VZCZCXRO6036
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #7111/01 3622248
ZNR UUUUU ZZH
P 282248Z DEC 06
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 4754
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 MEXICO 007111 
 
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, CINDY PENDLETON 
 
E.O. 12958: N/A 
TAGS: ECON ECPS ELAB EFIN PGOV PREL MX
SUBJECT: MEXICO ECONOMIC NOTES, DECEMBER 21 - DECEMBER 28, 
2006 
 
REF: A. MEXICO 7064 
 
     ¶B. MEXICO 7049 
 
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Summary 
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¶1. (U) Mexico's 2007 federal budget has been approved by the 
Mexican Congress and published in the Official Gazette.  The 
US$208-billion budget largely reflects President Felipe 
Calderon's initial proposal, but Congress edged up funding 
for education, highways, and pensions in rural areas, while 
cutting funding for the judiciary, Congress, and several 
government-owned companies.  A local research center says 
that the Senate's refusal to approve a 5-percent tax on soft 
drinks shows that it will be difficult to reach consensus on 
fiscal reform.  On the positive side, opposition lawmakers 
praised Finance Secretary Agustin Carstens' willingness to 
listen and negotiate effectively during the budget process. 
As part of the budget approval process, Mexico has now 
complied with a WTO ruling and eliminated a discriminatory 
20-percent tax on beverages sweetened with anything other 
than sugar cane.  Despite the show of political unity in 
Congress' approval of the budget, peso bonds declined due to 
expectations that the Bank of Mexico may hold off cutting 
interest rates next quarter as it waits for further signs 
inflation is slowing.  Mexico's trade deficit widened in 
November to its highest level in almost two years (US$1.57 
billion) as strong economic growth spurred imports ahead of 
the Christmas holiday.  In a sign of continuing growth in the 
banking sector, the Secretariat of Finance gave final 
authorization to UBS Bank Mexico to operate in Mexico. 
Finally, despite complaints from at least one U.S. airline, 
Mexican airport authorities told the Embassy that Mexico City 
airport's new baggage handling system is not causing delays. 
End Summary. 
 
Mexico's 2007 Federal Budget is Approved 
 
¶2. (U) As reported in Ref A, the Chamber of Deputies gave 
final approval to Mexico's US$208-billion budget package on 
December 23.  President Felipe Calderon's initial budget 
proposal passed largely intact, though lawmakers scrapped a 
new 5-percent tax the administration wanted to impose on soft 
drinks, and it edged up funding for education, highways, and 
pensions in rural areas.  To help offset these plus ups, 
Congress dipped into Mexico's Oil Stabilization Fund and 
decreased funding to the judiciary, the state oil company, 
Congress, the Federal Electricity Commission, and the Federal 
Electoral Institute.  As reported in Ref B, when Congress 
passed the revenue component of the budget on December 21, it 
eliminated the discriminatory 20-percent tax on beverages 
sweetened with anything other than sugar cane.  The budget 
package has been signed by Calderon and published in the 
Official Gazette.  On December 27, Calderon praised lawmakers 
for the responsibility they showed during the budget process. 
 
Local Research Center Sees Difficult Future for Fiscal Reform 
 
¶3. (U) The Private Sector Economic Studies Center (CEESP) 
said publicly that it believes reaching agreement on fiscal 
reform will be difficult, noting that the Senate's refusal to 
approve the 5-percent tax on soft drinks shows that lawmakers 
are still unwilling to tax consumption instead of income. 
CEESP's analysts criticized how the government relies on 
crude oil revenues to increase social spending, rather than 
finding alternate revenue sources.  On the positive side, 
opposition lawmakers publicly praised Finance Secretary 
Agustin Carstens' willingness to listen and negotiate 
effectively during the budget process.  The government's 
ability to work with Congress will undoubtedly be key to 
securing passage of much-needed economic reforms. 
 
MEXICO 00007111  002 OF 002 
 
 
 
Finance Secretariat Authorizes a New Bank 
 
¶4. (U) The Secretariat of Finance gave final authorization to 
UBS Bank Mexico to operate in Mexico.  The bank has 
subsidiaries in more than 40 countries, including the U.S. 
 
Bonds Fall, Trade Gap Widens to Two-year High 
 
¶5. (U) Peso bonds declined on expectations that the Bank of 
Mexico (BOM) may hold off cutting interest rates next quarter 
as it waits for further signs inflation is slowing. 
Speculation that the BOM will wait until the second quarter 
of 2007 to cut its benchmark rate picked up after a report 
last week showed consumer prices in the first half of 
December rose more than economists expected.  Policymakers in 
May stopped nine straight months of reductions that brought 
the benchmark lending rate down to 7 percent from 9.75 
percent in 2005.  The yield on Mexico's benchmark 8-percent 
bond due in December 2015 rose 3 basis points, or 0.03 
percentage points, to 7.50 percent. 
 
¶6. (U) Mexico's trade deficit widened in November to its 
highest level in almost two years as strong economic growth 
spurred imports ahead of the Christmas holiday.  Mexico 
posted a trade deficit of US$1.57 billion, the Finance 
Secretariat said in a public trade report, compared with a 
 
SIPDIS 
deficit of US$1.23 billion in November.  Economists had 
expected a trade deficit of US$1.83 billion, according to 
estimates in a recent Bloomberg survey. 
 
Mexico City Airport's Baggage Handling System Functioning 
 
¶7. (U) In response to urgent queries from the State 
Department Economic and Business Bureau (EB) about reports 
from U.S.-based airlines of chaotic baggage handling 
conditions at Mexico City's airport, Post contacted Mexican 
airport authorities.  Airport officials quickly responded to 
Post's inquiries, saying that the baggage belt had 
malfunctioned in the high volume week before Christmas but 
that the problem had been resolved the same day.  Regarding 
airline complaints that a new baggage screening system at the 
airport was causing massive delays, Mexican airport officials 
said that while there have been some delays, in general the 
system (which has been operating at 100% since November) is 
working.  The system, they say, is the same used by the 
Transportation Security Administration (TSA) in the United 
States.  Airport officials requested more information about 
the problems airlines have had.  Mexican airport authorities 
invited Econoff and a TSA representative for a tour of the 
new system, while welcoming ideas from the USG on how to make 
the system more efficient.  The Embassy has requested more 
information from EB regarding the specifics of the 
complaints.  There has been no media coverage of delays at 
the airport due to the new baggage system or other problems. 
 
 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity 
BASSETT