VZCZCXRO4388
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #0240/01 0292020
ZNR UUUUU ZZH
P 292020Z JAN 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 0292
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 000240 
 
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) 
TREASURY FOR IA (ALICE FAIBISHENKO) 
DOE FOR INTL AFFAIRS KDEUTSCH, ALOCKWOOD, AND GWARD 
NSC FOR RICHARD MILES, DAN FISK 
EXIM FOR MICHELE WILKINS 
STATE PASS TO USTR (EISSENSTAT/MELLE) 
STATE PASS TO FEDERAL RESERVE (ANDREA RAFFO) 
 
E.O. 12958: N/A 
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: FEAR OF U.S. RECESSION RATTLES MEXICAN MARKETS 
 
REF: 07 MEXICO 2670 
 
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Summary 
------- 
 
¶1. (SBU) The Mexican stock market is down 3.3% this month on 
fears that the U.S., Mexico's largest trading partner, could 
slip into recession.  Real GDP growth currently is expected 
to slow this year to 1.5-3.0% from an estimated 3.1% in 2007 
and 4.8% in 2006, due largely to the economy's tight links to 
the U.S.  Fortunately, Mexico is better prepared to absorb 
economic shocks from the U.S. than it was in 2001.  Domestic 
demand buoyed by more credit to the private sector, solid 
macroeconomic fundamentals, and increased government spending 
will help support local growth.  The depth and duration of a 
recession in the U.S. as well as the Calderon 
administration's ability to continue passing much-needed 
structural reforms will be key factors in determining how the 
Mexican economy fares.  End Summary. 
 
--------------------------------------- 
Increased Volatility in Mexican Markets 
--------------------------------------- 
 
¶2. (U) Mexico's IPC stock index plunged 5.3% on January 21 
amid steep losses in European and Asian markets on U.S. 
recession fears.  While the sell off was blunted by the U.S. 
Federal Reserve's decision to cut its benchmark rate 75 basis 
points to 3.5% on January 22, the market is still off 3.3% 
since the beginning of the month.  The Fed's rate cut widened 
the spread with Mexico's 7.5% key rate by the most since 
January 2006 -- a move that has made Mexican yields more 
attractive.  The yield on 10-year bonds due December 2016 has 
fallen 51 basis points to 7.67% so far this month.  The peso 
fell 0.53% against the dollar on January 21, but has 
strengthened since then on bets the Fed will cut rates again 
this week and positive news on durable goods orders in the 
U.S. 
 
--------------------------------- 
Concern Up, Growth Forecasts Down 
--------------------------------- 
 
¶3. (SBU) Econoffs have met with several government and 
private sector officials over the past week to get their 
perspective on recent market volatility and on how the 
Mexican economy would handle a recession in the U.S.  These 
conversations show that while most officials remain 
cautiously optimistic about Mexico's growth prospects, 
concern has increased notably in recent weeks.  Mexico's 
economy is simply too closely tied to that of the U.S. to 
escape unscathed.  A senior Bank of Mexico (BOM) official 
told econoffs that the BOM planned to lower its real GDP 
growth forecast for 2008 to 2.75% - 3.25%; private sector 
forecasts range from 1.5% to 3.0%. 
 
--------------------------------------------- - 
Better Positioned to Weather U.S. Recession... 
--------------------------------------------- - 
 
¶4. (SBU) While acknowledging that slower growth in the U.S. 
would undoubtedly affect Mexico, Marco Oviedo Cruz, the 
Director of Financial Planning at the Finance Secretariat, 
told econoff that Mexico is better prepared to handle a U.S. 
recession than it was in 2001.  He highlighted the country's 
solid macroeconomic fundamentals and noted how the 
manufacturing sector is more competitive than it was in the 
past.  Echoing comments from private sector analysts, Oviedo 
commented on the importance of domestic demand as a driver of 
growth, noting that while credit to the private sector was 
 
MEXICO 00000240  002 OF 003 
 
 
virtually non-existent seven years ago, it is now growing at 
high rates.  The 2007 fiscal reform will also help propel the 
economy, as it will allow for higher levels of public 
investment in infrastructure and social programs.  Oviedo 
remarked that while Mexico still sends most of its exports to 
the U.S., it has made progress diversifying the destination 
of its exports thanks to various trade agreements signed in 
recent years -- with Europe in particular.  He added that 
productive sectors have been helped by the fact that the peso 
has been following the dollar -- which has been weakening. 
 
¶5. (SBU) At a presentation in Monterrey on January 24, AmCham 
economist Deborah Riner echoed public comments by Finance 
Secretary Carstens that high oil prices also will allow the 
 
SIPDIS 
government to boost spending.  She added that the informal 
economy will help buffer Mexico's fall since it is less 
dependent on the U.S. economy.  Several analysts also have 
noted the importance of USG actions, such as interest rate 
cuts and the stimulus package. 
 
¶6. (SBU) When asked how a significant slowdown in remittances 
would affect Mexico, Oviedo replied that the impact would be 
very limited since remittances represent such a small 
percentage of GDP.  He noted, however, that poorer households 
that rely on the receipt of such transfers would take a hit. 
(Comment: Remittances help support many of the poorest 
families in Mexico.  For them, remittance income is critical, 
if not for survival, at least for maintenance of their modest 
standard of living.  End Comment.) 
 
-------------------------- 
... But Fallout Inevitable 
-------------------------- 
 
¶7. (SBU) While the variables listed above would help Mexico 
weather a U.S. recession, a series of other factors will curb 
Mexico's growth prospects: 
 
-- Slower growth in the U.S. weakens demand for Mexican goods 
in the U.S., the destination of more than 80% of Mexico's 
exports, according to Mexican trade statistics.  Analysts 
note that Mexican exporters that depend on the U.S. for a 
significant portion of their revenues, such as Cemex and 
Vitro, have already taken a hit. 
 
-- While Mexico's exports to the European Union have nearly 
doubled from 2000 to 2006 to USD 11.0 billion, a Director 
from the Graduate School of Business at ITESM (Monterrey Tec) 
noted that this figure is small compared to the amount of 
exports the U.S. buys from Mexico (USD 212 billion in 2006). 
 
-- The head of Economic Research at Bank of America noted 
that Mexico is too dependent on the manufacturing sector in 
the U.S. to avoid a slowdown.  The director from ITESM said 
the correlation between these two indicators was 
approximately 80%. 
 
-- The Bank of America official and an economist from 
Consultores Economicos Espacializados in Monterrey tried to 
debunk the government's argument that countercyclical fiscal 
policy would help stimulate the economy.  They said that the 
additional revenues available stem in part from the recent 
fiscal reform, adding that increasing taxes dampens rather 
than stimulates growth. 
 
-- Several private sector officials also questioned how 
quickly the government could begin the infrastructure 
projects it is touting as a way to help absorb shocks from 
the U.S.  The ITESM director said that while construction 
spending will help, states are not known to be efficient 
spenders of government funds. 
 
MEXICO 00000240  003 OF 003 
 
 
 
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Comment 
------- 
 
¶8. (SBU) The GOM and private sector are closely watching how 
the crisis in the U.S. unfolds.  If the U.S. slips into 
recession, the question is not if, but rather how much, 
Mexico will be affected.  The answer to this question is 
largely tied to the depth and duration of the recession as 
well as which U.S. sectors are most affected.  It is also 
linked to the Calderon administration's ability to continue 
passing much-needed economic reforms (energy, labor, 
competition, etc.) as mid-term congressional elections draw 
near.  Such measures would not only improve Mexico's global 
competitiveness, they would also bolster investor confidence 
in Mexico's future. 
 
¶9. (SBU) The effects of all this are not just economic. 
President Calderon and other political actors probably judge 
that lower growth and higher unemployment in Mexico can 
potentially influence the outcome of the July 2009 
congressional elections.  Moreover, the government would face 
significant pressure if Mexicans working in the U.S. return 
home because they cannot find work (e.g. if a Mexican 
employed in the suffering U.S. construction industry -- which 
16% of workers of Mexican orgin do -- cannot find work 
elsewhere). 
 
 
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