VZCZCXRO4898
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #0811/01 0782221
ZNR UUUUU ZZH
P 192221Z MAR 09
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 5684
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
RHMFIUU/HQ USNORTHCOM
RHMFISS/CDR USSOUTHCOM MIAMI FL
RHEHAAA/NSC WASHINGTON DC

UNCLAS SECTION 01 OF 03 MEXICO 000811 
 
SENSITIVE, SIPDIS 
 
STATE FOR A/S SHANNON 
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 (RACHEL JARPE) 
DOE FOR INTERNATIONAL AFFAIRS (ALOCKWOOD) 
NSC FOR RICHARD MILES/DAN FISK 
STATE PASS TO USTR (EISSENSTAT/MELLE) 
STATE PASS TO FEDERAL RESERVE (BORA DURDU) 
 
E.O. 12958: N/A 
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: EVERY CRISIS IS AN OPPORTUNITY; MEXICO SEES POSITIVE 
TRENDS IN PUBLIC FINANCE, AND OPPORTUNITIES FOR REFORM 
 
¶1. (SBU) Summary: While the deepening global crisis has 
worsened Mexico's economic outlook for 2009, the Mexican 
government feels it has a cushion to weather the crisis and 
shield its public finances in 2009 and 2010.  The Finance 
Secretariat's 
chief economist pointed to the successful oil hedging, the 
increase of its public deficit to 1.8% of GDP, loans from 
multilateral organizations, and about $ 9.3 billion in the 
government's oil stabilization funds as positive elements. 
Nevertheless, the expected duration of the economic recession 
and the projected decline in oil production and prices will 
significantly reduce the government's tax collection and 
revenues.  Over the next year, President Calderon's government 
will likely look closely at a broader tax reform, a gradual 
freeing of some government administered prices, and even 
cutting spending if required to prevent increasing the fiscal 
deficit.  Despite a gloomy economic prognosis through 2011, 
our contacts see the crisis as an opportunity to pass much 
needed and overdue structural reforms to improve Mexico's 
competitiveness and stability.  END SUMMARY 
 
¶2. (SBU) We spoke last week with Miguel Messmacher (strictly 
protect), the chief economist at the Secretariat of Finance 
and Public Credit. A political appointee in his mid-30s with a 
Ph.d in economics from Harvard University, Messmacher has also 
done a stint at the IMF until 2007. He listed a number of 
items that would help cushion MexicoQs public finances in 
2009-2010. 
 
OIL HEDGING SHIELD PUBLIC FINANCES IN 2009 
------------------------------------------ 
 
¶3. (U) In 2008, when oil prices were plummeting from over $120 
per barrel to around $90 per barrel, the Mexican government 
successfully locked in oil prices of at least $70 per barrel, 
protecting its 2009 oil revenues and shielding its public 
finances.  The cost of the oil hedging was $1.5 billion, but 
the government expects to obtain revenues for about $9.2 
billion from it. 
 
GETTING BETTER FINANCING FROM THE IDB AND WORLD BANK 
--------------------------------------------- -------- 
 
¶4. (U) To support the government's countercyclical measures, 
in particular more public spending on infrastructure, the 
Congress, under the balanced budget requirement, authorized 
an increase in the fiscal deficit in 2009 from zero to 1.8% of 
GDP.  It also lifted the government's indebtness cap to allow 
the government to request loans from multilateral 
organizations. The government is in the last stage of 
negotiations for securing loans from the Inter-American 
Development Bank and the World Bank for 2009 and 2010, which 
offer attractive conditions for mid-income countries like 
Mexico. 
 
¶5. (SBU) Miguel Messmacher said that the International 
Monetary Fund's Short-Term Liquidity Facility (STLF, announced 
in October 2008,  was not entirely designed for countries like 
Mexico.  The Mexican government along with other countries 
sent its comments to the IMF, which according to Messmacher, 
is in the process of designing a more suitable/simplified 
lending mechanism or "flexible credit line". 
 
2009 CURRENT ACCOUNT DEFICIT FULLY-FINANCED 
------------------------------------------- 
 
¶6. (U) Finance Secretary Agustin Carstens has been on record 
that lower remittances, exports, foreign direct investment and 
tourism inflows in 2009 will increase Mexico's current account 
deficit to around 2% of GDP.  (Note: most analysts expect a 
current account deficit of between 2.4 and 2.6% of GDP. End 
Note).  However, Carstens also asserts that the current 
account deficit will be fully financed by the expected year- 
end capital surplus thanks in part to the additional revenues 
 
MEXICO 00000811  002 OF 003 
 
 
from the oil hedging and the $13.8-billion financing from 
multilateral organizations. 
 
FINANCIAL CUSHION FOR 2009 
-------------------------- 
 
¶7. (SBU) The peso depreciation, which on one hand has put 
pressure on core inflation, on the other has been beneficial 
to the government because with the peso conversion it gets 
more pesos for its oil exports. The peso depreciation will 
also generate revenues for the Bank of Mexico via its 
seigneurage  These revenues will be transferred to the Finance 
Secretariat. The government could also obtain additional 
recurring revenues from public bids on toll roads. (Note: the 
second public bid of a package of toll roads included in the 
FARAC, the government's bailout program, was abrogated as a 
result of the existing credit crunch. End Note).  Moreover, 
the government has a cushion of about $9.3 billion in its Oil, 
Pemex investment and Transfers to the States' Stabilization 
Funds. 
 
BUT WHAT ABOUT 2010? 
-------------------- 
 
¶8. (SBU) The government seems to be at a crossroads on how to 
meet its 2010 and other medium-term goals.  Key obstacles are 
declining oil production and depressed international prices, a 
public sector that relies 40% on oil revenues, the 
unlikelihood of hedging as effectively again its oil revenues, 
and lower non-oil tax collection given the economic slowdown. 
However, according to Messmacher, government officials have 
decided that to meet the challenge, they will have to make 
fiscal adjustments equivalent to 0.5% of GDP, for which they 
would have to do a number of things.  These include cutting 
spending, gradually freeing government-administered prices to 
a level above the expected inflation, and approving some kind 
of tax reform. 
 
PASSAGE OF A BROADER FISCAL REFORM? 
---------------------------------- 
 
¶9. (SBU) For the most part, the pressure on public finances as 
a result of the decline in oil revenues and the low tax 
collection rates has led the government to think about passing 
a broader fiscal reform, which includes indirect taxes such as 
applying a VAT on food and medicines and the elimination of 
current loopholes.  However, the Executive is aware that in 
the run up for the mid-term elections, it cannot introduce 
such a reform.  It will likely wait until after the elections 
to try and pass a fiscal reform.  If the government is unable 
to pass an ambitious tax reform, it will have to make use of 
its public prices (such as gasoline) to raise its revenues, 
but taking care not to  create an inflationary bubble. 
 
¶10. (SBU)  While most analysts say the opposition PRI will 
likely win a plurality in the Congress during the July 2009 
midterm elections, Hacienda officials say the PRI state 
governors will likely be the most supportive of an ambitious 
tax reform because they are unwilling to see a decline in 
their federal tax transfers.  Messmacher said PRI leaders are 
also aware of the need for passing another tax reform to 
protect public finances in case they win the presidential 
elections in 2012.  Therefore, they might think it is better 
to have Calderon's National Action Party assume the political 
cost now rather than having to deal with the problem in the 
future. 
 
COMMENT 
------- 
¶11. (SBU) The Mexican press has recently quoted Finance 
Secretary Agustin Carstens acknowledging that the effects of 
the global crisis will be felt in Mexico like an economic 
"tsunami", a quite different view from when he stated last 
year that the country would only catch a mild cold.  This 
 
MEXICO 00000811  003 OF 003 
 
 
acknowledgement has led the government to think carefully 
about whether the announced measures will be sufficient to 
climb out of the hole or whether they need additional policy 
changes that look at the medium term.  Due to the expected 
slow recovery of the U.S. and Mexican economies, the 
government is already planning the next steps for the medium 
term.  The current crisis has highlighted the urgent need for 
passing broader tax reforms to become competitive again.  To 
be effective, these reforms might also include 
telecommunications, labor, education, expansion of banking 
services and credit. 
 
BASSETT