VZCZCXRO2732
PP RUEHCD RUEHGD RUEHHO RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHMC #0495/01 3091452
ZNR UUUUU ZZH
P 041452Z NOV 08
FM AMCONSUL MONTERREY
TO RUEHC/SECSTATE WASHDC PRIORITY 3235
INFO RUEHME/AMEMBASSY MEXICO PRIORITY 4257
RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHMC/AMCONSUL MONTERREY 8752

UNCLAS SECTION 01 OF 03 MONTERREY 000495 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EIND ETRD PGOV MX
SUBJECT: U.S. FINANCIAL WOES SPILL OVER INTO MONTERREY'S REAL 
ECONOMY 
 
REF: A) MONTERREY 473; B) MEXICO 3197; C) MONTERREY 489 
 
MONTERREY 00000495  001.2 OF 003 
 
 
¶1.       (U)  Summary.  The Monterrey business community has 
begun to be affected by the U.S.  financial crisis, including 
large derivative losses, abrupt changes in currency values, and 
restricted credit access.  Several large Monterrey companies 
incurred significant losses due to derivatives contracts gone 
bad.  Local economists think that dollar purchases by these 
corporations, to fund their derivative losses, helped depress 
the value of the Mexican peso.  The sudden decline of the peso 
has helped some exporters, but the effect depends on the region 
and the quantity of U.S. inputs in the finished product. 
Finally, credit access is tightening for Mexican companies as 
foreign owned banks withdraw liquidity to cover losses at home. 
End Summary. 
 
 
 
¶2.       (SBU)  This report is the companion cable to reftel A, 
which reported on the political and security concerns in 
Monterrey.   Overall, the mood here is dour as business 
executives and opinion-leaders can't decide which is worse:  the 
economic crisis or the worsening security climate. 
 
 
 
¶3.       (U)  Northern Mexico is just beginning to feel the 
effects of the U.S. financial crisis, which private economists 
expect will reduce economic growth at least into the first half 
of 2009.  In a speech to the American Chamber of Commerce, 
Everardo Elizondo, the Deputy Governor of the Central Bank of 
Mexico, warned that this was the worst U.S, financial crisis in 
50 years.  Econoff also attends a monthly meeting of a group of 
private economists, who predicted that the current U.S. 
recession would be shaped like a `L' rather than a `V', since 
the U.S. economy will be flat for at least one year and it could 
take longer to recover.  These economists commented that the 
`real economy' of Nuevo Leon had only started to feel the 
adverse impact in September. 
 
 
 
Monterrey Companies Suffer Substantial Derivative Losses 
 
 
 
¶4.       (SBU)  In the last several weeks, several large 
Monterrey companies have reported large losses resulting from 
their purchases of derivatives contracts to hedge on currency or 
raw materials, such as natural gas.  Our contacts believe that 
these companies generally were not speculating, but were engaged 
in legitimate hedging since they have large operations in other 
countries or use energy for their operations.  The value of the 
derivative contracts were marked to market value, so even if 
they are not immediately due they indicate current estimates of 
future market losses.  The companies with large losses include 
Cemex ($500 million USD), Alfa ($191 million), Vitro ($360 
million), Gruma ($291 Million) and the Saltillo Industrial Group 
($55 million) (see reftel B).   These losses come at a bad time 
for Cemex, which is already suffering from high debt load from 
past acquisitions and weakening demand from key markets in the 
United States, Spain and England.  According to press reports, 
76% of Cemex' debt was in dollars, which has sharply increased 
in value relative to the peso, although Cemex does receive a 
large portion of its income in dollars.  The derivative losses 
are the worst for the already weak Vitro, and Vitro's stock 
market value has plunged 70% since July 2007, including down 23% 
on October 22 alone.   However, we understand that Vitro has 
restructured its debt and will avoid defaulting on its debts. 
As a result of the derivative losses and market pressures, the 
credit agencies have lowered their ratings for Cemex and Gruma, 
and Vitro is under review. 
 
 
 
¶5.       (SBU)  In several cases, the Monterrey companies are 
closing out their derivative positions, eliminating the risk of 
additional losses but also foregoing the chance that the market 
will rebound and cut their losses.  The Consul General and 
Econoff met with Alfa, which stated that they have closed all of 
their derivative positions and reported the losses to Wall 
Street.  Alfa claims that they will be able to handle these 
losses and their cash flow to debt ratios are reasonable. 
Similarly, according to press reports, Vitro is closing its 
derivative positions, including those due from 2009 to 2011, to 
provide certainly to their losses.  Several economists 
questioned Vitro's strategy, since they are locking in losses, 
but since the company could be at risk it may be necessary to 
have a final accounting of their derivative losses. 
 
MONTERREY 00000495  002.2 OF 003 
 
 
 
 
 
Causes and Results of Dollar Revaluation 
 
 
 
¶6.       (SBU)  Central Bank Deputy Governor Elizondo and 
private economists concur that the need of these companies to 
cover derivative losses by purchasing dollars had a significant 
impact in the revaluation of the dollar in comparison to the 
Mexican peso.  According to this explanation, as the global 
financial market became worried, there was a `flight to quality' 
as investors moved away from emerging markets to the stability 
of the U.S. dollar.  These currency shifts resulted in 
derivative losses, which in turn forced the Mexican companies to 
dump pesos and buy dollars to cover their derivative losses and 
debt obligations, further increasing the strength of the dollar. 
 According to Elizondo, investor fear led to the overshooting of 
market fundamentals, so the dollar rose to 14 pesos/$1 USD, 
forcing the Mexican Central Bank to intervene to break the 
market psychology.  Although the Mexican Central bank burned 
through 10% of its large foreign exchange reserves in 72 hours, 
Elizondo defended the Bank's decision, maintaining that this was 
the purpose of the Central Bank's international reserves.  A 
group of private economists agreed that market fear had overshot 
the market, and they expect that the peso will settle between 11 
to 13 pesos per dollar, likely at 12 pesos/$1 dollar.  (As of 
November 4, it stood at 12.6pesos/$1 dollar). 
 
 
 
¶7.       (SBU)  Deputy Governor Elizondo also explained to the 
Amcham conference how the Mexican Government acted to calm the 
financial markets, using three prongs.  First, the  Bank of 
Development (Nafin) guaranteed commercial paper by large Mexican 
companies like Cemex and also small enterprises.  Second, the 
Central Bank will provide liquidity for bank to bank loans. 
Third, the Federal Mortgage Society (SHF) will provide liquidity 
and credit to the housing sector and support mortgage backed 
instruments.  These measures respond to reported spikes in 
interbank lending rates in early October. 
 
 
 
¶8.       (SBU)  The market devaluation of the Mexican peso 
increases the competitiveness of certain exporters, although 
they will still suffer from decreased demand in the United 
States.   According to American Chamber of Commerce 
International Trade Director Luciano Escobedo, at the dollar's 
height Mexican exports were up to 30% more competitive. 
However, the actual impact depends on the amount of inputs from 
the United States.  For a maquila which uses imported American 
inputs, they will gain comparatively less, but if a company 
utilizes Mexican inputs, they could reap a large increase in 
competitiveness.  (Note.  We understand that for the maquila 
industry in general, 70% of the inputs are imported from the 
U.S.  End Note).  Overall, Escobedo estimated that maquilas in 
border towns such as Matamoros and Ciudad Juarez, which depend 
heavily on U.S. inputs and exports, would lose 30-40% of their 
jobs, while companies in Monterrey or Saltillo, which have more 
of a Mexican supplier base and sell partially to the Mexican 
domestic market, could see employment gains of 4-5%. 
 
 
 
Impact of Restricting Credit Access 
 
 
 
¶9.       (SBU) The Mexican financial system is still relatively 
limited compared to other countries, which reduced its exposure 
in the current global financial crisis.  According to Monterrey 
TEC professor Alejandro Ibarra, the Mexican banking sector still 
has not fully recovered from the 1994 banking collapse.  In 1993 
the financial intermediation level was 47% of Mexico's GDP, but 
in 2006 it was still only 25% of the Mexican GDP (in comparison, 
the U.S. ratio is 140%).  The Mexican banks focus on consumer 
credit, which bring strong returns, since there are no limits to 
legal interest rates, and mortgage loans.  However, Mexican 
mortgages are relatively uncomplicated and do not include the 
exotic variable rates or no money down loans that have resulted 
in large losses in the U.S. 
 
 
 
¶10.   (U)  Although the Mexican banking system has not itself 
suffered significant losses, liquidity has been drained to 
 
MONTERREY 00000495  003.2 OF 003 
 
 
assist the foreign banks.  According to a Fitch ratings report 
in 2007, foreign owned banks control 80% of Mexican commercial 
banking assets, led by the Spanish owned BBVA/Bancomer (25% of 
the market), Citibank owned Banamex (19%), the Spanish Santander 
(14%), HSBC (11%), the Mexican Banorte (9%), the Canadian 
Scotiabank (5%), the Mexican Inbursa (4%), other Mexican owned 
banks (7%) and other foreign owned banks (6%).   According to 
our contacts, many foreign banks have withdrawn money to cover 
losses in other markets.  In addition, large Mexican 
corporations (like CEMEX) generally raise funds through the sale 
of commercial banks, or borrowing from international banks. 
 
 
 
¶11.    (SBU)  Finally, the Mexican credit markets have tightened 
for both large and medium Mexican companies.  Deputy Governor 
Elizondo confirmed that Mexican credit is more expensive, and 
more limited, with much higher credit standards for loans, 
echoing comments by other business contacts.  Mexican borrowers 
are being to feel the heat.  For example, Enrique Garza, a 
lawyer experienced in investment funds, said that his company 
used to close 1-2 deals per months, but now all his deals are 
frozen, and instead several of his companies have come to him 
discussing bankruptcy.    There will less of an impact on small 
Mexican businesses, because many of them were unable to borrow 
even before the current credit problems. 
 
 
 
¶12.   Comment.  Until recently, U.S. economic problems had had a 
limited impact on the real economy of Mexico, hitting vulnerable 
sectors such as the auto industry and declining remittances, but 
not affecting the financial industry.   However, now it is clear 
that the U.S. financial crisis is affecting both Mexican 
companies and the availability of credit.  The Government of 
Mexico is using the financial tools available to assure 
liquidity, and the government will spend substantial sums on its 
national infrastructure plans to boost the economy.  However, 
the Mexican economy is still so closely tied to the American 
economy, since the U.S. is still the destination of 80% of 
Mexico's exports, Mexicans laboring in the U.S. remitted $24 
billion last year (see reftel C), and the U.S. remains the 
largest source of foreign direct investment.  Therefore, 
although Northern Mexico can take some steps to alleviate the 
economic problems, our economist contacts think that Mexico will 
have very low growth through 2009 until the U.S. economy 
recovers.   End Comment. 
WILLIAMSON