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PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #3266/01 1731618
ZNR UUUUU ZZH
P 221618Z JUN 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 7594
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
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
RHMFIUU/CDR USSOUTHCOM MIAMI FL PRIORITY
RHMFIUU/CDR USNORTHCOM PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

UNCLAS SECTION 01 OF 04 MEXICO 003266 
 
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/GWORD 
USDOC FOR ITS/TD/ENERGY DIVISION 
TREASURY FOR IA (ALICE FAIBISHENKO) 
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND ALOCKWOOD 
STATE PASS TO USTR (EISSENSTAT/MELLE) 
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA) 
NSC FOR DAN FISK 
 
E.O. 12958: N/A 
TAGS: EAGR ECON ECPS EFIN ELAB ENRG ETRD KIPR MX
PGOV, PREL, SCUL 
SUBJECT: MEXICO ECONOMIC NOTES, JUNE 2 - JUNE 22 
 
Summary 
------- 
 
¶1.  (SBU) Reaction to the Calderon Administration's release 
of its fiscal reform proposal was mixed.  Consumer price 
inflation fell 0.49% in May, resulting in a reduced annual 
inflation rate of 3.95%.   Opening of corn, bean, milk and 
sugar markets under NAFTA scheduled for January 2008 may not 
have as negative an effect on farmers as had been previously 
thought, according to one local analyst.  The CROC union 
(Revolutionary Confederation of Workers and Peasants/ 
Farmers) may be planning to sever its longstanding ties to 
the Institutional Revolutionary Party (PRI).  The U.S film 
industry may support PRD Senator Maria Rojo's proposal for a 
one peso tax on movie tickets to help support Mexican film 
producers if that would help win her support on passing 
legislation to stiffen IPR enforcement.  Cofetel, the Mexican 
telecom regulator, published rules on number portability 
while legislators proposed allowing 100% foreign ownership of 
firms in the telecom sector.  Energy committee chair 
Labastida called for less government control over Pemex.  End 
summary. 
 
Reaction Mixed to Tax Measures 
------------------------------ 
 
¶2.  (U) Reaction to the Administration's release of its 
fiscal reform proposal was mixed.  The proposal introduces an 
alternative minimum tax on businesses and individuals, adds a 
2% "informal economy" tax on cash bank deposits over about 
USD 1800 per month, and a 20% tax on gambling winnings. 
Additionally, to gain support from opposition parties, the 
proposal allows for the creation of state taxes on products 
including gasoline and alcohol.  Administration experts 
expect the measures will increase collection from 10% of GDP 
to 13% by 2012.  The state tax provisions as well as the 
omission of taxes on consumption will help win support from 
PRI and PRD legislators.  Local markets remained 
unenthusiastic about the new measures, dropping 1.6% the day 
after it was announced.  Business organizations called the 
measures insufficient.  Finance Secretary Carstens offered a 
mild defense of the measures calling them "not incomplete." 
The government hopes the measure will be approved this summer 
during an extraordinary session of Congress so the measures 
can be included in the President's 2008 federal budget 
proposal, which is due to the Chamber of Deputies on 
September 8. (See Mexico 3246) 
 
May Inflation Fell 
------------------ 
 
¶3. (U) Consumer price inflation fell 0.49% in May, resulting 
in a reduced annual inflation rate of 3.95%.  A Bank of 
Mexico report said that the prices of electricity, onions, 
and limes dropped reducing overall consumer prices.  Some 
analysts believe that the decline in the annual inflation 
rate damped speculation that the central bank will raise 
interest rates for a second time this year.  Yet, there is 
still concern that inflation will rise due to worldwide rises 
in interest rates, thereby making emerging market assets like 
Mexican stocks and bonds less attractive to investors.  Core 
inflation in Mexico for May rose 0.22% to reach an annual 
rate of 3.73%. 
 
Economist Worried About Competitiveness, Not NAFTA 
--------------------------------------------- ----- 
 
¶4. (SBU) At an AmCham briefing on whether the full NAFTA 
opening of corn, bean, milk and sugar markets scheduled for 
January 2008 presented a threat or an opportunity to the 
Mexican countryside, Dr. Ken Shwedel, the Director of 
 
MEXICO 00003266  002 OF 004 
 
 
Analysis for the Dutch agro-industrial bank Rabobank, 
downplayed the potential for negative economic impact on 
Mexico's farmers.  Shwedel pointed out that many of the 
country's communal producers (generally the poorest of 
Mexico's farmers, and the ones NAFTA critics predict will be 
hardest hit by the full liberalization of corn and beans) no 
longer depend on agriculture for the majority of their 
income, with those from the smaller communes (less than 5 
farmers) reliant on non-agricultural economic activities and 
remittances for well over half of their income.  He also 
pointed out that most communal farmers grow food for their 
own (or very local) consumption and are not linked to 
national, let alone international, markets.  At the same 
time, Mexican agricultural imports and exports have grown 
steadily, helping keep food prices down and fostering 
competition for products like avocadoes, tomatoes, and 
processed foods and beverages. 
 
¶5. (SBU)  Nonetheless, Shwedel noted that Mexico's 
agricultural sector as a whole (i.e., including both the 
relatively efficient producers tied to domestic and 
international markets and the relatively backward small and 
communal producers more engaged in subsistence farming) has 
grown slower than the rest of the Mexican economy over the 
past dozen years, foreign investment in the sector has 
dropped off, and productivity growth has lagged behind that 
of neighbors like the U.S., Colombia, Costa Rica, and Chile. 
Even more worrying, despite overall growth in agricultural 
exports to the U.S., since 2002 Mexico has fallen behind 
China in terms of produce exports to the U.S. market. 
Shwedel then asserted that Mexico's corn market is in fact, 
if not in name, already open, and that U.S. corn crops will 
be more likely to end up as ethanol than to be exported to 
Mexico next year.  Similarly, he predicted very little 
economic shock to Mexico's bean and dairy sectors resulting 
from final NAFTA opening.  Shwedel concluded that Mexican 
farmers have very little to fear in economic terms on January 
1, 2008.  What they should be concerned about is the failure 
to use the long phase-in periods provided by NAFTA to raise 
competitiveness in the sector.  A follow-on speaker, Lynch 
Grattan of a local logistics firm, identified the poor state 
of Mexico's road system and the legal challenges of investing 
in communal areas as just two obstacles to developing a more 
modern agricultural sector. 
 
Is the CROC Preparing to Split from the PRI? 
-------------------------------------------- 
 
¶6.  (SBU) According to a press report from the northern 
Mexican State of Coahuila, the CROC labor union 
(Revolutionary Confederation of Workers and 
Peasants/Farmers), the third largest national level labor 
federation in Mexico, has begun to establish municipal 
political action type committees in various parts of the 
country.  CROC began as one of the various unions linked to 
Mexico's former ruling party, the PRI (Institutional 
Revolutionary Party) and the media report speculated that the 
newly formed committees are part of the CROC's ongoing 
efforts separate from the PRI and perhaps ultimately form its 
own political party.  A CROC official in Mexico City denied 
that the union was planning to leave the PRI and told post's 
Labor Counselor that the committees were a part of the CROC's 
long standing endeavor to enhance its ability to play an 
effective role in Mexican politics.  The media speculation 
that the CROC might be leaving the PRI is not outside the 
realm of possibility given that in Mexico's 2006 presidential 
election, the union's national leader openly supported the 
candidate of what is now the country's main opposition party, 
the PRD (Party of the Democratic Revolution).  Since then, 
the CROC has apparently returned to its PRI roots but 
speculation generated by the union's brief alliance with the 
 
MEXICO 00003266  003 OF 004 
 
 
PRD continues to show up in the press and in various labor 
circles. 
 
Film Industry Committee Discuss Quotas, Piracy 
--------------------------------------------- - 
 
¶7.  (SBU) U.S. and Mexican motion picture business 
representatives, together with a handful of Mexican officials 
and legislators, met June 18 for the 17th Meeting of the 
Bi-national Committee for Promotion of the Film Industry. 
One of the principal points of discussion was the fact that 
Mexican-made movies have a hard time finding space on the 
silver screen and store shelves even in Mexico.  A number of 
Mexican producers and directors attributed this problem to 
the fact that the major distributors -- all affiliates of the 
big U.S. studios -- and theater owners -- are unwilling to 
give local flicks a shot and instead cede the vast majority 
of screen and shelf space to foreign, and in particular 
American, movies.  They applauded policies in France, 
Argentina, and Canada that reserve a certain number of 
screens for domestic films.  Representatives of the 
distributors and theater owners replied that quotas are 
economically unsustainable, asserted that they have no 
prejudice against Mexican films, and added that they make 
decisions based solely on what consumers are willing to pay 
to see.  They pointed out that many Mexican film makers have 
little idea about the business side of the industry, and 
offered to put together training seminars to help sensitize 
them.  A number of the major U.S. studio representatives also 
pointed out that they are co-producing films here in Mexico. 
 
¶8.  (SBU) One issue on which nearly everyone in the room 
agreed was the horrible impact of piracy on the industry. 
Both Mexican movie makers and a representative of U.S. 
independent films stressed to econoff that their constituents 
are hit even harder by piracy than the big Hollywood studios, 
since in a shrinking legitimate market the available 
investment tends to flow to sure-fire blockbusters, leaving 
less to fund smaller, riskier projects.  Industry 
representatives from both countries took advantage of the 
presence of Mexican legislators at the meeting (including 
Maria Rojo, the chair of the Senate Culture Commission from 
the leftist opposition party PRD) to lobby for stronger IPR 
laws.  A U.S. participant told econoff after the meeting that 
the American film companies might support (albeit 
reluctantly) Senator Rojo's proposal for a one peso tax 
(about a dime) on box office tickets to help support Mexican 
film producers if that would help win her support on passing 
legislation to stiffen IPR enforcement. 
 
Number Portability Comes To Mexico 
---------------------------------- 
 
¶9.  (U) Cofetel, the Mexican telecom regulator, published 
rules that will allow both fixed and wireless Mexican telecom 
users to switch providers while retaining the same phone 
number.  Cofetel has up to 90 days to publish the technical 
specifications for the project in the Diario Official, 
followed by a 60 day period in which to hire a company to 
manage the number portability database.  Operators will pass 
some of the costs of the change to users.  Cofetel has also 
published quality guidelines that telecom operators must 
follow during the procedure.  Cofetel expects the system to 
be fully operational by the first quarter of 2008.  At a 
recent industry conference, Cofetel President Hector Osuna 
highlighted the announcement as evidence of the regulator's 
commitment to increasing telecom competition. 
 
Proposal to Open Telecom Sector to FDI 
-------------------------------------- 
 
 
MEXICO 00003266  004 OF 004 
 
 
¶10.  (SBU) Legislators from the PRI and "Convergencia" 
parties sent a proposal to the Economics Committee of the 
Chamber of Deputies that would allow 100% foreign ownership 
in Mexico's telecom sector, assuming the investors' country 
offers the same possibility to Mexican companies.  According 
to an industry expert, foreign investors would likely seek to 
acquire existing companies rather than deploy their own 
networks.  Using this logic, Axtel would become an attractive 
candidate for Spanish firm Telefonica, which has been trying 
to enter the Mexican fixed line market for many years.  The 
National Chamber of the Cable Television Industry (Canitec) 
and the Federal Competition Commission (CFC) have applauded 
the proposal indicating that increased competition in the 
sector would benefit Mexican consumers. 
 
Senate Energy Committee Chair on Reform 
--------------------------------------- 
 
¶11.  (U) At a June 13 Tec de Monterrey-sponsored seminar on 
Mexican energy reform, the chair of the Senate Energy 
Committee, Francisco Labastida told the audience that it was 
a mistake for the GOM to mandate oil production increases to 
boost government revenue, rather Pemex and the federal 
government must build petroleum infrastructure and improve 
technology.  Labastida also called for the creation of an 
autonomous oil and gas regulator.  The Senator is currently 
developing a first pass at energy reform legislation in 
cooperation with the Calderon Administration. 
 
 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity and the North American 
Partnership Blog at http://www.intelink.gov/communities/state/nap / 
GARZA