VZCZCXRO1799
PP RUEHCD RUEHGD RUEHHO RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHMC #0280/01 1700138
ZNR UUUUU ZZH
P 180138Z JUN 08
FM AMCONSUL MONTERREY
TO RUEHC/SECSTATE WASHDC PRIORITY 2981
INFO RUEHME/AMEMBASSY MEXICO PRIORITY 3955
RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHMC/AMCONSUL MONTERREY 8440

UNCLAS SECTION 01 OF 02 MONTERREY 000280 
 
SENSITIVE 
 
SIPDIS 
 
STATE PASS TO USTR AND FCS 
 
E.O. 12958: N/A 
TAGS: ECON EIND ETRD PGOV MX
SUBJECT: US ECONOMIC SLOWDOWN WILL IMPACT MEXICO AS INFLATION FEARS 
LOOM 
 
REF: A) MEXICO 240; B) MEXICO 1504 
 
MONTERREY 00000280  001.2 OF 002 
 
 
¶1.  (SBU)  Summary.  On June 13, at the Consulate's periodic 
Business Roundtable, two leading economists presented their 
views of the impact of the United States economic slowdown on 
Mexico and Mexico's growing inflationary concerns.  The event, 
hosted by the Consul General, brought together fifteen of the 
Consulate's best private sector contacts.  The economists agreed 
that Mexico has not yet experienced the full impact of the U.S. 
economic slowdown, which will most strongly affect Northern 
Mexico.  Although Mexican inflation is still very low by 
historical standards, prices are increasing above the Central 
Bank's target and inflationary expectations are also rising, 
which may require increasing Mexican interest rates.  Finally, 
the economists and our private sector contacts decried President 
Calderon's suggestion that the Mexican Central Bank reduce 
interest rates to spur economic growth.  End Summary. 
 
¶2.   (SBU)  The two economists who made presentations were Dr. 
Agustin del Rio Toffe, regional head of the Mexican Central Bank 
(who emphasized that these were his personal views) and 
prominent local economist Dr. Salvador Kalifa. 
 
¶3.   (SBU)  Both economists agreed that the slowdown in the 
United States would have a significant impact on Mexico, 
particularly the Northern region.  Kalifa described the collapse 
of the subprime mortgage market and subsequent decline in the 
U.S. housing market, and he estimated that nine million U.S. 
homeowners are underwater, i.e. their homes are worth less than 
their mortgages.  The declining housing market means fewer 
construction jobs for Mexican legal and illegal immigrants, 
contributing to the sudden decline in remittances sent by 
workers in their United States to their Mexican relatives. 
Kalifa thought that there would be a lag of at least 3-4 months 
before other effects of the American economic slowdown hit 
Mexico.  Del Rio described the "wealth effect," that since home 
ownership is the most important asset for most Americans, when 
the value of their house declines, they will spend less money on 
consumer goods.  The wealth effect will have its strongest 
impact in Northern Mexico, which is very dependent on exporting 
heavy consumer goods to the United States such as cars, domestic 
appliances or electronics.  Nonetheless, the negative trend 
could be partially offset as American auto manufacturers reduce 
costs by moving production to Mexico.  However, historically 
there is a strong correlation between the U.S. industrial 
production and Mexican economic growth, so U.S. economic 
problems will eventually hit Mexico.  Kalifa forecast that the 
Mexican economy would begin to stumble in the first half of 
¶2008.  However, he allowed that Mexico was in far better shape 
than before.  Although the foreign trade deficit is high, Mexico 
has ample foreign reserves and much of its foreign debt is 
denominated in pesos.  After the discussion period following the 
presentations, several business leaders agreed that Mexican 
exports would be hit hard by reduced U.S. demand (see reftel A). 
 
¶4.  (SBU)  Kalifa and Del Rio also thought that Mexico faces 
serious inflationary pressures due to rising energy and food 
prices.  Although low by Mexican historical standards, the 
approximately 4.5-5% inflation rate is the highest in six years, 
and del Rio conceded that inflation would remain above the 
Central Bank's target of 3% for 2008.  Kalifa thought that the 
Mexican Central Bank would increase interest rates, perhaps as 
soon as its June meeting, to counter rising expectations of 
inflation.  Del Rio prudently did not make a prediction on 
future interest rates, but he did comment that inflation was a 
serious concern.  Unlike the Federal Reserve Bank, which has the 
twin goals of maintaining price stability and fostering economic 
growth, the Mexican Central Bank's sole mission is to contain 
inflation.  Del Rio said that if there are rising inflationary 
expectations (such as pressure from unions for higher salaries 
in anticipation of future inflation), the Central Bank could 
counter with increased interest rates to dampen demand (see also 
reftel B). 
 
¶5.  (SBU)  Finally, the economists and businessmen took 
President Calderon to task for publicly calling for the Mexican 
Central Bank to reduce interest rates to stimulate the economy. 
Del Rio's personal opinion was that President Calderon should 
not have made the suggestion, as it undermined the Central 
Bank's credibility for fighting inflation.  Del Rio commented 
that with current inflationary pressures from increasing food 
and energy prices, any reduction in interest rates would 
increase inflation.  Kalifa also noted that the Government of 
Mexico was stimulating demand through spending and he thought 
that there would be a clash between President Calderon and the 
Central Bank on interest rates.  Several businessmen thought 
 
MONTERREY 00000280  002.2 OF 002 
 
 
that the independence of the Mexican Central Bank was critical 
for investor confidence and that Mexico would control inflation. 
 They criticized President Calderon for trying to undercut the 
autonomy of the Mexican Central Bank. 
 
¶6.  (SBU)  Comment.  There may well be a clash between the needs 
of the Mexican economy and the political calendar.  The mid term 
2009 elections are crucial for President Calderon to strengthen 
his ability to pass reforms though Congress, and his political 
task will be much harder if the Mexican economy grows slowly 
over the next year.  End comment. 
WILLIAMSON