VZCZCXRO7755
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #5858/01 3192229
ZNR UUUUU ZZH
P 152229Z NOV 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 9585
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 04 MEXICO 005858 
 
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 ITA (ISRALY ECHEGARAY) 
TREASURY FOR IA (ALICE FAIBISHENKO, ANNA JEWEL) 
TREASURY FOR OCC/IBF (SUSAN QUILL) 
TREASURY FOR IBSMO (WILBUR MONROE, BILL FOSTER) 
EXIM FOR MICHELE WILKINS 
CFTC FOR OIA (WARREN GORLICK) 
NSC FOR RICHARD MILES, DAN FISK 
SEC FOR OIA (SHAUNA STEELE) 
STATE PASS TO USTR (EISSENSTAT/MELLE/SHIGETOMI) 
STATE PASS TO FEDERAL RESERVE (ANDREA RAFFO/ANN MISBACK) 
 
E.O. 12958: N/A 
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: CHALLENGES FACING MEXICO'S STOCK EXCHANGE 
 
 
------------------------ 
Summary and Introduction 
------------------------ 
 
¶1. (SBU) On October 29, 2007, the Mexican Stock Exchange 
(BMV) held its 18th annual convention, which centered on the 
need to "democratize" the stock market and to increase 
medium-sized companies, access to capital markets.   Finance 
Secretary Agustin Carstens and Bank of Mexico Governor 
 
SIPDIS 
Guillermo Ortiz participated in the event, and pledged more 
competition in the stock market, the issuance of more initial 
public offerings (IPOs), the elimination of entry barriers, 
and the adoption of international standards by the BMV. 
President Calderon highlighted his administration,s efforts 
to consolidate macroeconomic stability, as well as his 
commitment to fight organized crime and to support reforms of 
the judicial system, energy, labor, and telecommunications 
sectors, as well as deregulation to help Mexico become more 
competitive.  End summary. 
 
-------------------------------------- 
Modernizing the Mexican Stock Exchange 
-------------------------------------- 
 
¶2. (U) Stock exchanges in developing countries have abandoned 
the organic-growth model to make way for a wave of mergers, 
acquisitions, and IPOs from the stock exchanges themselves. 
Resources obtained from these IPOs have been channeled to the 
construction of global stock exchanges. The Mexican Stock 
Exchange (BMV) does not want to be the exception.  Following 
the successful mergers and the IPOs of the Montreal and 
Brazilian Stock Exchanges, the BMV's board decided to 
reorganize its structure and implement corporate governance 
standards for an eventual IPO issuance.  They also have 
understood the importance of developing products for more 
aggressive investors, such as hedge funds and private pension 
funds.  Thanks to the reforms of the private pension funds' 
investment regime, the participation of these institutional 
investors has grown from 8% of GDP in 2000 to 21% of GDP in 
¶2007.  Currently, 37 million Mexicans are investing their 
pension funds in the stock market through private pension 
funds called Siefores.  In view of this, the BMV has issued 
more derivatives, structured products, and new asset classes. 
 
 
¶3. (U) BMV President Guillermo Prieto explained that the 
exchange's modernization strategy is based on four pillars: 
1.) innovating by offering derivatives, futures, swaps, and 
very soon Mexico's version of real estate investment trusts 
(called FIBRAS); 2.) improving operations by updating 
technology; 3.) broadening ownership to increase transparency 
 (Note: the BMV now has more independent members on its board 
and on its auditing, securities registration, and regulation 
committees than in the past.); and 4.) creating a larger 
social impact.  The BMV's role as a facilitator in channeling 
resources to social welfare has been significant.  From 2001 
to date, the accumulated debt placed by the Federal Mortgage 
Corporation, the Private Sector Workers' National Housing 
Development Institute (Infonavit), and mortgage sofoles 
(non-bank banks) totals USD 7.7 billion.  Around USD 4.6 
billion of public works in states and municipalities have 
been financed through the BMV. 
 
--------------------------------------------- 
Democratization of the Mexican Stock Exchange 
--------------------------------------------- 
 
¶4. (U) All of the speakers attending the convention agreed 
that one of the most significant challenges for the sector 
 
MEXICO 00005858  002 OF 004 
 
 
was to "democratize" the BMV and facilitate medium-sized 
businesses' access to financing.  Thanks to the new 
Securities Market Law approved in 2005, it is easier for 
medium-sized businesses to have access to financing through 
the stock market, provided they comply with basic corporate 
governance requirements.  The BMV has also implemented a 
program to facilitate their progressive access.  The sector 
understands that it has to work harder to promote the listing 
of more issuers and to achieve a deeper local capital market. 
 As the Vice Chairman of the Mexican Financial Intermediaries 
Association said: "The Mexican secondary market will only 
strengthen to the extent that the primary market grows." 
 
-------------------------------------------- 
Regulation, Supervision and Competitiveness 
-------------------------------------------- 
 
¶5. (U) Guillermo Babatz, President of the National Banking 
and Securities Commission (CNBV), spoke about the 
modernization process that the securities law has undergone 
in recent years to incorporate international standards. 
Babatz noted that the challenge currently lay in implementing 
the law and regulations adequately to stimulate the sector's 
development.  He pledged to strengthen sanctions against 
violations and to protect minority stockholders.  The CNBV 
will continue cooperating with its counterparts in other 
countries regarding supervision.  Babatz noted that Mexico 
should be prepared to face more aggressive competition 
worldwide by promoting the entry of more financial 
intermediaries in specific niches, and by reducing placement, 
operation, and regulatory costs.  The CNBV announced it will 
reduce its fees for securities and debt issuance by 20% and 
40%, respectively, beginning on January 1, 2008.  Finally, 
Babatz called for a reduction in placement fees charged by 
brokers. 
 
-------------------------------------------- 
Use of FIBRAS To Boost Infrastructure 
-------------------------------------------- 
 
¶6. (U) BMV Deputy Director Alejandro Reynoso announced that 
Mexican Real Estate Investment Trusts (FIBRAS for the acronym 
in Spanish) were ready to be launched.  Legislation allowing 
for FIBRAS was passed in 2003.  He explained that authorities 
approved several tax benefits for FIBRAS, including the 
deferment of income and real estate acquisitions payments, no 
tax withholdings, and no tax for change of control.  However, 
he also explained that there are some restrictions to prevent 
taxpayers using FIBRAS only for tax planning and tax evasion 
purposes.  Recent changes to the pension law will create five 
different Siefores (private pension funds), which will be 
able to diversify their portfolios and risk levels depending 
on the age of the worker.  Reynoso said that, ideally, 
Siefores and insurance funds should be able to invest in 
infrastructure projects during the construction stage -- that 
is, investing more with capital than with debt to give 
workers more value added on their investment.  Fitch Ratings 
will assign a rating to the FIBRAS based on several factors, 
including their debt level, experience in the sector, and the 
value of the land in question. 
 
---------------- 
Challenges Ahead 
---------------- 
 
¶7. (U) For Bank of Mexico Governor Guillermo Ortiz, the 
financial markets' most significant challenges are: 
increasing savings, expanding access for households and SMEs, 
providing incentives to increase participation in debt and 
 
MEXICO 00005858  003 OF 004 
 
 
capital markets, and having the financial system play a 
greater role in promoting the country's productivity and 
economic growth.  For the sector, it is necessary to foster 
the development of capital formation and strengthen the BMV, 
both economically and institutionally, so that it is able to 
compete globally.  It should also eliminate obstacles and 
entry barriers for new issuers.  To illustrate the growth 
potential of the BMV, Ortiz compared the number of listed 
companies on the exchange (156) against the number of 
companies listed on the Brazilian Stock Exchange (350).  The 
number of companies registered with the Secretariat of 
Finance for tax purposes is 11,000.  During the past year, 
Mexico only had five IPOs, whereas Brazil has had 60.  He 
also said that the BMV's capitalization ratio was 47% against 
60% of the Brazilian Stock Exchange's, not to mention the 
existing high level of concentration of the largest ten 
companies in the BMV, which represent 80% of the total market 
value. 
 
¶8. (U) Finance Secretary Carstens noted that while the 
securities market helped make up for commercial banks' lack 
of lending after the 1994-95 economic crisis, it is now 
necessary to reevaluate the securities market's role.  For 
Carstens, the securities market's primary role is not to 
satisfy the daily financial needs of businesses, but to 
provide capital to entrepreneurial and productive projects 
needed to stimulate job creation and economic welfare -- in 
other words, "to democratize the capital."  Carstens 
considered that the size of the Mexican stock market does not 
correspond to the economy's size and potential.  He called 
for more IPO's taking advantage of the existing macroeconomic 
stability and modern legal framework.  He also urged the BMV 
to adopt international governance standards for the issuance 
IPOs. 
 
------------------------------ 
Calderon Promises More Reforms 
------------------------------ 
 
¶9. (U) During his presentation, President Calderon praised 
the BMV's performance, the consolidation of macroeconomic 
stability, and the consensus achieved among different 
political actors on the ISSSTE (the social security institute 
for government workers), fiscal, and electoral reforms 
approved during his eleven months in power.  He pledged to 
continue fighting organized crime and to support reforms of 
the judicial system, energy, labor, and telecommunications 
sectors, and a deregulation process to help Mexico become 
more competitive and attractive to investors.  He added that 
the BMV should become an investment option, not only for 
large corporations, but also for businesses in need of credit 
or capitalization.  In other economic issues, President 
Calderon highlighted the need to diversify exports to reduce 
Mexico's vulnerability to the performance of the U.S. 
economy.  He also announced that in the coming year the 
government will channel 70% of its programmable spending to 
social programs, and 65% of the additional resources obtained 
from the recently approved fiscal reform to infrastructure 
projects. 
 
------- 
Comment 
------- 
 
¶10. (SBU) There has been a general call from various sectors, 
the public, politicians, and international organizations to 
take on Mexico's public and private monopolies.  The BMV is 
no exception.  There is an urgent need to break down 
resistance and reduce the concentration of conglomerates 
 
MEXICO 00005858  004 OF 004 
 
 
owned or controlled by powerful families to help SMEs go 
through the entire process of listing their assets and 
obtaining more capital.  One of the sector's short-term goals 
would be implementing and taking advantage of modern 
regulations, the new securities law, which protects minority 
shareholders, as well as macroeconomic stability to stimulate 
the issuance of more IPOs, and to satisfy their need for 
capital and implement the productive projects that Mexico so 
badly needs.  End comment. 
 
 
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