures contracts, he said. The government 
expects oil revenue to drop to 7.3 percent of GDP in 2012 
from 8.3 percent in 2007.  Carstens has also stated that the 
proposed taxes for 2007 will not have a recessionary impact 
on the economy since the additional collection, is marginal 
compared to the MXP 2.3 billion budget.  Carstens asserted 
that without reforms, the fiscal deficit could reach 3 
percent of GDP by 2012.  The recently ratified Under 
 
MEXICO 00007032  003 OF 006 
 
 
Secretary of Income, Fernando Sanchez Ugarte, acknowledged 
 
SIPDIS 
that the tax system in Mexico is complicated and that it has 
to be simplified.  The Mexican Institute of Finance 
Executives argued that the tax proposals planned by the 
Executive branch only target the same honest taxpayers and 
have a nega 
tive impact on investment and creation of jobs. 
 
Infrastructure: Priority for Secretariat of Communications 
and Transportation 
------------------ 
 
¶6. (U) Secretary of Communications and Transportation Luis 
Tellez announced that most of the 2007 Secretariat of 
Communications and Transportation (SCT) budget will be 
channeled to infrastructure projects.  Of the MXP 27.56 
billion allocated to the Secretariat, 68.5 percent will be 
used for the construction and modernization of 927.3 km of 
highways.  Under Secretary of Infrastructure, Oscar de Buen, 
said that the public investment will be complemented by 
investment from private sources with approximately MXP 16.34 
billion will be assigned to either private sector concessions 
or the service lending scheme Proyecto Para Prestactions de 
Servicio(PPS).  Under Secretary of Transportation, Manuel 
Rodriguez Arregui, disregarded rumors of the construction of 
a new international airport terminal.  He says that with the 
expansion of Mexico City's airport, the existing airports are 
enough to meet demand and that Transportation's priorities 
will be Punta Colonet, the Suburban Train, Tran-seismic 
Corridor, and the renewal of trucks.  Tellez confirmed that 
he is in talks with the U.S. on opening the border to 
trucking. 
 
------------------ 
Telecommunications 
------------------ 
 
Calling Party Pays 
------------------ 
 
¶7. (U) Alestra and Maxcom decided to join Long Distance 
Calling Party Pays beginning o/a December 16.  According to 
the agreement reached by the companies, interconnection fees 
will be gradually reduced over four years, from 1.34 pesos 
per minute in 2007, to 1.21 in 2008, 1.09 in 2009, and 1 peso 
per minute in 2010.  In return, the companies will withdraw 
the injunctions they had filed against the plan, which went 
into effect on November 4, 2006.  It is expected that 
Telefonica, as well as Avantel-Axtel, will also reach an 
agreement to join the scheme soon.  Marcatel has announced 
that for now, it won't subscribe to any agreement.  The fixed 
line companies opposed the plan because they claimed the 
interconnection fees to be charged by cell phone providers 
were too high. 
 
Convergence Agreement 
--------------------- 
 
¶8. (U) Two Cofetel announcements this week brought Mexico 
closer to triple play services under the Convergence Accord 
published in October 2006.  First, Cofetel issued a 
resolution on rules of number portability.  Number 
portability should be implemented during the second half of 
2007 by Telmex, and at the end of the year by other 
companies, including Telcel.  Implementation will be based on 
the consultation of a common database by telephone operators. 
 It is expected that the industry will have to invest around 
USD 300 million.  Jose Luis Peralta, one of Cofetel's 
commissioners, explained that the consumer might have to pay 
a fee to keep the number when switching companies.  However, 
 
MEXICO 00007032  004 OF 006 
 
 
he explained that companies won't charge any fee to recover 
the investment made.  Telmex will have to implement the 
number portability before any other company in order to 
comply with the Convergence Agreement.  Telmex is also 
required to comply with rules on interconnection and 
interoperability, though Cofetel is not expected to meet the 
deadline for issuing guidelines on interconnection.  Cofetel 
also announced that it has found no legal grounds to oblige 
Telmex to pay for the right to provide video services. 
Former Secretary of Finance Francisco Gil Diaz proposed 
during the debate over the Convergence Accord that Telmex 
should pay for this right in order for the government to 
benefit from the profits Telmex will make once its concession 
is modified. One of Cofetel's commissioners, Eduardo Ruiz 
Vega, said that Cofetel sent its opinion to the new 
Secretariat of Finance, which will now have to determine 
 
SIPDIS 
whether Telmex has to pay or not. 
 
Debate over Third Television Channel 
------------------------------------ 
 
¶9. (U) The debate over whether Mexico should open the 
television market to a third channel continued this week. The 
new head of the Secretariat of Communications and 
Transportation, Luis Tellez, sent mixed signals as media 
reported he used a secret meeting to order Cofetel to start 
looking into the steps needed to allow a third channel, and 
to work with the SCT to take on duopolists Televisa and TV 
Azteca.  Cofetel commissioners denied the report.  In his 
first press conference as minister of the SCT, Tellez told 
reporters that Calderon had not promised to grant a license 
for a third TV company.  He explained that in his 100 
commitments, Calderon promised to bid TV and radio 
frequencies in different cities, but he didn't talk about a 
third broadcasting company.  However, Tellez said that the 
Mexican government would be willing to authorize greater 
"foreign" participation in the telecommunications sector as 
long as the U.S. did the same for Mexican companies.  During 
the conference, Del Villar asserted that the basis for 
telecom public policy is: "competition, coverage, and 
convergence".  The debate also reached the Senate, where on 
December 15 Senator Javier Orozco, a member of the 
Communications and Transportation Committee, said that U.S. 
company General Electric's participation in Palmas 26 (a 
collaboration between GE and Mexican Isaac Saba's Grupo Xtra 
to enter the Mexican television market) should be strictly 
inspected.  On December 18, several senators called for more 
competition in the sector, saying that there is room for a 
third company in order to eliminate the existing duopoly. 
PRI Senator, Rafael Alejandro Moreno, said that to authorize 
a third company could mean an exorbitant increase in money 
spent on political campaigns.  For its part, the Secretary of 
Governance commented that all talk of a third channel is pure 
speculation at this point, saying "We must allow time to know 
what kinds of opportunities really exist for a new channel." 
 
-------------- 
All About Asia 
-------------- 
 
China Passes Mexico in U.S. Trades 
---------------------------------- 
 
¶10. (U) China passed Mexico as the second-largest U.S. 
trading partner in the first 10 months of this year. China's 
rise indicates a relative decline for Mexico. China's trade 
with the United States is on pace to quadruple from the total 
in 1998, while Mexico's trade with the U.S. is up less than 
50% over that same time period. 
 
 
MEXICO 00007032  005 OF 006 
 
 
Japan Looks for Mexican Investments 
----------------------------------- 
 
¶11. (U) Thanks to the economic association agreement signed 
in 2005, Mexico will receive more Japanese investment.  Honda 
is evaluating the possibility of expanding its operations in 
Mexico.  According to the Mexican branch of the Japanese 
External Trade Organization (Jetro), several Japanese 
companies are currently performing feasibility studies to 
decide whether to invest more in the country.  After the 
agreement was signed, Nissan invested USD 800 million in its 
Aguascalientes plant, Bridgestone invested USD 220 million in 
its Monterrey factory, and Toyota channeled USD 37 million to 
expand its plant in Baja California.  Jetro said Japanese are 
waiting to see what Calderon's industrial promotion policy 
will be.  Jetro also asserted that with the strengthening and 
deepening of NAFTA, Japanese companies tend to see the region 
as an integrated market when they analyze the future of their 
investments.  Jetro believes that Mexico could be capable of 
attracting research and development centers, but only if the 
country improves its education system. 
 
---------------------------------------- 
New Housing Plan to Help Poorest Workers 
---------------------------------------- 
¶12. (U) On Monday, Calderon announced that the government's 
principle housing assistance program will give top priority 
to the poorest workers. "Our housing program will have an 
eminently social character," Calderon said. "We want to put a 
large subsidy program into effect so that the families that 
earn less than three times the minimum daily salary will be 
able to build a house, improve their existing home, or 
acquire an apartment." Calderon said his administration would 
seek to double the annual number of housing credits delivered 
through housing program Infonavit, setting a goal of 6 
million credits for his six-year administration. That number, 
however, would include participation from the private sector. 
"By the year 2030, we have to build as many housing units as 
were built in the entire 20th century," he said. 
 
------------------------------------------ 
Teacher's Union Gains Friend in High Place 
------------------------------------------ 
 
¶13. (U) The National Teacher's Union (SNTE) has been the 
focus of considerable attention recently because of their 
alleged influence on Mexico's education policy. The most 
recent accusations have to do with the appointment of Jose 
Francisco Gonzalez Sanchez as Undersecretary for Basic 
Education.  Gonzalez Sanchez is the son-in-law of SNTE 
president Elba Esther Gordillo, who in her own right has been 
the focus of attention due to the alleged wealth she has 
amassed while serving as leader of the organization.  While 
Gonzalez Sanchez does have background in Basic Education, 
journalist have noted that he has in the past acted as the 
political link between Calderon and his mother-in-law. 
 
--------------------------------------------- ------- 
Peso Falls as Remittances Ease During Holiday Period 
--------------------------------------------- ------- 
 
¶14. (U) The peso had one of the sharpest weekly declines 
falling 0.4 percent to 10.8225 pesos per U.S. dollar on 
December 18.  Earlier, it weakened as much as 0.5 percent, 
the biggest one-day decline since Dec. 7.  The decrease is 
partly due to slowing inflows of dollars from Mexicans 
working abroad.  Remittances dropped after their sharp rise 
during the first half of the month helped fuel a 1.4 percent 
increase in the peso. (Comment: Remittances for the month 
were likely sent earlier than usual to be available for use 
 
MEXICO 00007032  006 OF 006 
 
 
during the holiday season. End Comment.) During the first 
nine months of 2006, remittance flows had spurred a surplus 
of USD 628 million in Mexico's current, reversing a deficit 
in 2005. Mexico's currency was also driven lower on December 
18 by declining prices for oil. Oil dropped 1.9 percent to 
USD 62.21 per barrel as warmer-than-normal weather in the 
U.S. curbed heating fuel consumption. The yield on the 
Mexico's 8 percent peso bond due in December 2015 rose 3 bond 
points to 7.55 percent, its highest since Dec. 5. The price, 
which moves inversely to the yield, fell 0.19 centavos to 
102.93 centavos per peso. 
 
 
 
 
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