VZCZCXRO7333
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #5418/01 2841938
ZNR UUUUU ZZH
P 111938Z OCT 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 9185
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEHNSC/NSC WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUEHC/DEPT OF LABOR WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 MEXICO 005418 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR A/S SHANNON 
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH 
STATE FOR EB/ESC MCMANUS AND IZZO 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD 
USDOC FOR ITS/TD/ENERGY DIVISION 
TREASURY FOR IA (ALICE FAIBISHENKO, ANNA JEWEL) 
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND ALOCKWOOD 
NSC FOR RICHARD MILES, DAN FISK 
STATE PASS TO USTR (EISSENSTAT/MELLE) 
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA) 
 
E.O. 12958: N/A 
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: FISCAL REFORM AND OTHER ECONOMC DEVELOPMENTS IN 
MEXICO 
 
REF: MEXICO 5044 
 
¶1. (SBU) SUMMARY:  The Finance Secretariat is preparing a 
presidential decree that it says will "refine some of the 
details" of the recently passed fiscal reform package.  The 
decree will adjust the way inventories accumulated by yearend 
are treated, and gives special treatment to maquiladoras. 
The government published five of the seven components of the 
fiscal reform in the Official Gazette on October 1.  The two 
remaining parts pertain to federalism and constitutional 
reforms.  The former will be published in mid-December so the 
5.5% gasoline and diesel tax hike will come into effect on 
January 1, 2008, and the latter is in the process of being 
ratified in the state legislatures.  A Hacienda official told 
econoff that he does not see another tax reform during 
President Calderon's term.  Standard & Poor's on October 8 
upgraded Mexico's sovereign debt rating, citing an improved 
outlook for tax collection, a better debt profile, and the 
recent cooperation among political parties pushing reforms 
through Congress.  Consumer price inflation rose a slightly 
less-than-expected 0.78% in September, bringing the annual 
inflation rate to 3.79%.  The Chamber of Deputies will vote 
on the revenue portion of the 2008 budget package by next 
week.  END SUMMARY. 
 
Government To Issue Supplemental Decree on Fiscal Reform 
--------------------------------------------- ----------- 
 
¶2. (SBU) The Finance Secretariat (Hacienda) is preparing a 
presidential decree that will include new deductions for the 
Single Rate Corporate Tax (IETU), which will mainly benefit 
maquiladoras and the concessionaires of the highway system, 
according to local press reports.  A mid-level Hacienda 
official told econoff on October 10 that the decree is needed 
to "refine some of the details" of the recently passed fiscal 
reform package (see reftel).  He explained that the decree 
has two main parts.  First, Hacienda is going to adjust the 
way inventories accumulated by December 31, 2007 are treated. 
 Second, they are going to give special treatment to 
maquiladoras.  Agreement has been reached on the former 
initiative, but the latter is still under discussion.  The 
Hacienda official remarked that the decree will be published 
in the coming weeks. 
 
¶3. (SBU) This decree should come as no surprise to the 
private sector.  During an Ernst & Young-sponsored tax 
conference on September 25, companies called on Hacienda to 
clarify some aspects of the fiscal reform, including parts 
related to inventories and how companies will report fiscal 
losses before 2008.  At the conference, Ernst & Young 
representatives said they expected the government to issue 
changes and clarifications through decrees, reforms to tax 
laws, or changes to the "Miscelanea Fiscal" -- tax 
regulations that will be approved along with the budget 
package in November. 
 
Additional Tax Reforms on Hold Until Next Sexenio? 
--------------------------------------------- ----- 
 
¶4. (SBU) Despite the Finance Secretary's public calls for 
additional reforms, the same mid-level Hacienda official told 
econoff that he does not see the need for another fiscal 
reform at this time.  He believes tax reform will be 
addressed again in five years when another president with 
more political capital is in office.  He remarked that 
collection of the value-added tax (VAT) will improve due to 
changes implemented in the fiscal reform.  He added that if 
tax evasion continues at the current rate, then the 
government would be forced to take action before it leaves 
office.  He remarked that the next fiscal reform initiative 
would have to include efforts to tax consumption through the 
VAT.  Businessmen have argued that the recently passed reform 
 
MEXICO 00005418  002 OF 003 
 
 
hit them particularly hard because the government did not 
want to tackle the politically sensitive VAT. 
 
Part of Fiscal Reform Published in Official Gazette 
--------------------------------------------- ------ 
 
¶5. (U) The government published five of the seven components 
of the fiscal reform in the Official Gazette on October 1. 
The two remaining parts pertain to federalism and 
constitutional reforms.  The former will be published in 
mid-December so the 5.5% gasoline and diesel tax hike will 
come into effect on January 1, 2008, and the latter is in the 
process of being ratified in the state legislatures. 
 
S&P Upgrades Mexico 
------------------- 
 
¶6. (U) Standard & Poor's on October 8 upgraded Mexico's 
sovereign debt rating, citing an improved outlook for tax 
collection, a better debt profile, and the recent cooperation 
among political parties pushing reforms through Congress. 
S&P raised Mexico's long-term foreign currency credit rating 
from BBB to BBB  -- the third-lowest investment grade rating 
-- bringing S&P's rating in line with ratings from Moody's 
and Fitch.  It also increased Mexico's long-term local 
currency credit rating from A to A .  The move was discounted 
by markets.  Bank of Mexico Deputy Governor Guillermo Guemez 
said publicly that the upgrade would help reduce interest 
rates. 
 
Inflation Falls Slightly in September 
------------------------------------- 
 
¶7. (SBU) Consumer price inflation rose a slightly 
less-than-expected 0.78% in September, bringing the annual 
inflation rate to 3.79%, down from 4.03% the previous month. 
The figure was driven by higher food prices and seasonally 
high educational costs.  Annual core inflation fell from 
3.86% in August to 3.80% last month.  These readings, along 
with government policies aimed at containing energy and bread 
prices this year, reduce pressure on the Bank of Mexico (BOM) 
to tighten monetary policy.  Nonetheless, market analysts 
have not ruled out a 25-50 basis point rate hike by December. 
 An economist at HSBC told econoff that he does not see the 
BOM lifting rates at its policy meeting on October 26, but 
rather waiting to see if the U.S. Federal Reserve cuts rates 
on October 30/31.  He added that if the BOM decides to hike 
rates this month, it will be because it wants to send the 
message that it will not tolerate concerns about high food 
prices contaminating wage settlements or other prices in the 
economy. 
 
Budget Negotiations on Track 
---------------------------- 
 
¶8. (SBU) The mid-level Hacienda official told econoff that 
the Chamber of Deputies will vote on the revenue portion of 
the 2008 budget package late this week, or early next week 
(Note: local press reports say the vote will take place on 
October 18.  The Chamber of Deputies has until the 20th to 
approve the Revenue Bill and send it to the Senate, which has 
until October 31 to ratify it.  End Note.)  He remarked that 
negotiations have centered on how to spend the revenue 
generated from fiscal reform.  He noted that some members of 
Congress were trying to increase the oil price estimate used 
in the government's budget proposal (US$46.60 per barrel) to 
around US$50 per barrel.  He said they were incorrectly using 
the formula specified in the budget law for setting the price 
of oil.  In the end, he said they agreed to increase the oil 
price estimate by approximately US$1 per barrel, which would 
boost total revenues by $7 billion pesos. 
 
 
MEXICO 00005418  003 OF 003 
 
 
 
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