VZCZCXRO7560
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #1504/01 1401221
ZNR UUUUU ZZH
P 191221Z MAY 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 1906
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEHNSC/NSC WASHINGTON DC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 04 MEXICO 001504 
 
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/GERI WORD 
USDOC FOR ITS/TD/ENERGY DIVISION 
TREASURY FOR IA (LUYEN TRAN, RACHEL JARPE) 
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 EFIN EINT MX
SUBJECT: ANALYSTS DISCUSS ECONOMIC DEVELOPMENTS IN MEXICO 
 
REF: MEXICO 240 
 
¶1. (SBU) SUMMARY:  Market analysts are relatively upbeat 
about prospects for the Mexican economy due in part to high 
oil prices and domestic demand.  Consumer price inflation is 
expected to increase again in May and June, and then begin 
falling slowly.  Several local observers believe a watered 
down energy reform will be passed this year, and that nothing 
will come of the constitutional challenges against the Single 
Rate Corporate Tax (IETU).  The Mexican Social Security 
Institute had to correct the way it measures formal 
employment because it had been overestimating job creation. 
An official at the Mexican Stock Exchange said the exchange 
will launch an initial public offering to list its own shares 
next month.  END SUMMARY. 
 
----------------------------- 
Prospects for Economic Growth 
----------------------------- 
 
¶2. (SBU) Alberto Gomez, Banamex,s chief economist, was 
relatively upbeat about prospects for the Mexican economy -- 
in part because the U.S. economy "is doing a little better 
than expected."  He believes Mexico will grow by 2.6% this 
year.  Mexico is weathering the U.S. slowdown better than in 
the past because high oil revenues allow the government to 
run countercyclical fiscal policy.  Domestic demand is 
stronger than in the past, giving Mexico a buffer against the 
U.S.'s woes.  Nonetheless, he believes that the U.S. slowdown 
will negatively affect the Mexican economy eventually because 
the link between to two economies is "simply too great." 
Alonso Rios and Arnulfo Rodriguez, officials from Accival 
(Banamex's brokerage arm), echoed Gomez's comments on growth, 
adding that they believe remittances from the U.S. to Mexico 
will be lower than the USD 24 billion recorded in 2007. 
 
¶3. (SBU) The Accival officials said they are not concerned 
about Mexico having the same problems as the U.S. with the 
mortgage market because there are so many restrictions for 
granting loans.  For example, a client has to give a down 
payment of at least 30% of the house's value (including 
credits from the government's housing development agencies), 
and monthly mortgage payments should be no more than 30% of 
the person's income.  The large down payment gives clients a 
strong incentive to continue paying even if the value of 
their house falls.  Moreover, when Mexicans purchase a house, 
it is usually used as their primary residence -- not a second 
or third house.  Finally, the mortgage market represents a 
small portion of the debt market. 
 
------------------------------ 
Inflation and the Central Bank 
------------------------------ 
 
¶4. (SBU) A Bank of Mexico (BOM) official told Econoffs he 
expects inflation to increase again in May and June, and then 
to begin falling gradually.  Gomez agreed, saying that 
inflation would continue to rise in the near term due largely 
to pressure from processed foods.  He does not believe that 
the BOM has room to adjust interest rates in the foreseeable 
future given recent inflation readings.  He remarked that 
higher prices for food products (and a few other goods) have 
not yet contaminated other prices. 
 
¶5. (SBU) The Accival officials told Econoffs that there is an 
ongoing debate between banks and the authorities regarding 
the easing of monetary policy to stimulate growth. 
Nonetheless, most analysts agree it would be difficult for 
the BOM to change its mandate to include fostering economic 
growth as long as it has difficulty keeping inflation near 
its 3% target.  Rodriguez, who knows BOM Governor Ortiz, said 
Ortiz is a "conservative economist" who believes there should 
be an instrument for each economic situation.  That is, Ortiz 
 
MEXICO 00001504  002 OF 004 
 
 
believes that the BOM should focus on inflation, while other 
government agencies should develop programs and implement 
structural reforms to spur economic growth.  Separately, 
Rodriguez said that Calderon opposed Ortiz's appointment as 
BOM Governor because Calderon partially blamed Ortiz for the 
1994-95 economic crisis. 
 
------------------------ 
Calderon's Reform Agenda 
------------------------ 
 
¶6. (SBU) Gomez and Banamex economist Sergio Luna told Econoff 
that energy reform would be passed -- probably in August 
during an extraordinary congressional session -- but said the 
reform will be even more watered down than the government's 
initial proposal.  Alejandro Reynoso, the Managing Director 
of Corporate Strategy at the Mexican Stock Exchange (BMV), 
agreed that the reform would be passed, but was more critical 
of the proposal's contents.  He said it is unclear what the 
government hopes to accomplish with energy reform because its 
proposal has "no game plan."  Therefore, the proposal is open 
to criticism and unlikely to get support from the Mexican 
public.  Reynoso lamented that there were not any brilliant 
people, like Finance Secretary Carstens, behind the reform 
package. 
 
¶7. (SBU) Gomez believes that after energy reform is passed, 
the government will turn its attention to labor and, to some 
extent, competition reform.  The latter will only happen 
"little by little."  It will be a give and take process 
between the government and people like Carlos Slim.  Gomez 
noted that the government has been defending Telmex in 
Ecuador and Venezuela, and that it will want concessions from 
Telmex for this support.  Luna said that the head of the 
Federal Competition Commission's work of bringing competition 
problems to the attention of legislators cannot be 
understated.  That said, Mexico still has a long way to go in 
terms of creating a culture of competition. 
 
¶8. (SBU) Gomez believes the government will focus more on 
social issues in the run up to the midterm congressional 
election in 2009.  Luna said the Institutional Revolutionary 
Party (PRI) wants more social programs run by the states, but 
the federal government will resist this change because the 
political benefits associated with such programs would be 
credited to governors (the plurality of whom are PRI) versus 
Calderon's own National Action Party (PAN).  Gomez added that 
no one really knows what reform the government will "pick" 
after these are complete. 
 
¶9. (SBU) Neither Gomez nor the BOM contact thought that 
anything would come of the constitutional challenges against 
the Single Rate Corporate Tax (IETU).  Local lawyers and 
Finance Secretariat officials have told Gomez they are 
optimistic the IETU will hold up. 
 
¶10. (SBU) When asked to characterize President Calderon's 
approach to economic reform, Gomez responded that Calderon 
focuses on passing reforms that are politically feasible, 
even if they are not necessarily ideal.  Luna asserted that 
Calderon wants to maintain the momentum for reform and build 
political capital so he is able to continue passing reforms 
during his last three years in office.  Calderon is picking 
his fights and making allies.  Alejandro Reynoso was more 
severe on the government, saying that so far Calderon only 
has completed former President Fox's reform agenda.  He 
opined that the federal government has capitulated to 
entrenched interests (e.g. unions, monopolies, governors) and 
that he does not see movement toward weakening these groups' 
grip on power. 
 
--------------------------------------------- - 
Government Admits Unemployment Stats Incorrect 
 
MEXICO 00001504  003 OF 004 
 
 
--------------------------------------------- - 
 
¶11. (SBU) The Mexican Social Security Institute (IMSS) 
acknowledged that it has been overestimating formal 
employment figures.  According to estimates from BBVA 
Bancomer, 529,000 jobs were created in 2007, not the 756,000 
jobs previously reported (and often used in the President's 
speeches).  IMSS had been counting jobs that changed from 
temporary to permanent status as new jobs.  IMSS has 
corrected its methodology and is supposed to release more 
revised figures next month.  A Bank of Mexico official told 
Econoffs that he was not surprised when this news surfaced. 
He said some government officials have been questioning the 
calculations for some time. 
 
------------------------------------ 
Stock Exchange Prepares for Sell-off 
------------------------------------ 
 
¶12. (SBU) Reynoso told Econoffs on May 7 that the Mexican 
Stock Exchange (BMV) will launch an initial public offering 
(IPO) to list its own shares in June.  (Note: The BMV 
announced plans to go public in 2006 but has repeatedly 
delayed the debut.  End Note.)  The prospectus is slated to 
be posted on May 19.  As of now, two of the BMV's 25 
shareholders have said they will sell some of their shares. 
The IPO was able to move forward because of four important 
factors:  improved market conditions, new-found support from 
the BMV's board members for the IPO, the active role 
government authorities took in promoting the transaction, and 
the success of the Brazilian stock exchange's IPO.  Recent 
steps to make the BMV Board more independent and transparent 
also helped.  Proceeds will be channeled to integrate the 
BMV's sister companies (derivatives, stock market, etc.) into 
a holding company.  It is expected that 30,000 small 
investors will be able to acquire the shares in financial 
markets. 
 
¶13. (SBU) Reynoso said the IPO, together with steps to adopt 
corporate governance measures, will make the stock exchange 
"more democratic" and transparent.  The general public will 
have access to the exchange's financial information and how 
it operates because it will be a public company.  Reynoso 
remarked that the IPO will help break the "cartel of families 
that used to run this business." 
 
----------------------------------- 
Fibras Get Off the Ground (Finally) 
----------------------------------- 
 
¶14. (SBU) Reynoso told Econoffs that another project that 
took a long time to become a reality was Mexico's version of 
real estate investment trusts (called Fibras).  Companies 
were reluctant to issue Fibras because of the associated tax 
burden and because the vehicle was untested.  Reynoso 
asserted that both issues have been resolved.  Ironically, 
the first issuer of Fibras was the Mexico City government 
under PRD Mayor Marcelo Ebrard.  The city government was 
attracted to Fibras because it is highly indebted and because 
it would not have to pay taxes on the transaction if it used 
this vehicle. 
 
¶15. (SBU) Reynoso told Econoffs that the city issued a Fibra 
to tap into one of its highly valued assets that it cannot 
legally sell: subway stations.  Mexico City's 17 inter-modal 
subway stations move around 4 million passengers a day -- 
making the areas immediately around them ideal locations for 
commercial establishments.  The city created an entity called 
"Capital en Crecimiento" that will have the concession to 
create joint ventures with the private sector to operate 
these commercial facilities.  Mexican businessmen -- 
including Carlos Slim, Moises Saba, the Chedraui family, and 
David Serur -- have expressed interest in participating. 
 
MEXICO 00001504  004 OF 004 
 
 
 
¶16. (SBU) Reynoso said that people are "paying attention" to 
Mexico City's Fibras.  The federal government followed the 
same model to create its National Infrastructure Fund, and 
Carlos Slim is expected to list a Fibra within eight months 
for one inter-modal subway station, which will include not 
only commercial establishments but also a hospital and a 
hotel.  Moreover, Nuevo Leon and the State of Mexico are 
interested in issuing Fibras.  Interestingly, Reynoso said 
that Finance Secretary Carstens and Mexico City's Finance 
Secretary, Mario Delgado, cooperate behind-the-scenes on 
financial issues.  Reynoso added that Carstens' show of 
respect for his counterparts fosters this cooperation. 
 
--------- 
Bio Notes 
--------- 
 
¶17. (SBU) When asked who President Calderon listens to on 
economic policy issues, Gomez listed Secretary of Social 
Development Ernesto Cordero, Under Secretary of Expenditures 
(and Calderon's former economic chief within the Office of 
the Presidency) Dionisio Perez Jacome, Finance Secretary 
Carstens, Under Secretary of Finance Alejandro Werner, and 
(to some extent) Economy Secretary Eduardo Sojo.  Carstens 
gained a lot of credibility with the President because of the 
IETU, which is working well.  Calderon also listens to 
business leaders and people such as Arturo Fernandez at ITAM. 
 Gomez believes the President (who studied economics) takes 
in the opinion of others, and then makes his own decision. 
Alonso Rios told Econoffs he believes that Cordero is 
Calderon's closest economic advisor, but added that the 
President also listens to Carstens. 
 
¶18. (SBU) The Accival officials and Reynoso suggested that 
Calderon could make Carstens the head of the central bank 
when Ortiz's term ends in 2009.  Rios and Rodriguez remarked 
that Carstens has always wanted this position and that he was 
upset when he did not get a BOM deputy governor position 
before he went to the IMF.  The Accival officials suggested 
that Cordero could replace Carstens as Finance Secretary 
since he has some financial experience from his time at 
Banobras (National Works and Public Services Bank).  They 
noted, however, that analysts are a little worried because 
Cordero is so young and lacks experience in public 
administration.  Reynoso agreed that Cordero was a possible 
candidate to replace Carstens, but noted that "anyone" could 
end up getting the job. 
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