VZCZCXRO0243
PP RUEHCD RUEHGD RUEHHO RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHMC #0089/01 0541945
ZNR UUUUU ZZH
P 231945Z FEB 09
FM AMCONSUL MONTERREY
TO RUEHC/SECSTATE WASHDC PRIORITY 3535
INFO RUEHME/AMEMBASSY MEXICO PRIORITY 4582
RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHMC/AMCONSUL MONTERREY 9095

UNCLAS SECTION 01 OF 03 MONTERREY 000089 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT PLEASE PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD MX
SUBJECT: MEXICAN ECONOMISTS EXPECT DISMAL ECONOMY THROUGH 2010 
 
REF: A) MEXICO 467; B) MEXICO 413; C) MEXICO 42; AND D) MEXICO 45 
 
MONTERREY 00000089  001.2 OF 003 
 
 
¶1.       (U)  Summary.  Macroeconomics has become a hot topic 
among Monterrey businessmen as they try to determine the length 
and depth of the U.S. recession and its impact on Mexico.  The 
Mexican economy is closely linked to the United States, and the 
U.S. recession has been transmitted to Mexico through declining 
exports, falling direct foreign investment, and other factors. 
Mexican economists generally expect the Mexican economy to 
remain weak through 2010, the Mexican peso will not recover, but 
inflation will moderate.  They do not have high hopes for 
President Calderon's anti-recession package of infrastructure 
spending and reduced energy prices.  End Summary. 
 
 
 
Economists Forecast Weak Mexican Economy Until 2010 
 
 
 
¶2.      (U)  In recent weeks Econoff has attended five different 
presentations by prominent economists to packed houses of 
business professionals. Although the current crisis is not as 
bad as the economic slump of 1995, since government finances and 
the banking system are sound, there has been a substantial 
impact.  The U.S. recession has particularly affected the 
Monterrey area, which focuses on exports of bulky consumer 
durables, such as cars and electronics, to the United States 
(see reftel A for the effect on employment throughout Mexico). 
 
 
 
¶3.      (U)  Due to the close economic ties between the U.S. and 
Mexico, particularly in areas such as trade, investment and 
remittances, the Mexican economy is likely to follow the lead of 
the United States.  Former Mexican Central Bank Deputy Governor 
Everardo Elizondo and American Chamber of Commerce economist 
Deborah Riner both noted that Mexican economic growth is closely 
correlated with the U.S. Industrial Production index.  Just as 
the U.S. industrial production index is falling sharply, the 
Mexican GDP is, after a lag, following suit.  Riner commented 
that the U.S. economy sets the parameters for Mexican growth. 
Elizondo stated that the Mexican economy will show negative 
growth at least in the last quarter of 2008 and in the first 
quarter of 2009, and internal Mexican demand will not recover 
until 2010.  Riner commented that under her optimist scenario 
Mexican GDP would fall 1% in 2009, and slowly grow at 1.7% in 
¶2010.  Several businessmen attending the Riner presentation 
thought that these projections were far too rosy. 
 
 
 
¶4.      (U)  Elizondo and Riner detailed several reasons for the 
continued weakness of the Mexican economy.  Since Mexico exports 
almost 80% of its goods to the U.S., obviously a weak U.S. 
economy adversely affects Mexico.  Riner also expects 
remittances to decline but not to drop drastically, and she 
projects that foreign direct investment in Mexico will fall from 
$25 billion USD in 2007 to $19 Billion in 2008, dropping to 
$17.5 billion in 2009 until rebounding slightly to $19 billion 
in 2010.  Elizondo emphasized that Mexican consumer spending 
accounts for approximately 70% of the GDP, and he expects that 
tight credit and low consumer confidence will hold down consumer 
spending in the near term.  Moreover, Mexican consumers have 
lost spending power, since wages rose 4.5%, while inflation 
increased by 6% in 2008. 
 
 
 
¶5.      (U)  The Mexican peso has depreciated 40% in value 
against the U.S. dollar, and the economists do not expect the 
peso to recover (see reftel B).   Following the trend of other 
currencies, the Mexican peso has devalued sharply since the 
second half of 2008 due to the global flight to the safety of 
U.S. greenbacks, falling Mexican industrial and petroleum 
exports, small declines in remittances, an outflow of portfolio 
investments, and the demand by Mexican corporations for dollars 
to cover substantial losses in derivatives.   Elizondo, Riner, 
Cemex economist Gerardo Cruz Vasconcelos, and Actinver 
Investment House economist Francisco Suarez all project that the 
Mexican peso will not recover its value through 2010.  Moreover, 
there are some worrisome long term trends.  In the summer of 
2008 the Government of Mexico cleverly hedged and ensured that 
Mexico will receive $70 per barrel of oil through 2009, far 
above the current world price of oil.  However, starting in 2010 
Mexico will only receive the market price, and its oil 
production is also declining significantly (see reftel C). 
Lower manufacturing exports, foreign direct investment and lower 
 
MONTERREY 00000089  002.2 OF 003 
 
 
remittances will reinforce the trend towards a weaker peso. 
Riner, for example, projects higher current account deficits of 
$10 billion in 2007 (1.0% of GDP), $16 billion in 2008 (1.5% of 
GDP), $25 billion in 2009 (2.8% of GDP), and $42 billion in 2010 
(4.7% of GDP). 
 
 
 
¶6.      (U)  Several economists project that inflation, which 
reached 6.5% in 2008, far above the Central Bank's target of 3%, 
would decline due to weakened demand.  Riner forecasts that 
annual inflation will fall to 4.37% in 2009 and 3.66% in 2010. 
However, several business people were skeptical of this 
favorable scenario.  Mexico imports many goods, including 
foodstuffs, from the United States, and the depreciation of the 
Mexican peso will push the price of imported goods sharply 
higher.  Although Elizondo thought that weak demand would 
restrain prices in the short run, if a store's inputs increase 
40% in price, they cannot continue to maintain their price 
levels for long.  In addition, many goods made in Mexico contain 
U.S. components, which will also push these prices higher. 
 
 
 
¶7.      (U)  Another drag on the economy could be the increasing 
IETU tax rates.  The IETU, introduced by President Calderon in 
2008 to increase tax collection rates, will increase its rate 
from 16.5% in 2008 to 17% in 2009 and up to 17.5% in 2010. 
Mexican taxpayers must calculate their tax both for the ISR 
income tax (with higher tax rates and many more deductions) and 
the IETU (focusing on sales with many fewer deductions) and pay 
the higher of the two.  Cruz Vasconcelos complains that since 
businesses cannot deduct business losses the IETU tax will 
increase tax collection during a recession, further dampening 
demand and the economy.  Note.  Businessmen have complained 
about the IETU since its inception, and Econoff has heard 
complaints, but no rigorous economic analysis, demonstrating how 
the IETU taxes would damage the economy.  End Note. 
 
 
 
¶8.      (SBU)  The depreciation of the Mexican peso should boost 
exports and international competitiveness by companies utilizing 
substantial Mexican content.  For instance, a Mexican company 
selling services could do well, since most of its costs are paid 
to Mexican professional in pesos but its income is in U.S. 
dollars.  One such example is the Monterrey software based 
development firm Dextratech, whose principal expense, salaries, 
in denominated in pesos while its sales to U.S. clients are 
denominated in appreciated dollars.  Dextratech's overall volume 
of sales has declined slightly, but profits have risen due to 
the rising exchange rate.  However, this phenomenon is of 
limited benefit to many Mexican maquilas, since they use U.S. 
inputs for over 70% of the value of their exports, so the 
declining peso will be of marginal assistance.  In addition, 
some countercyclical industries are also doing well.  For 
example, the U.S. company Autozone, which supplies auto parts to 
consumers, has increased sales as people repair their old cars 
rather than purchase a new one. 
 
 
 
Criticism of Calderon's  Program to Reactivate the Economy 
 
 
 
¶9.       (U)  The economists all agreed that President 
Calderon's plan to reactivate the economy is too small to do the 
job.  President Calderon has proposed several plans to stimulate 
internal demand, including spending on infrastructure, programs 
to retain jobs, and freezing gasoline prices (see reftel D). 
Riner pointed out that Calderon's entire program represents 1% 
of Mexico's GDP, insufficient in her view to restart demand. 
Riner also noted that the GOM is very slow to spend money on 
infrastructure projects, a key component of Calderon's plan. 
Cemex's Cruz Vasconcellos argued that Calderon's infrastructure 
spending will only balance out declines in the construction 
industry, not provide fresh stimulus to the economy.  Although 
Cruz Vasconcellos projects that Calderon's program will increase 
infrastructure spending from 472 billion pesos in 2008 to 589 
billion pesos in 2009, this will be more than counterbalanced by 
falling construction of non-residential buildings.   Indeed, 
Cruz Vasconcellos projects that total spending by the 
construction industry on residential, non-residential and 
infrastructure projects, will fall from 1,593 billion pesos in 
2008 to 1,554 billion pesos in 2009. 
 
 
MONTERREY 00000089  003.2 OF 003 
 
 
 
 
¶10.   (SBU)  Comment.  Econoff has found that Northern Mexican 
businessmen are keenly interested in President Obama's economy 
recovery package, which they see as their potential salvation. 
They are not impressed with their own government's efforts, 
which seem to focus on denying the economic difficulties of 
2009, rather than designing a program large enough to reactivate 
the Mexican economy.  End Comment. 
WILLIAMSON