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OO RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #0725/01 0701703
ZNR UUUUU ZZH
O 111703Z MAR 09
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5592
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC
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RUEHC/DEPT OF LABOR WASHINGTON DC
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RUEHBS/USEU BRUSSELS

UNCLAS SECTION 01 OF 06 MEXICO 000725 
 
SENSITIVE, SIPDIS 
 
STATE FOR WHA/MEX, WHA/EPSC 
STATE FOR EB/IFD/OMA - ALEX WHITTINGTON 
TREASURY FOR IMB B MURDEN, W MONROE AND M BEASLEY 
 
E.O. 12958: N/A 
TAGS: ECON EFIN MX
SUBJECT: MEXICO AND THE G-20 MEETINGS 
 
REF: A. Secstate 17502 
 ¶B. Mexico 467 
      ¶C. Mexico 413 
      ¶D. Mexico 45 
      ¶E. Mexico 30 
 
¶1. (SBU) SUMMARY.  President Calderon has announced three sets of 
economic stimulus packages to help offset the impact of the global 
financial and economic crisis and stimulate the economy.  The 
Mexican banking sector remains solid with an adequate capitalization 
rate.  However, the deepening of the global crisis and the lack of 
positive reactions to the U.S. stimulus package have worsened 
Mexico's economic outlook for 2009.  Most analysts expect a GDP 
contraction of more than 3%, given the country's close link to the 
U.S. economy.  While the government is implementing measures to 
protect its most vulnerable sectors, it has also called the 
international community to prevent protectionism and keep trade 
flowing freely.  End Summary. 
 
Stimulus: 
--------- 
 
¶2.  The Mexican government has announced three stimulus packages 
over the past 12 months:  "Program to Support to the Economy" 
announced on March 3, 2008; "Program to Stimulate Growth and 
Employment" announced on October 8, 2008; and "The National Accord 
in Favor of Families, the Economy and Employment", announced on 
January 7, 2009. 
 
--The first stimulus package included a set of measures worth 
approximately $ 1.7 billion and involved tax incentives, such as a 
3% reduction in the provisional payments of income (IRS) and single 
corporate tax (IETU) as well as other tax incentives for small 
businesses. It also included government support to stimulate 
employment, such as subsidies in social security fees paid by 
employers and peak-hour electricity rates reductions for the 
productive sector and more budgetary resources for development 
banks. 
 
--The second program focused on increasing spending in 
infrastructure and facilitating the timely development of 
infrastructure projects, which include the construction of a 
refinery, toll roads, school, water treatment plants, railway 
tracks, etc; support to small and medium-sized via financing from 
development banks, and the elimination and streamlining of import 
duties.  This package ws worth approximately $10 billion. 
 
--The third package targets job creation, avoiding layoffs, pension 
protection, lowering electricity rates, freezing gasoline and gas 
prices and boosting investment in infrastructure.  This package 
involves resources from development banks and trust funds valued at 
approximately 1% of GDP. 
 
These programs will not increase the government's fiscal deficit 
more than the 1.8% of GDP approved by the Mexican Congress for 2009. 
 The government will be financed through oil hedging, tax 
 
MEXICO 00000725  002.2 OF 006 
 
 
collection, stabilization funds and if necessary spending cuts in 
other areas. 
 
Financial Sector: 
----------------- 
 
 
¶2. The Mexican banking sector is relatively solid, having not 
acquired toxic assets, and therefore, not requiring the same 
injection of capital as banks in other parts of the world.  The 
banks' capitalization level is currently adequate -around 14%- and 
their key concern to date has been a hike in the rate of credit 
cards defaults, which currently stands at around 10%.  Most of the 
banks have reacted by decreasing the number of credit cards issued 
to private citizens and are being more careful on their risk 
analysis.  Banks with the largest number of defaults have 
implemented programs to help clients renegotiate their debts.  As a 
result of the growth in unemployment and the expected growth in 
non-performing loans, banks might be forced to increase their 
capital reserves to the detriment of their profits. 
 
¶3. In October 2008, the government reported significant losses from 
companies involved in risky derivative ventures. The firms included 
large enterprises such as Comercial Mexicana, Cemex, Vitro, Alfa and 
Gruma. The Mexican government announced that it will require Mexican 
companies whose shares are traded on the Mexican stock exchange to 
adopt International Financial Reporting Standards (IFRS) to provide 
greater transparency and clarity for foreign and local investors in 
Mexican publicly-traded companies. 
 
¶4. Mexican financial authorities have called both for stricter 
supervision of corporate finances and the elimination of existing 
legal loopholes.  The Finance Secretariat has been working for some 
time now on legislation to simplify existing bankruptcy procedures, 
as part of the lessons learned from the financial crisis in 1995, 
which include early alerts and a deeper risk analysis for granting 
loans.  A group of Senators and the Bank of Mexico governor have 
publicly criticized banks, especially foreign ones, for charging 
higher interest rates than in their countries of origin.  The 
Congress intends to pass a bill to put a cap on interest rates to 
allegedly help stimulate credit. 
 
¶5. The U.S. government's announcement of the conversion of its 
preferred stocks in Citi in common equity generated controversy in 
Mexico about the future of Banamex, which Citi acquired in 2001. 
Some observers have said that Mexican financial laws prohibit a 
foreign government from having a stake in Mexican banks.  The Senate 
considered a bill that could eventually have forced Citi to return 
Banamex to Mexican hands.  Discussion of the bill was postponed 
until the government, through the Finance Secretariat, announces 
this week its interpretation of what is allowed under Mexican laws 
and international agreements. 
 
Real economy: 
------------- 
 
 
MEXICO 00000725  003 OF 006 
 
 
¶6. The deepening of the global crisis and the lack of  positive 
reactions to the U.S. stimulus package have worsened Mexico's 
economic outlook for 2009.  The Bank of Mexico now projects a GDP 
decline of between -0.8 and 
-1.8%, but most analysts are expecting a contraction of more than 
3%, given the country's close link to the U.S. economy.  Exports, 
industrial output, consumption, remittances and foreign direct 
investment have all suffered the effects of the crisis.  During the 
fourth quarter of 2008, non-oil exports to the U.S. fell 9.7%. 
Within them, automobile exports to the U.S. - Mexico's largest 
manufacturing exporter - fell 11.1%.  In December 2008, industrial 
output registered its eighth consecutive decline slumping 6.7%. 
Both, the manufacturing and construction sectors plunged by 6.6% and 
7.1%, respectively.  Foreign direct investment and remittances, the 
second and third most important sources of foreign exchange inflows 
fell 31% and 3.6% in annual terms in 2008.  Expected further 
declines in foreign currency inflows in 2009 will increase the 
current deficit from 1.4% of GDP in 2008 to between 2.6 and 3% of 
GDP. 
 
¶7. The most vulnerable sectors of the economy are the automobile, 
auto parts and maquila sectors.  In January, production and exports 
from the automobile industry fell 51% and 57%, respectively.  In an 
attempt to prevent permanent closures protect employment in these 
sectors - about 500,000 jobs- the government implemented a $ 135 
million program to economically support manufacturing companies 
which have been forced by economic conditions to call for technical 
stoppages.  About 500 companies have registered to receive support, 
which consists of paying part of the companies' payroll with 
government budget resources. 
 
¶8. While the government is implementing measures to protect its most 
vulnerable sectors, it has also called the international community 
to prevent protectionism and keep trade flowing freely.  As a token 
of its commitment to free trade, Mexico eliminated tariffs on 
imports from non-FTA partner countries in December.  At the G20 
meeting on November 15, 2008 President Calderon and other leaders 
pledged to refrain from raising new barriers to trade. Calderon is 
not only adhering to this commitment; he is reducing barriers to 
trade in the hopes of spurring economic growth and opportunities to 
offset a deeper economic downturn. 
 
¶9. The announcement of the "Buy American" provision first raised 
concerns among the government and possible affected industries, such 
as Mexican steel and the manufacturing sector.  The latest Mexican 
government's statement about the provision is that it has been 
watered down to prevent violating international agreements. 
Calderon has expressed concern that a potential review of NAFTA 
might create uncertainty especially in those sectors where the 
economy has shown substantial growth in recent years. 
 
Social/Labor Impact: 
-------------------- 
 
¶10. The official jobless rate -which masks informal employment, 
underemployment, and discouraged workers who are not actively 
 
MEXICO 00000725  004 OF 006 
 
 
seeking employment - reached a record of 5% in January. Some 
analysts believe that unemployment could well reach 10 or 12%. The 
two traditional escape valves, migration to the U.S. and employment 
in the informal sectors are becoming insufficient to absorb the 
number of unemployed.  The government has announced a set of 
measures to address increased unemployment.  These measures include: 
temporary unemployment insurance that includes training programs and 
healthcare services; expansion of the current temporary public works 
employment program 40% over what was initially planned to cover 
250,000 Mexicans; allowing unemployed workers to take money out of 
their pension funds before retirement without penalty; expansion of 
social and health coverage for people who lose their jobs. 
 
¶11. Having failed to deliver as the employment president, Calderon 
and his PAN party face a hard challenge in 2009 congressional and 
governor races.  Deteriorating security and economic conditions will 
erode Calderon's PAN chances of winning more congressional seats in 
July and could eventually open the door to more populist 
challengers.  Moreover, the failure to absorb the current and future 
labor force might eventually increase insecurity and poverty levels. 
Jobless Mexicans may find it more difficult to resist working for 
criminal organizations. 
 
Dimension of the Crisis: 
------------------------ 
 
¶12. Although the Mexican government has frequently praised the 
country's macroeconomic stability and solid banking sector, it has 
finally acknowledged that Mexico is feeling the effects of a global 
economic "tsunami".  It is unlikely that the Bank of Mexico will 
meet its inflation target due to the pressure exercised by the peso 
depreciation.  The higher inflation expectations have prevented the 
central bank from relaxing its monetary policy as fast as the 
government would like to see. 
 
¶13. The economic slowdown will significantly reduce the government's 
tax revenues.  The expected decline in oil production and prices 
motivated the government to hedge its oil revenues for 2009 at $ 70 
per barrel for about 75% of its exports.  This wise decision plus 
the increase in the fiscal deficit from a balanced budget to 1.8% of 
GDP and financing expected to be obtained from the Inter-American 
Development Bank and the World Bank will help Mexico weather the 
economic crisis in 2009 and part of 2010.  Should the recession last 
beyond 2009, the government still has resources in its stabilization 
funds that could be used to prevent cuts in public spending or an 
increase in the fiscal deficit. Government sources have told Embassy 
officers that they remain committed to maintaining public deficit 
under control. Thus, in the medium term, Mexico will have to pass 
bills to increase its tax collection and non-oil revenues. 
 
Financial markets and liquidity: 
-------------------------------- 
 
¶14. The Mexican government has taken a number of measures to support 
liquidity in debt markets.  Last year, the Bank of Mexico announced 
a measure to allow commercial banks to use their required reserves 
 
MEXICO 00000725  005 OF 006 
 
 
as collateral for short-term funding through guaranteed loans. 
Banks can also access short-term funding via repurchase agreements 
with the Bank of Mexico in exchange for government and corporate 
debt instruments.  The Economic Secretariat has set up a guarantee 
fund of about $ 167 million to improve non-bank financial 
institutions' (sofoles and sofomes) access to liquidity. 
 
¶15. The Finance Secretariat, through the government's development 
banks Nafin and Bancomext, announced a guarantee program to help 
companies roll over short-term debt or commercial paper.  Last year, 
there were liquidity shortfalls in Mexico's mortgage market, but the 
housing development bank, Sociedad Hipotecaria Federal (SHF) offered 
approximately $ 2.7 billion to support debt issuances, special 
credit lines and bridge loans.  SHF also negotiated a $2.5-billion 
loan with the Inter-American Development Bank. 
 
¶16. The Bank of Mexico and the Finance Secretariat implemented in 
2008 a series of measures aimed at alleviating pressures in the 
local bond market.  The initiatives include a reduction of 10, 20 
and 30-year government bond issuances in favor of treasury bills; 
credit lines of up to $5 billion to the government from multilateral 
lenders; a reduction of the size of the weekly auction of debt 
securities issued by deposit insurance agency IPAB; and the 
establishment of a program that will enable the central bank to 
repurchase IPAB securities. 
 
¶17.  The National Infrastructure Plan is seen by the Calderon 
administration as the largest stimulus economic and employment tool. 
 However, the existing credit crunch has prevented the government 
from bidding large infrastructure programs such as the mega port in 
Punta Colonet and toll road packages.  The real annual growth of 
direct financing to the private sector by commercial banks has 
decreased from 15.4% in July 2008 to 5.4% in January 2009.  The 
growth of direct lending for businesses fell from 20.8% to 19.4% 
during the same period, but the sector that has been hit the hardest 
has been consumer credit.  Direct lending by commercial banks to 
consumers declined 33% in January 2009. 
 
Foreign exchange rate and Bank of Mexico's response: 
--------------------------------------------- ------- 
 
¶18. The peso depreciated 55% from its highest level in August 2008 - 
9.3 to 15.35 pesos to the dollar  - as of March 10.  Investors' 
quest for liquidity and safety has led them to reduce their exposure 
to emerging markets.  Moreover, speculative bets on the exchange 
rate and on the central bank's dollar auctions have also negatively 
impacted the peso.  In an effort to moderate volatility, the Bank of 
Mexico has intervened in the foreign exchange market via daily 
dollar auctions and extraordinary direct offerings of dollars.  The 
Bank of Mexico has used about $19 billion of its $85 billion 
international reserves to ease the peso volatility.  The currency 
depreciation has  helped exporters, public finances and remittance 
recipients with the peso conversion, but will also have an undesired 
impact on the inflation. 
 
Role of the G20 and Mexico's goals: 
 
MEXICO 00000725  006 OF 006 
 
 
----------------------------------- 
 
¶19.  President Calderon and the GOM have made few public comments 
about Mexico's goal for the G20.  During President Sarkozy's March 
8-10 trip to Mexico, he and President Calderon discussed the G-20 
and the possibility of finding common goals in their positions. 
Calderon gave an interview to AFP in which he said that Germany and 
France are strong leaders in the search of measures to mitigate the 
crisis. He added that it is urgent to restore the financial and 
banking sector in particular those of the U.S.  He stressed that it 
was vital to restructure multilateral financial institutions. 
Calderon expects that from the London summit, members will come up 
with quick and concrete solution.  Otherwise it would be difficult 
to see the end of the global crisis. 
 
Note:  All figures in this cable are in US dollars. Embassy Mexico 
POC on the G-20 are Economic Counselor Adam Shub (shubam@state.gov) 
and Deputy Economic Counselor Sigrid Emrich (emrichs@state.gov)