VZCZCXRO3796
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #0357/01 0392149
ZNR UUUUU ZZH
P 082149Z FEB 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 0439
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 000357 
 
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: MEXICAN OFFICIALS DISCUSS INFLATION, GROWTH, AND 
REFORM EFFORTS 
 
REF: MEXICO 240 
 
------------------------ 
Summary and Introduction 
------------------------ 
 
¶1. (U) Key cabinet members and economists discussed economic 
challenges for the Mexican economy at a seminar hosted by the 
Autonomous Technological Institute of Mexico (ITAM) last 
month.  Bank of Mexico Governor Ortiz said that the impact of 
the 2007 fiscal reform on inflation may be smaller than 
previously expected.  To the surprise of many in the 
audience, he said that the new gasoline tax hike will not 
adversely affect inflation since the monthly gasoline price 
increase will actually be smaller after the tax,s 
implementation.  Both Ortiz and Finance Secretary Carstens 
said that Mexico is better positioned to weather a U.S. 
recession than it was in 2001 thanks to solid macroeconomic 
fundamentals, strong domestic demand, and increased 
government spending.  The head of President Calderon's 
economic cabinet commented on how the government has 
strengthened public finances and reduced the economy's 
"operational costs."  Labor Secretary Lozano spoke about the 
need to make the labor market more flexible and competitive 
without touching Article 123 of the constitution.  The head 
of the Automobile Distributors Association complained about 
businesses overregulation, the slow judicial process, and the 
government's lack of support for small businesses.  End 
Summary. 
 
--------------------------------------------- ------ 
BOM Governor Discusses Inflation and Growth Outlook 
--------------------------------------------- ------ 
 
¶2. (U) Bank of Mexico (BOM) Governor Guillermo Ortiz said 
that the impact of fiscal reform on inflation may be smaller 
than previously expected.  He remarked that it was difficult 
to measure how the new Single Rate Corporate Tax (IETU) would 
affect inflation, adding that it may be less than what the 
BOM had estimated at the end of last year.  To the surprise 
of many in the audience, Ortiz said that the new gasoline tax 
hike will not/not adversely affect inflation since the 
monthly gasoline price increase will fall from around 3 
centavos per month before the tax's implementation to around 
2 centavos per month.  (Note: the government adjusts the 
price of gasoline each month according to inflation.  Post 
assumes that Ortiz's statement means that the government will 
halt these adjustments, and only increase gasoline prices as 
specified in the gasoline tax hike.  End Note.)  Ortiz said 
that the main risks to inflation in the short term include: 
potential contamination from supply shocks into other prices 
in the economy; additional hikes in international food 
prices; a greater slowdown in the U.S.; and an increase in 
volatility in international financial markets.  He said that 
so far there are no signs that high food prices have 
contaminated salaries or long-term inflation expectations. 
 
¶3. (U) Ortiz said that while the Mexican and U.S. economies 
are still tied together -- especially through the 
manufacturing sector -- Mexico is better prepared to handle a 
U.S. recession than it was in 2001.  He highlighted Mexico's 
solid macroeconomic fundamentals and the dynamism of the 
domestic economy.  He remarked that the banking sector is 
stronger and extends more credit to the private sector than 
it did in 2001.  The expected public-private investment in 
infrastructure of 5% of GDP will also help reduce the effect 
of a U.S. recession.  Ortiz added, however, that Mexico's 
growth prospects would depend in part on the "size" of the 
U.S. recession.  As in other forums, Ortiz called for the 
approval of labor, education, and telecommunications reforms, 
 
MEXICO 00000357  002 OF 003 
 
 
the elimination of corruption, and improved rule of law. 
 
--------------------------------------------- --- 
Carstens Expresses Confidence in Mexican Economy 
--------------------------------------------- --- 
 
¶4. (U) Finance Secretary Agustin Carstens also said that 
Mexico is better positioned to weather a U.S. recession than 
it was in 2001 thanks to solid macroeconomic fundamentals, 
strong domestic demand, investment in infrastructure, and 
expected growth in the housing sector.  The 2007 fiscal 
reform and high oil prices will allow the government to 
implement countercyclical fiscal policy.  He remarked that 
programmable expenditures are set to rise 10.5% this year and 
that investment in infrastructure will reach a record high. 
Carstens also noted that the government has been able to 
consolidate the banking sector, which is now lending more to 
the private sector. 
 
---------------------------------------- 
Government Actions To Strengthen Economy 
---------------------------------------- 
 
¶5. (U) Felipe Duarte Olvera, head of President Calderon's 
economic cabinet, said that the government strengthened 
public finances via the passage of the fiscal and pension 
reforms, its commitment to maintain fiscal discipline, and 
its efforts to improve the country's debt profile.  The 
pension reform will allow savings equivalent to 24% of GDP 
over time, and the fiscal reform allows the government to 
earmark more resources for social development and 
infrastructure and to reduce the country's reliance on oil 
revenues. 
 
¶6. (U) The government also has taken steps to reduce the 
economy's "operational costs," such as reducing the time to 
open a new business, lowering industrial electricity rates 
during peak hours, strengthening development banks, and 
fostering more competition in LP gas distribution.  The 
government also created Promexico, an agency that will 
promote Mexico as a safe and attractive destination for 
foreign investment. 
 
-------------------------------- 
Labor Secretary Calls for Reform 
-------------------------------- 
 
¶7. (U) Labor Secretary Javier Lozano spoke about the need to 
make the labor market more flexible and competitive without 
touching Article 123 of the constitution -- the foundation 
for all federal labor laws.  He proposed including 
productivity requirements in collective contracts and 
modifying the "contratos-ley" (an industry-wide collective 
bargaining agreement) in the textile and rubber sectors, for 
example.  The government recently negotiated a modification 
to the sugar industry's contract to make the sector more 
competitive.  Another challenge for the Secretariat will be 
developing training programs and investing in human capital. 
 
--------------------------------- 
Auto Sector's View of the Economy 
--------------------------------- 
 
¶8. (U) Jose Gomez, the head of the Automobile Distributors 
Association (AMDA), complained about overregulation of 
businesses and the slow judicial process.  He said that it 
takes an average of 421 days to conclude the judicial process 
in Mexico.  Gomez remarked that the government's financial 
support to small- and medium-sized enterprises (SMEs) is 
insufficient.  He said that only 0.11% of the budget was 
 
MEXICO 00000357  003 OF 003 
 
 
channeled to SMEs from 2001 through 2006 even though SMEs 
account for 72% of total employment.  Gomez called for the 
approval of structural reforms and a policy to reduce the 
importation of used vehicles, which has affected his sector. 
 
------- 
Comment 
------- 
 
¶9. (SBU) Carstens' and Ortiz's views aside, Mexico's economy 
is closely linked to that of the U.S. and will undoubtedly 
suffer if the U.S. slips into recession.  The BOM and Finance 
Secretariat have both revised downward their GDP growth 
 
SIPDIS 
forecasts for this year, due largely to slower U.S. growth. 
If the situation in the U.S. worsens, we can expect these 
forecasts to fall even further. 
 
 
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