VZCZCXRO9080
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #3340/01 3152313
ZNR UUUUU ZZH
P 102313Z NOV 08 ZFR
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 3926
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RHMFIUU/HQ USNORTHCOM
RHMFISS/CDR USSOUTHCOM MIAMI FL
RHEHAAA/NSC WASHINGTON DC

UNCLAS SECTION 01 OF 08 MEXICO 003340 
 
SENSITIVE, SIPDIS 
 
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) 
DOE FOR INTERNATIONAL AFFAIRS (KDEUTSCH AND ALOCKWOOD) 
NSC FOR DAN FISK 
STATE PASS TO USTR (EISSENSTAT/MELLE) 
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA) 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ENRG EINV PGOV MX
SUBJECT: MEXICO'S ECONOMY HIT BY GLOBAL CRISIS; PLANE CRASH 
EXACERBATES FINANCIAL MARKETS' NERVOUSNESS 
 
MEXICO 00003340  001.2 OF 008 
 
 
ZFR --- ZFR --- ZFR --- ZFR --- ZFR --- ZFR --- ZFR 
PLEASE CANCEL THIS TELEGRAM.  THANK YOU 
ZFR --- ZFR --- ZFR --- ZFR --- ZFR --- ZFR --- ZFR 
 
¶1. (SBU) Summary: Jitters over the depth of the global economic 
downturn, the drop in oil prices, and foreign investors' flight to 
quality have hurt domestic financial markets.  The financial crisis 
and the downturn of the U.S. economy is adversely affecting the 
Mexican economy, reflected in a decline in manufacturing exports, a 
slump in remittances sent by Mexicans abroad, an expected drop in 
tourism and FDI flows, a lower demand for Mexican oil exports, and 
unemployment.  The government has implemented a series of measures 
to help relieve liquidity pressures, stabilize the main economic 
variables, offset the oil revenue shortfalls, and boost the economy. 
 The timing and effectiveness of the government's countercyclical 
measures, especially the National Infrastructure Plan (NIP), and the 
passage of other economic reforms or will determine how effectively 
Mexico will weather the economic recession. The November 4 plane 
crash that killed the Secretary of Interior, a close friend and 
advisor to President Calderon, has contributed to a sense of 
uncertainty.   While it is premature to speculate on the causes of 
this tragic event, the impact has shaken policy makers and markets. 
End Summary. 
REACTION TO SECRETARY OF INTERIOR'S SUDDEN DEATH 
--------------------------------------------- --- 
¶2. (SBU) The Mexican stock market's index, the IPC, fell 5.05% and 
the peso depreciated 0.96% to 12.60 pesos to the dollar a day after 
the U.S. elections and the plane crash which killed Secretary of the 
Interior Juan Camilo Mourino.  Government officials and analysts had 
expected some relief in financial markets after the U.S. elections, 
but poor economic data in the U.S., rising jitters on the depth of 
the global economic recession, and what analysts have called a 
healthy profit-taking after a weekly gain of 28% had negative 
effects on the stock market. 
¶3. (SBU) Finance Secretary Agustin Carstens and the Chairman of the 
Stock Market Guillermo Prieto maintained that it was premature to 
speculate on the cause of the crash which killed Mourino and on the 
long term impact on the economy.  Both asserted that Mexico's 
economic fundamentals were solid and unaltered after the tragedy. 
The government has been implementing a series of measures to help 
relieve liquidity pressures and stabilize the main economic 
variables.  Carstens noted that Mexican financial markets are 
"functioning adequately and will continue to".  Prieto acknowledged 
speculation about possible sabotage of Mourino's airplane as a 
response to the government's ongoing war against drugs, but stressed 
that until the government releases the results of the investigation, 
"investment plans and financial markets should not be affected." 
 
PLANE CRASH BRINGS BACK MEMORIES OF 1994 
---------------------------------------- 
¶4. (SBU) The government's war against drugs, surging insecurity 
levels and the Secretary of the Interior's sudden death brought back 
unpleasant memories of the assassination of Revolutionary 
Institutional Party's (PRI) presidential candidate Luis Donaldo 
Colosio in 1994 and the financial ("Tequila") crisis that ensued. 
Most experts consider these fears to be premature, and speculation 
before the government announces the real cause of the plane crash, 
could be risky. The government has undertaken a thorough 
investigation of the crash, inviting aviation experts from the U.S. 
and the U.K. to assist.  The government's communication strategy on 
the incident, informing the media and the public step-by-step on the 
process of the investigation and  the level of cooperation with 
foreign governments including the U.S., as well as President 
Calderon's commitment to investigate the case thoroughly have helped 
soothe concerns. While the investigation is ongoing and may not be 
completed until eleven months from now, all evidence uncovered to 
date points to the crash being the result of an accident and non/not 
sabotage. 
ANALYSTS THINK GOM FUNDAMENTALS ARE SOLID 
----------------------------------------- 
¶5. (SBU) Banamex-Citigroup's chief political and economic analyst 
Sergio Kurczyn told us that if the investigation concluded that 
sabotage was the cause of the plane crash, financial variables would 
undoubtedly be affected.  But, more than these variables the 
strongest impact would be on the credibility and strength of the 
country's institutions.  Kurczyn said he thought the pillars of 
public institutions had already been weakened by the tight 2006 
presidential election and Andres Manuel Lopez Obrador's protests 
claiming electoral fraud, as well as the removal of the Federal 
 
MEXICO 00003340  002.2 OF 008 
 
¶1. (SBU) Summary: Jitters over the depth of the global economic 
downturn, the drop in oil prices, and foreign investors' flight to 
quality have hurt domestic financial markets.  The financial crisis 
and the downturn of the U.S. economy is adversely affecting the 
Mexican economy, reflected in a decline in manufacturing exports, a 
slump in remittances sent by Mexicans abroad, an expected drop in 
tourism and FDI flows, a lower demand for Mexican oil exports, and 
unemployment.  The government has implemented a series of measures 
to help relieve liquidity pressures, stabilize the main economic 
variables, offset the oil revenue shortfalls, and boost the economy. 
 The timing and effectiveness of the government's countercyclical 
measures, especially the National Infrastructure Plan (NIP), and the 
passage of other economic reforms or will determine how effectively 
Mexico will weather the economic recession. The November 4 plane 
crash that killed the Secretary of Interior, a close friend and 
advisor to President Calderon, has contributed to a sense of 
uncertainty.   While it is premature to speculate on the causes of 
this tragic event, the impact has shaken policy makers and markets. 
End Summary. 
REACTION TO SECRETARY OF INTERIOR'S SUDDEN DEATH 
--------------------------------------------- --- 
¶2. (SBU) The Mexican stock market's index, the IPC, fell 5.05% and 
the peso depreciated 0.96% to 12.60 pesos to the dollar a day after 
the U.S. elections and the plane crash which killed Secretary of the 
Interior Juan Camilo Mourino.  Government officials and analysts had 
expected some relief in financial markets after the U.S. elections, 
but poor economic data in the U.S., rising jitters on the depth of 
the global economic recession, and what analysts have called a 
healthy profit-taking after a weekly gain of 28% had negative 
effects on the stock market. 
¶3. (SBU) Finance Secretary Agustin Carstens and the Chairman of the 
Stock Market Guillermo Prieto maintained that it was premature to 
speculate on the cause of the crash which killed Mourino and on the 
long term impact on the economy.  Both asserted that Mexico's 
economic fundamentals were solid and unaltered after the tragedy. 
The government has been implementing a series of measures to help 
relieve liquidity pressures and stabilize the main economic 
variables.  Carstens noted that Mexican financial markets are 
"functioning adequately and will continue to".  Prieto acknowledged 
speculation about possible sabotage of Mourino's airplane as a 
response to the government's ongoing war against drugs, but stressed 
that until the government releases the results of the investigation, 
"investment plans and financial markets should not be affected." 
 
Electoral Institute's counselors by the Congress. 
¶6. (SBU) Banamex analyst Kurczyn told us he did not think Mexico 
would relive the political and economic crisis of 1994 and 1995. 
Echoing the government's views on the economic and financial 
situation, he noted that the economic and financial conditions are 
very different now from what they were more than a decade ago: 
Mexico has lower foreign debt (equivalent to 2.4% of GDP), high 
foreign reserves, a fixed exchange rate, a low inflation rate 
compared to other countries, well-capitalized banks, a lack of risky 
structured instruments, low private sector leverage, etc.  Moreover, 
the financial crisis did not originate in Mexico this time.  For 
Kurczyn, international confidence in Mexico's fundamentals was 
reflected in the Federal Reserve Bank's recent 30-billion swap line 
to the Bank of Mexico and the International Monetary Fund's decision 
to double borrowing limits for emerging-market countries.  Goldman 
Sachs Director General in Mexico and former Finance Under Secretary, 
Martin Werner echoed Kurczyn's confidence in the strength of the 
financial institutions saying that Mexico learned its lesson and 
that banks are stronger.  The only impact on financial institutions 
would be the cut in annual profits because they will be forced to 
increase their preventive reserves to face the rising non-performing 
consumer loans. 
¶7. (SBU) Financial authorities and Hacienda officials have 
repeatedly denied the risk of a collapse of the banking system 
thanks to the regulations implemented since the 1994-1995 so-called 
"Tequila crisis", which have strengthened financial institutions. 
Banks have dramatically changed the way they report their accounting 
and their balance sheets are available to investors' scrutiny.  An 
exception though was the exposure of some companies to foreign 
exchange derivatives, which made the peso depreciate to over 14 
pesos to the dollar in October.  The peso depreciation led to the 
 
MEXICO 00003340  003.2 OF 008 
 
¶1. (SBU) Summary: Jitters over the depth of the global economic 
downturn, the drop in oil prices, and foreign investors' flight to 
quality have hurt domestic financial markets.  The financial crisis 
and the downturn of the U.S. economy is adversely affecting the 
Mexican economy, reflected in a decline in manufacturing exports, a 
slump in remittances sent by Mexicans abroad, an expected drop in 
tourism and FDI flows, a lower demand for Mexican oil exports, and 
unemployment.  The government has implemented a series of measures 
to help relieve liquidity pressures, stabilize the main economic 
variables, offset the oil revenue shortfalls, and boost the economy. 
 The timing and effectiveness of the government's countercyclical 
measures, especially the National Infrastructure Plan (NIP), and the 
passage of other economic reforms or will determine how effectively 
Mexico will weather the economic recession. The November 4 plane 
crash that killed the Secretary of Interior, a close friend and 
advisor to President Calderon, has contributed to a sense of 
uncertainty.   While it is premature to speculate on the causes of 
this tragic event, the impact has shaken policy makers and markets. 
End Summary. 
REACTION TO SECRETARY OF INTERIOR'S SUDDEN DEATH 
--------------------------------------------- --- 
¶2. (SBU) The Mexican stock market's index, the IPC, fell 5.05% and 
the peso depreciated 0.96% to 12.60 pesos to the dollar a day after 
the U.S. elections and the plane crash which killed Secretary of the 
Interior Juan Camilo Mourino.  Government officials and analysts had 
expected some relief in financial markets after the U.S. elections, 
but poor economic data in the U.S., rising jitters on the depth of 
the global economic recession, and what analysts have called a 
healthy profit-taking after a weekly gain of 28% had negative 
effects on the stock market. 
¶3. (SBU) Finance Secretary Agustin Carstens and the Chairman of the 
Stock Market Guillermo Prieto maintained that it was premature to 
speculate on the cause of the crash which killed Mourino and on the 
long term impact on the economy.  Both asserted that Mexico's 
economic fundamentals were solid and unaltered after the tragedy. 
The government has been implementing a series of measures to help 
relieve liquidity pressures and stabilize the main economic 
variables.  Carstens noted that Mexican financial markets are 
"functioning adequately and will continue to".  Prieto acknowledged 
speculation about possible sabotage of Mourino's airplane as a 
response to the government's ongoing war against drugs, but stressed 
that until the government releases the results of the investigation, 
"investment plans and financial markets should not be affected." 
 
bankruptcy of a major Mexican retail store and left other major 
Mexican corporations shaky.  The Finance Secretariat asserted that 
the demand for dollars has been supplied and that most of these 
operations had been closed. 
¶8. (SBU) Corporations' failure to disclose their exposure to such 
operations made authorities realize the need for stricter 
supervision.  The National Banking and Securities Commission (CNBV) 
stepped up by conducting an investigation on the companies' 
compliance to their obligation to report significant financial 
information.  Lawmakers are preparing an initiative to increase 
disclosure of derivative positions and their potential risk.  The 
Finance Secretariat is currently working on a specific bankruptcy 
law and is also looking into incorporating further controls based on 
the U.S. subprime experience. 
CREDIT CARDS AND CONSUMER LOANS 
-------------------------------- 
¶9. (SBU) The increase of non-performing consumer loans, in 
particular credit cards, has raised concerns about bank solvency. 
The National Banking and Securities Commission (CNBV) reported that 
the delinquency index, which measures delinquent loans as a 
percentage of total loans, rose from 2.82% to 3.03% during the third 
quarter of the year. This figure is still low compared to 16.3% in 
¶2001.  The delinquency index in consumer loans, including credit 
cards and automobile loans, rose from 6.92% to 7.69%.  Within it, 
the delinquency index for credit cards grew from 8.18% in the second 
quarter to 9.41% in the third quarter, and from 3.9% in December of 
¶2005.  The delinquency index for housing and business loans rose 
from 3.05% to 3.34% and from 1.05% to 1.09%, respectively. 
¶10. (SBU) Banks have raised their preventive reserves due to the 
increase in credit cards' overdue payments.  Currently, coverage for 
non-performing loans is 157%, which means that for each peso owed, 
 
MEXICO 00003340  004.2 OF 008 
 
¶1. (SBU) Summary: Jitters over the depth of the global economic 
downturn, the drop in oil prices, and foreign investors' flight to 
quality have hurt domestic financial markets.  The financial crisis 
and the downturn of the U.S. economy is adversely affecting the 
Mexican economy, reflected in a decline in manufacturing exports, a 
slump in remittances sent by Mexicans abroad, an expected drop in 
tourism and FDI flows, a lower demand for Mexican oil exports, and 
unemployment.  The government has implemented a series of measures 
to help relieve liquidity pressures, stabilize the main economic 
variables, offset the oil revenue shortfalls, and boost the economy. 
 The timing and effectiveness of the government's countercyclical 
measures, especially the National Infrastructure Plan (NIP), and the 
passage of other economic reforms or will determine how effectively 
Mexico will weather the economic recession. The November 4 plane 
crash that killed the Secretary of Interior, a close friend and 
advisor to President Calderon, has contributed to a sense of 
uncertainty.   While it is premature to speculate on the causes of 
this tragic event, the impact has shaken policy makers and markets. 
End Summary. 
REACTION TO SECRETARY OF INTERIOR'S SUDDEN DEATH 
--------------------------------------------- --- 
¶2. (SBU) The Mexican stock market's index, the IPC, fell 5.05% and 
the peso depreciated 0.96% to 12.60 pesos to the dollar a day after 
the U.S. elections and the plane crash which killed Secretary of the 
Interior Juan Camilo Mourino.  Government officials and analysts had 
expected some relief in financial markets after the U.S. elections, 
but poor economic data in the U.S., rising jitters on the depth of 
the global economic recession, and what analysts have called a 
healthy profit-taking after a weekly gain of 28% had negative 
effects on the stock market. 
¶3. (SBU) Finance Secretary Agustin Carstens and the Chairman of the 
Stock Market Guillermo Prieto maintained that it was premature to 
speculate on the cause of the crash which killed Mourino and on the 
long term impact on the economy.  Both asserted that Mexico's 
economic fundamentals were solid and unaltered after the tragedy. 
The government has been implementing a series of measures to help 
relieve liquidity pressures and stabilize the main economic 
variables.  Carstens noted that Mexican financial markets are 
"functioning adequately and will continue to".  Prieto acknowledged 
speculation about possible sabotage of Mourino's airplane as a 
response to the government's ongoing war against drugs, but stressed 
that until the government releases the results of the investigation, 
"investment plans and financial markets should not be affected." 
 
banks have 1.57% to cover it.  Banks' current capitalization index 
or the capital-to-asset ratio is 15%, which is way above the 
required 8% by domestic and international standards.  The private 
sector's current leverage is equivalent to 22% of GDP - which 
comparies favorably to 201% in the U.S.  The recent increase in 
credit card interest rates from an average of 34% to 42% is 
worrisome, especially when there is a potential risk of a higher 
unemployment rate in the coming months.  To offset this risk, banks 
have reduced the issuance of credit cards and are being more careful 
with their credit origination procedures, both for credit cards and 
mortgages.  The Bank of Mexico, the Finance Secretariat, other 
financial authorities, and banks have created a coalition to improve 
financial education for consumers. 
CENTRAL BANK ACTIONS TO ADDRESS THE CRISIS 
------------------------------------------- 
¶11. (SBU) To shore up the peso and tackle liquidity pressures, the 
central bank has engaged in daily U.S. dollar sales (USD 13.1 
billion of its $84 billion foreign exchange reserves) in an attempt 
to break a dangerous cycle of currency weakness begetting turmoil. 
Foreign exchange reserves continue to be high despite this dollar 
injection (USD 76 billion).  Other central bank policy actions 
include: paying interest on dollar deposits held with the central 
bank; repurchasing up to 150 billion pesos of Savings Protection 
Bonds, which is expected to help in the sterilization process in 
order to reduce the amount of dollars auctioned by the central bank; 
establishing an interest rate swap mechanism via which local banks 
will be able to exchange exposure to long-term fixed interest rates 
for short-term variable rates; and, establishing a USD 30 billion 
swap facility with the U.S. Federal Reserve. 
¶12. (SBU) The government announced it will reduce the supply of its 
long-term securities in its fourth quarter 2008 auction program and 
 
MEXICO 00003340  005 OF 008 
 
¶1. (SBU) Summary: Jitters over the depth of the global economic 
downturn, the drop in oil prices, and foreign investors' flight to 
quality have hurt domestic financial markets.  The financial crisis 
and the downturn of the U.S. economy is adversely affecting the 
Mexican economy, reflected in a decline in manufacturing exports, a 
slump in remittances sent by Mexicans abroad, an expected drop in 
tourism and FDI flows, a lower demand for Mexican oil exports, and 
unemployment.  The government has implemented a series of measures 
to help relieve liquidity pressures, stabilize the main economic 
variables, offset the oil revenue shortfalls, and boost the economy. 
 The timing and effectiveness of the government's countercyclical 
measures, especially the National Infrastructure Plan (NIP), and the 
passage of other economic reforms or will determine how effectively 
Mexico will weather the economic recession. The November 4 plane 
crash that killed the Secretary of Interior, a close friend and 
advisor to President Calderon, has contributed to a sense of 
uncertainty.   While it is premature to speculate on the causes of 
this tragic event, the impact has shaken policy makers and markets. 
End Summary. 
REACTION TO SECRETARY OF INTERIOR'S SUDDEN DEATH 
--------------------------------------------- --- 
¶2. (SBU) The Mexican stock market's index, the IPC, fell 5.05% and 
the peso depreciated 0.96% to 12.60 pesos to the dollar a day after 
the U.S. elections and the plane crash which killed Secretary of the 
Interior Juan Camilo Mourino.  Government officials and analysts had 
expected some relief in financial markets after the U.S. elections, 
but poor economic data in the U.S., rising jitters on the depth of 
the global economic recession, and what analysts have called a 
healthy profit-taking after a weekly gain of 28% had negative 
effects on the stock market. 
¶3. (SBU) Finance Secretary Agustin Carstens and the Chairman of the 
Stock Market Guillermo Prieto maintained that it was premature to 
speculate on the cause of the crash which killed Mourino and on the 
long term impact on the economy.  Both asserted that Mexico's 
economic fundamentals were solid and unaltered after the tragedy. 
The government has been implementing a series of measures to help 
relieve liquidity pressures and stabilize the main economic 
variables.  Carstens noted that Mexican financial markets are 
"functioning adequately and will continue to".  Prieto acknowledged 
speculation about possible sabotage of Mourino's airplane as a 
response to the government's ongoing war against drugs, but stressed 
that until the government releases the results of the investigation, 
"investment plans and financial markets should not be affected." 
 
the weekly issuance of Savings Protection Bonds.  The GOM will 
temporarily permit financial institutions to buy and sell government 
instruments from investment funds that are part of the same 
financial group.  The government is providing guarantees on 
commercial paper via development and mortgage banks.  The most 
recent measure announced by the Finance Secretariat is the buy-back 
of up to USD 3.2 billion of debt (bonds with maturities between 10 
and 30 years) in an effort to drive down long-term yields.  The 
government expects liquidity pressures to stabilize during the first 
quarter of 2009, but will extend these measures if needed. 
¶13. (SBU) On Oct. 8th, President Calderon announced his Program for 
Growth and Employment aimed at mitigating the impact of the global 
economy's deterioration and credit crunch.  The Program for Growth 
and Employment focuses boosting the economy by increasing public 
spending on infrastructure projects.  The elimination of Pidiregas 
(long-term debt for infrastructure projects), included in the 
program will enable the government to convert Pidiregas liabilities 
into public debt and exclude Pemex's capital expenditures from the 
balanced budget.  This measure will give the government an 
additional USD 6 billion to spend on infrastructure.  The initiative 
will also allow Pemex to use its current stabilization fund of 
approximately USD 923 million to build a refinery. 
OIL PRICE AND THE RISK OF REVENUE SHORTFALLS 
-------------------------------------------- 
¶14. (SBU) Due to the deterioration of the global economy, the 
government had to submit revised economic projections to the 
Congress.  GDP growth, the Mexican oil mix price, the exchange rate 
were revised downward from 3% to 1.8%, from USD 80.3 to USD 70 per 
barrel, and from 11.20 pesos to the dollar to 11.70 pesos to the 
dollar, respectively.  The 1.8% GDP growth seems too optimistic 
given the depth of the global financial crisis and the sharply 
 
MEXICO 00003340  006 OF 008 
 
¶1. (SBU) Summary: Jitters over the depth of the global economic 
downturn, the drop in oil prices, and foreign investors' flight to 
quality have hurt domestic financial markets.  The financial crisis 
and the downturn of the U.S. economy is adversely affecting the 
Mexican economy, reflected in a decline in manufacturing exports, a 
slump in remittances sent by Mexicans abroad, an expected drop in 
tourism and FDI flows, a lower demand for Mexican oil exports, and 
unemployment.  The government has implemented a series of measures 
to help relieve liquidity pressures, stabilize the main economic 
variables, offset the oil revenue shortfalls, and boost the economy. 
 The timing and effectiveness of the government's countercyclical 
measures, especially the National Infrastructure Plan (NIP), and the 
passage of other economic reforms or will determine how effectively 
Mexico will weather the economic recession. The November 4 plane 
crash that killed the Secretary of Interior, a close friend and 
advisor to President Calderon, has contributed to a sense of 
uncertainty.   While it is premature to speculate on the causes of 
this tragic event, the impact has shaken policy makers and markets. 
End Summary. 
REACTION TO SECRETARY OF INTERIOR'S SUDDEN DEATH 
--------------------------------------------- --- 
¶2. (SBU) The Mexican stock market's index, the IPC, fell 5.05% and 
the peso depreciated 0.96% to 12.60 pesos to the dollar a day after 
the U.S. elections and the plane crash which killed Secretary of the 
Interior Juan Camilo Mourino.  Government officials and analysts had 
expected some relief in financial markets after the U.S. elections, 
but poor economic data in the U.S., rising jitters on the depth of 
the global economic recession, and what analysts have called a 
healthy profit-taking after a weekly gain of 28% had negative 
effects on the stock market. 
¶3. (SBU) Finance Secretary Agustin Carstens and the Chairman of the 
Stock Market Guillermo Prieto maintained that it was premature to 
speculate on the cause of the crash which killed Mourino and on the 
long term impact on the economy.  Both asserted that Mexico's 
economic fundamentals were solid and unaltered after the tragedy. 
The government has been implementing a series of measures to help 
relieve liquidity pressures and stabilize the main economic 
variables.  Carstens noted that Mexican financial markets are 
"functioning adequately and will continue to".  Prieto acknowledged 
speculation about possible sabotage of Mourino's airplane as a 
response to the government's ongoing war against drugs, but stressed 
that until the government releases the results of the investigation, 
"investment plans and financial markets should not be affected." 
 
downgraded outlook for the U.S. economy.  In its World Economic 
Outlook 2008, the IMF projects a GDP growth of 0.9% in 2009 from the 
previous projection of 1.8%.  There are growing concerns that lower 
economic growth and the decline of international oil prices could 
lead to a revenue shortfall next year. 
¶15. (U) The Finance Secretariat assures that it will not have to cut 
spending next year particularly in infrastructure projects, 
security, and social development as it has a cushion of USD 4.3 
billion in the Oil Stabilization Fund.  The government is also 
confident that a weaker peso will compensate for the oil price fall. 
 The stabilization fund would be sufficient if the Mexican oil price 
falls from the USD 70 per barrel set in the budget to USD 60 per 
barrel.  However, the Mexican oil mix price keeps on falling and on 
November 5 it closed at USD 43 per barrel.  The government might 
have already hedged a chunk of its oil exports, according to 
analysts, although it is unlikely that the Finance Secretariat will 
acknowledge this fact.  The Finance Secretariat continues to 
gradually eliminate the gasoline subsidy. 
¶16. (SBU) The elimination of Pidiregas will allow the government to 
have a fiscal deficit of 1.8% of GDP, which will help the government 
funnel resources to countercyclical measures, such as the 
development of infrastructure projects.  Next year, the government 
will spend USD 10.6 billion against the USD 18.5 billion disbursed 
in 2008.  The government also requested the Congress to increase its 
indebtness levels and incur in foreign debt of USD 5 billion with 
multilateral financial organizations.  The Finance Secretariat is 
confident that if required it will have access to those loans since 
the Mexican government prepaid USD 9 billion of its foreign debt in 
¶2006.  Leftist economist Rogelio Ramirez de la O  and other critics 
strongly believe the government should cut its current expenses and 
bureaucrats' salaries to help offset the revenue shortfalls. 
 
MEXICO 00003340  007 OF 008 
 
¶1. (SBU) Summary: Jitters over the depth of the global economic 
downturn, the drop in oil prices, and foreign investors' flight to 
quality have hurt domestic financial markets.  The financial crisis 
and the downturn of the U.S. economy is adversely affecting the 
Mexican economy, reflected in a decline in manufacturing exports, a 
slump in remittances sent by Mexicans abroad, an expected drop in 
tourism and FDI flows, a lower demand for Mexican oil exports, and 
unemployment.  The government has implemented a series of measures 
to help relieve liquidity pressures, stabilize the main economic 
variables, offset the oil revenue shortfalls, and boost the economy. 
 The timing and effectiveness of the government's countercyclical 
measures, especially the National Infrastructure Plan (NIP), and the 
passage of other economic reforms or will determine how effectively 
Mexico will weather the economic recession. The November 4 plane 
crash that killed the Secretary of Interior, a close friend and 
advisor to President Calderon, has contributed to a sense of 
uncertainty.   While it is premature to speculate on the causes of 
this tragic event, the impact has shaken policy makers and markets. 
End Summary. 
REACTION TO SECRETARY OF INTERIOR'S SUDDEN DEATH 
--------------------------------------------- --- 
¶2. (SBU) The Mexican stock market's index, the IPC, fell 5.05% and 
the peso depreciated 0.96% to 12.60 pesos to the dollar a day after 
the U.S. elections and the plane crash which killed Secretary of the 
Interior Juan Camilo Mourino.  Government officials and analysts had 
expected some relief in financial markets after the U.S. elections, 
but poor economic data in the U.S., rising jitters on the depth of 
the global economic recession, and what analysts have called a 
healthy profit-taking after a weekly gain of 28% had negative 
effects on the stock market. 
¶3. (SBU) Finance Secretary Agustin Carstens and the Chairman of the 
Stock Market Guillermo Prieto maintained that it was premature to 
speculate on the cause of the crash which killed Mourino and on the 
long term impact on the economy.  Both asserted that Mexico's 
economic fundamentals were solid and unaltered after the tragedy. 
The government has been implementing a series of measures to help 
relieve liquidity pressures and stabilize the main economic 
variables.  Carstens noted that Mexican financial markets are 
"functioning adequately and will continue to".  Prieto acknowledged 
speculation about possible sabotage of Mourino's airplane as a 
response to the government's ongoing war against drugs, but stressed 
that until the government releases the results of the investigation, 
"investment plans and financial markets should not be affected." 
 
HOW THE CRISIS AFFECTS MEXICO'S REAL ECONOMY 
-------------------------------------------- 
¶17. (SBU) Tourism, oil and trade. The financial crisis and the 
downturn of the U.S. economy is having an adverse impact on the 
Mexican economy through various channels: a decline in manufacturing 
exports, a slump in remittances sent by Mexicans abroad, a drop in 
tourism and FDI flows, a lower demand for Mexican oil exports, and 
unemployment.  About 85% of Mexico's foreign trade is tied to the 
U.S. economy.  The exports value of manufactured goods declined by 
3.8% yoy in August.  Non-oil exports to the U.S. fell by 6.6% and 
with them, automobile sales to the U.S. dropped by 16.4%.  From 
January thru June, foreign direct investment dropped 24% and tourism 
inflows are expected to slow next year. 
¶18. (SBU) Migrants and remittances. The lower remittances will 
likely have a negative impact on domestic consumption and housing 
construction.  From January thru September, remittances have fallen 
by 3.7%. In July alone, they dropped by 7%.  The potential return of 
thousands of Mexicans who have lost their jobs in the U.S. 
construction sector will put pressure on Mexico's job creation. 
Mexico's official unemployment rate reached a record of 4.25%. 
¶19. (SBU) Financial markets.  Jitters on the depth of the global 
economy, the drop in oil prices, and foreign investors' flight to 
quality from peso-denominated bonds to U.S. Treasuries have hurt 
Mexico's financial markets.  The stock market's main index, the IPC, 
has plunged and the peso has suffered a major depreciation against 
the dollar during the past months.  The peso has lost 33% from its 
strongest level of 10 pesos to the dollar last July and the IPC has 
fallen 31.5% during the year.  The country-risk premium closed at 
405 basis points on November 7 from 141 basis points in December 
¶2007.  The yield of the 30-year bond reached 11.30% on October 24 
before the government's actions to address liquidity problems, but 
 
MEXICO 00003340  008 OF 008 
 
¶1. (SBU) Summary: Jitters over the depth of the global economic 
downturn, the drop in oil prices, and foreign investors' flight to 
quality have hurt domestic financial markets.  The financial crisis 
and the downturn of the U.S. economy is adversely affecting the 
Mexican economy, reflected in a decline in manufacturing exports, a 
slump in remittances sent by Mexicans abroad, an expected drop in 
tourism and FDI flows, a lower demand for Mexican oil exports, and 
unemployment.  The government has implemented a series of measures 
to help relieve liquidity pressures, stabilize the main economic 
variables, offset the oil revenue shortfalls, and boost the economy. 
 The timing and effectiveness of the government's countercyclical 
measures, especially the National Infrastructure Plan (NIP), and the 
passage of other economic reforms or will determine how effectively 
Mexico will weather the economic recession. The November 4 plane 
crash that killed the Secretary of Interior, a close friend and 
advisor to President Calderon, has contributed to a sense of 
uncertainty.   While it is premature to speculate on the causes of 
this tragic event, the impact has shaken policy makers and markets. 
End Summary. 
REACTION TO SECRETARY OF INTERIOR'S SUDDEN DEATH 
--------------------------------------------- --- 
¶2. (SBU) The Mexican stock market's index, the IPC, fell 5.05% and 
the peso depreciated 0.96% to 12.60 pesos to the dollar a day after 
the U.S. elections and the plane crash which killed Secretary of the 
Interior Juan Camilo Mourino.  Government officials and analysts had 
expected some relief in financial markets after the U.S. elections, 
but poor economic data in the U.S., rising jitters on the depth of 
the global economic recession, and what analysts have called a 
healthy profit-taking after a weekly gain of 28% had negative 
effects on the stock market. 
¶3. (SBU) Finance Secretary Agustin Carstens and the Chairman of the 
Stock Market Guillermo Prieto maintained that it was premature to 
speculate on the cause of the crash which killed Mourino and on the 
long term impact on the economy.  Both asserted that Mexico's 
economic fundamentals were solid and unaltered after the tragedy. 
The government has been implementing a series of measures to help 
relieve liquidity pressures and stabilize the main economic 
variables.  Carstens noted that Mexican financial markets are 
"functioning adequately and will continue to".  Prieto acknowledged 
speculation about possible sabotage of Mourino's airplane as a 
response to the government's ongoing war against drugs, but stressed 
that until the government releases the results of the investigation, 
"investment plans and financial markets should not be affected." 
 
by November 4 it had fallen to 8.8%.  Short-term yields' performance 
will continue to depend on the inflation, which reached 5.78% in 
October on higher gasoline and electricity prices.  The central 
bank's benchmark overnight lending rate is 8.25%.  The Bank of 
Mexico expects the inflation to begin to recede in the second 
quarter of 2009. Foreign currency flows have also declined.  The 
Bank of Mexico is projecting a current account deficit of between 
1.6% and 2% in 2009.  One of the most pessimistic projections is 
that from Banamex with a 2.8% deficit. 
COMMENT 
------- 
¶20. (SBU) Comment:  The government's war against drugs, the 
deteriorating security situation and the Secretary of the Interior's 
sudden death raised fears here that Mexico would experience another 
"Tequila" crisis, much like the one which ensued after the 
assassination of PRI presidential candidate Luis Donaldo Colosio in 
¶1994.  Experts, however, caution against jumping to such 
conclusions.  The government has made extraordinary efforts to 
soothe worried investors by constantly referring to Mexico's 
well-ordered finances and macroeconomic variables, but Mexico's 
integration with the U.S. economy will undoubtedly impact the 
country's economy. On the financial front, the Finance Secretariat 
and the Bank of Mexico seem to have been reacting promptly to tackle 
liquidity pressures and the financial crunch. The timing and 
effectiveness of the government's countercyclical measures, 
especially the National Infrastructure Plan, and the passage of 
other economic reforms will determine not only how well Mexico 
weathers the economic recession, but also how fast the country will 
succeed in its insertion into the global economy.  End Comment. 
GARZA