VZCZCXRO6782
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #0529/01 0331815
ZNR UUUUU ZZH
P 021815Z FEB 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 5200
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 MEXICO 000529 
 
SIPDIS 
 
SENSITIVE 
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, CYNTHIA PENDLETON 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ELAB PGOV PINR MX
SUBJECT: KEY MEXICAN LEADERS AND ACADEMICS DISCUSS ECONOMIC 
POLICY 
 
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Summary 
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¶1. (SBU) Two GOM ministers, Bank of Mexico (BOM) Governor 
Guillermo Ortiz, and leading experts discussed the future of 
economic policy in Mexico and key economic challenges at 
seminar hosted by the Autonomous Technological Institute of 
Mexico (ITAM) on January 11, 2007.  Finance Secretary Agustin 
Carstens said Mexico will probably not have to make any 
adjustments to the budget this year because of lower oil 
prices, but noted the importance of fiscal reform to reduce 
the government's reliance on oil-related revenues.  Carstens 
said that the administration plans to begin negotiations on a 
fiscal reform soon.  He also highlighted the importance of 
"translating" recent economic growth into poverty 
alleviation.  Ortiz said inflation would remain relatively 
high during the first half of the year, but then fall during 
the second half.  He said that the recent increase in prices 
is temporary, but emphasized the importance of these shocks 
not contaminating inflation expectations.  Participants also 
highlighted the need for pension reform, noting the fast rate 
at which Mexico's population is aging.  Secretary of 
Communications and Transportation Luis Tellez spoke about the 
need to address globalization and migration issues and the 
need for better infrastructure to meet the demands of 
increasing foreign trade.  ITAM professor Jesus Silva Herzog 
said that the prospects for getting reforms though Congress 
are better under President Felipe Calderon than they were 
under the previous administration.  He added that Calderon's 
initial "signals" have been encouraging.  End Summary. 
 
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Finance Secretary Calls for Reforms and Poverty Alleviation 
--------------------------------------------- -------------- 
 
¶2. (SBU) Speaking at a seminar held at the Autonomous 
Technological Institute of Mexico (ITAM) on January 11, 
Finance Secretary Carstens said that the Mexican economy will 
face a moderate slowdown this year due to slower growth in 
the U.S. and lower oil prices.  He believes Mexico will be 
able to weather a U.S. economic slowdown through strong 
domestic demand, robust consumption, additional investment in 
the construction sector, and prudent fiscal and monetary 
policies.  Carstens said that if there is a large, sustained 
drop in oil prices, the government would have to cut 
spending, but he does not foresee the need to make any 
adjustments this year.  He explained that the government has 
built mechanisms into the 2007 federal budget to help absorb 
the shocks associated with volatile oil prices.  He said that 
the recent fall in oil prices highlights the need for Mexico 
to advance fiscal reform and to confront the challenges 
facing Pemex. 
 
¶3. (SBU) Carstens announced that in the coming weeks the 
administration would begin negotiations with Congress and the 
states for a comprehensive fiscal reform.  He said that 
measures in the 2007 federal budget -- such as the reduction 
of the income tax from 29% to 28%, the tax hike on tobacco 
products, and the scaling back of tax deductions on new cars, 
assets, and consumption in restaurants -- are "steps in the 
right direction."  According to Carstens, a comprehensive 
fiscal reform should improve tax collection, cut back on tax 
exemptions, diversify income sources so the government is 
less dependent on oil, and address the public pension system. 
 Carstens criticized generous tax deductions and exemptions, 
which allow companies to significantly reduce the amount of 
income on which they have to pay taxes.  For him, liabilities 
from the public pension system and long-term infrastructure 
investment projects called "Pidiregas" represent the largest 
sources of pressure on public finances. 
 
¶4. (SBU) Carstens acknowledged that Mexico needs to 
"translate" recent economic growth into poverty alleviation. 
To reduce poverty -- a key government objective -- Carstens 
said that Mexico needs to increase the "capacity" of the 
 
MEXICO 00000529  002 OF 003 
 
 
individuals, create employment, and invest more in food, 
health, and educational programs.  As a way to help reduce 
income inequality, Carstens called for better infrastructure 
in southern Mexico to link this region with the rest of the 
country.  Development banks will help extend credit to small- 
and medium-sized businesses and to the agricultural sector. 
 
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BOM Governor Discusses Interest Rates and Inflation 
--------------------------------------------- ------ 
 
¶5. (SBU) Bank of Mexico (BOM) Governor Ortiz sees two main 
risks to the Mexican economy:  the slowdown in the U.S. 
construction sector and the drop in demand and output of the 
automobile sector.  Ortiz said that in general the economic 
outlook for Mexico is good, and that inflationary pressures 
in the U.S. are receding due to the fall of energy prices. 
Given existing levels of global liquidity, he does not expect 
other central banks to further tighten monetary policy. 
Ortiz does not expect 2007 to be a repeat of 2001 in terms of 
slowed economic growth, citing the growth in housing and 
consumption credit and the strength of domestic consumption. 
 
¶6. (SBU) Ortiz blamed the recent hike in tortilla prices on 
speculation, noting that this pushed up core inflation in 
late 2006 and early 2007.  Ortiz asserted that corn 
distribution in Mexico is not competitive.  The 4.05% 
inflation seen in 2006 was due to increases in tomato, sugar, 
and corn prices.  He explained that these inflationary shocks 
were temporary, but emphasized the importance of these shocks 
not contaminating inflation expectations.  He said inflation 
would remain relatively high during the first half of the 
year, but then fall during the second half.  Ortiz also 
called for labor, energy, and fiscal reforms. 
 
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Speakers Highlight Need for Pension Reform 
------------------------------------------ 
 
¶7. (SBU) Moises Schwartz, the head of the National Retirement 
Funds Commission (CONSAR), said that the population in Mexico 
was aging at a faster rate than many developed countries.  By 
2030, 17% of the Mexican population will be older adults, and 
by 2050, the population pyramid will begin to invert.  This 
shift in the age structure will put even more strain on 
public finances and the pension system.  In the mid-1990s, 
Mexico passed a reform that created individual retirement 
accounts for private sector employees enrolled in Mexico's 
main pension system, the Mexican Social Security Institute 
(IMSS).  Schwartz noted that, nevertheless, the Government 
Workers' Social Security and Pension Institute (ISSSTE), 
IMSS, the Federal Electricity Commission, Pemex, public 
universities, and state and local government officials are 
still under the old defined-benefit plan.  More than 3.5 
million government employees are still under the old plan. 
The challenge for the new administration will be passing a 
reform that balances assets with existing liabilities and 
creating a National Pensions System.  Schwartz said that 
there is also a need to simplify the system, promote more 
voluntary contributions, and provide more information on the 
different funds and on commissions.  He said funds need to 
diversify even more.  While they are investing more in 
long-term bonds, funds continue to invest heavily in 
government paper. 
 
¶8. (SBU) Javier Berinstain, Director General of Afore XXI and 
creator of the 1996 reform, said that future reforms should 
take into consideration older people who do not have a 
pension, those who do not have a pension because they work in 
the informal economy, and those whose pensions are too small 
to be considered "dignified."  He suggested that reforms 
should move towards a funded capitalization system. 
Berinstain said reforms were largely a political issue, in 
which some will lose (e.g. employees of IMSS and Pemex), but 
the rest of the population will gain.  He said it will have 
to be a joint effort where public sector workers increase 
 
MEXICO 00000529  003 OF 003 
 
 
their contributions and private sector employees help pay 
existing liabilities. 
 
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SCT Secretary Talks About Infrastructure and Telephones 
--------------------------------------------- ---------- 
 
¶9. (SBU) Secretary of Communications and Transportation Luis 
Tellez spoke about the need to address globalization and 
migration issues and the need for better infrastructure to 
meet the demands of increasing foreign trade.  He said the 
new administration will face the following challenges: 
regulating airports to make their fees and services more 
competitive, improving railway interconnections and 
regulations, improving the conditions of highways, and using 
highways and railways to better connect ports to urban 
production centers. 
 
¶10. (SBU) Tellez said that along with Cofetel, SCT will look 
to have more competition and more access to broadband. 
Tellez said that telephone rates have fallen since 1998, but 
acknowledged that they were still high. 
 
--------------------------------------------- --- 
Analysts Discuss Calderon's First Steps, Reforms 
--------------------------------------------- --- 
 
¶11. (SBU) ITAM professor Jesus Silva Herzog said that the 
prospects for getting reforms though Congress are better 
under Calderon than they were under former President Vincente 
Fox.  Silva Herzog said that the "signals" Calderon has sent 
so far are encouraging, and that they show determination and 
strength.  Since his first day in office, Calderon has shown 
that he plans to maintain order and lead a cohesive team. 
Silva Herzog praised the new government's work fighting drug 
trafficking and organized crime, saying that this was clearly 
Calderon's top priority.  That said, he noted a lack of 
progress on other fronts (e.g. fiscal and labor reform), 
saying that he did not even know what Calderon's second and 
third priorities were.  He believes it would be a good sign 
if the administration followed through on its plan to begin 
serious discussions on fiscal reform. 
 
¶12. (SBU) Jorge Chavez Presa -- former advisor to PRI 
presidential candidate Roberto Madrazo -- called for an 
energy policy that would increase Mexico's capacity to refine 
oil, explore and exploit natural gas, and produce 
petrochemicals.  He said that talk of privatization should be 
changed to talk about "timely supply at lower costs." 
 
 
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