VZCZCXRO0861
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #5614/01 2992047
ZNR UUUUU ZZH
P 262047Z OCT 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 9334
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEHRC/DEPT OF AGRICULTURE WASHDC PRIORITY
RHMFIUU/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 03 MEXICO 005614 
 
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, ANNA JEWEL) 
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND RDAVIS 
STATE PASS TO USTR (EISSENSTAT/MELLE) 
STATE PASS TO FEDERAL RESERVE (ANDREA RAFFO) 
NSC FOR RICHARD MILES, DAN FISK 
 
E.O. 12958: N/A 
TAGS: ECON ECPS EFIN ELAB MX PGOV PREL
SUBJECT: MEXICO ECONOMIC NOTES, OCTOBER 19-26, 2007 
 
 
¶1. (SBU) SUMMARY:  The Chamber of Deputies on October 23 
approved the 2008 Revenue Bill for a total of 2.57 trillion 
pesos (USD 236 billion).  A PRD proposal to include in the 
Revenue Bill a provision to establish a government body to 
control imports and exports of sensitive agricultural 
products like corn and beans was defeated in the Chamber of 
Deputies, and thus not sent forward to the Senate for 
consideration.  The Revenue Bill will now move to the Senate 
for approval by the end of the month, while the Chamber turns 
its attention to the Expenditure Bill.  The government on 
October 25 announced a few changes to the Foreign Direct 
Investment Law, which include increasing sanctions for 
companies that fail to report their investments on time and 
allowing the use of internet and other technological tools to 
submit reports.  The Bank of Mexico (BOM) on October 26 
lifted the benchmark interest rate by 25 basis points to 
7.50%, to the surprise of many market analysts.  Simultaneous 
with announcements made in Washington and other capitals, 
Mexico announced on October 23 that it would join with the 
U.S., Japan, Canada, the EU, and Switzerland in negotiating 
an Anti-Counterfeiting Trade Agreement (ACTA).  Experts 
expect a wave of court injunctions to be filed against the 
recently passed fiscal reform once it takes effect on January 
¶1.  A major energy research firm calls Mexican production 
declines following 2011 unstoppable.  END SUMMARY. 
 
Lower House Approves Revenue Bill 
--------------------------------- 
 
¶2. (U) After having approved the revenue chapter of the 
budget "in general" on October 18, the Chamber of Deputies 
(lower house) approved remaining articles of the 2008 Revenue 
Bill on October 23.  The plan allows for 2.57 trillion pesos 
(USD 236 billion) in spending, 152.5 billion pesos more than 
initially proposed by the Calderon government.  Approximately 
119.0 billion pesos of this extra revenue comes from the tax 
overhaul legislation approved on September 14, 17.9 billion 
pesos from increasing the oil price estimate from USD 46.60 
per barrel to USD 49.00 a barrel, and the rest from other 
taxes.  Hacienda has said that much of these additional 
resources will be channeled to infrastructure projects.  The 
bill will now move to the Senate for approval by the end of 
the month, while the Chamber turns its attention to the 
Expenditure Bill, which has to be approved by November 15. 
 
Protectionist Proposal Rejected 
------------------------------- 
 
¶3. (SBU) A proposal by the main leftist opposition party to 
include in the federal revenue bill for 2008 a provision to 
establish a government body to control imports and exports of 
sensitive agricultural products like corn and beans was 
defeated in the Chamber of Deputies, and thus not sent 
forward to the Senate with the rest of the revenue package. 
Embassy Foreign Agricultural Service and Economic officers 
had alerted relevant congressional offices of U.S. concerns 
that such a body would constitute a violation of Mexico's 
NAFTA commitments.  Post will continue to track this issue as 
the Senate considers the revenue bill. 
 
Planned Investment Law Changes Mostly Administrative 
--------------------------------------------- ------- 
 
¶4. (SBU) Under Secretary of Foreign Investment and 
International Trade Practices Carlos Arce on October 25 
announced planned changes to the Foreign Direct Investment 
Law.  While, during previous meeting with Econoff, Economia 
had expressed an interest in making deeper changes, the 
planned amendments only increase sanctions for those 
companies that fail to report their investments on time, and 
allow the use of internet and other technological tools to 
submit reports.  Arce used the announcement of updated 
 
MEXICO 00005614  002 OF 003 
 
 
investment figures for the first half of 2007 -- USD 14.6 
billion, over USD 1.3 billion more than the investment that 
was reported on time -- as proof that companies need stricter 
penalties for late reporting.  There are no planned 
modifications to allow more foreign investment in restricted 
sectors such as telecommunications, energy or transportation, 
but the government acknowledges that the opening of these 
sectors could attract more investment.  Arce said that 
Economia continues to expect over USD 23 billion in foreign 
direct investment (FDI) flows to Mexico for CY 2007 and that 
the increase in FDI over the previous few years reflects the 
confidence investors have in the country and its strategic 
geographical location. 
 
Central Bank Hikes Interest Rates 
--------------------------------- 
 
¶5. (U) The Bank of Mexico (BOM) on October 26 lifted the 
benchmark interest rate by 25 basis points to 7.50%, to the 
surprise of many market analysts.  In its press release, the 
BOM said the move was intended to help prevent the 
"contamination" of wages and other prices and to stem 
inflation expectations.  The central bank also announced that 
inflation will not drop to 3 percent (its target inflation 
rate) until the end of 2009, a year later than was forecasted 
only a couple of months ago.  While headline inflation came 
in less than expected for the first half of October, the core 
inflation result was disappointing, due in part to higher 
prices for pasteurized milk and tobacco.  Core prices rose 
0.21% during this time period -- more than the median 
estimate of 0.15% in a Bloomberg survey of 18 economists. 
 
Mexico Joins ACTA Initiative 
---------------------------- 
 
¶6. (SBU) Simultaneous with announcements made in Washington 
and other capitals, Mexico announced on October 23 that it 
would join with the U.S., Japan, Canada, the EU, and 
Switzerland in negotiating an Anti-Counterfeiting Trade 
Agreement (ACTA).  Gilda Gonzalez of the Mexican Institute of 
Industrial Property (IMPI, rough equivalent of U.S. PTO) said 
that IMPI would lead the Mexican negotiating team, which 
would also include representatives of the Office of the 
Attorney General of the Republic, the Mexican National 
Copyright Institute, and Customs.  Gonzalez noted that the 
goal of the ACTA was for member nations to commit to stronger 
enforcement of intellectual property rights, though she 
emphasized that the agreement should focus on technical 
assistance and cooperation with the private sector over 
establishing penalties regime for non-compliance. 
 
Fiscal Reform Likely to be Challenged 
------------------------------------- 
 
¶7. (SBU) Experts expect a wave of court injunctions to be 
filed against the recently passed fiscal reform once it takes 
effect on January 1.  Some law experts have argued that parts 
of the legislation are unconstitutional because they are 
"unequal."  These "a la carte" injunctions will be tied to 
the impact the new tax regime has on each taxpayer.  In the 
past, lawsuits filed by a group of people were used to 
challenge tax regulations, but this time around companies and 
lawyers will have to modify their strategy, as the Single 
Rate Corporate Tax (IETU) affects taxpayers differently.  The 
new Tax on Cash Deposits (IDE) could also be challenged in 
the courts.  No precedence exists on the IETU and IDE because 
they are new taxes. 
 
Consultants Call Mexican Production Decline Unstoppable 
--------------------------------------------- ---------- 
 
¶8.  (SBU) In analysis prepared for clients, and shared with 
 
MEXICO 00005614  003 OF 003 
 
 
the Embassy, energy consultants Cambridge Energy Research 
Associates (CERA) called 2008 budget changes reducing 
effective taxes on Pemex from 79 percent of income in 2006 to 
71.5 percent in 2012 insuffiicent to stem declining 
production.  The firm suggests that the lion's share of Pemex 
reserves are associated with marginal fields and rapidly 
declining producing assets.  Even if future exploration 
efforts bear fruit, CERA believes that it will be impossible 
for Pemex to contain Mexican production decline after 2011. 
 
 
 
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 / 
BASSETT