VZCZCXRO9518
RR RUEHCD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHGD #0131/01 0932236
ZNR UUUUU ZZH
R 032236Z APR 09
FM AMCONSUL GUADALAJARA
TO RUEHC/SECSTATE WASHDC 1331
INFO RUEHME/AMEMBASSY MEXICO 2506
RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUEHGD/AMCONSUL GUADALAJARA 5387

UNCLAS SECTION 01 OF 03 GUADALAJARA 000131 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EAGR EIND EINV ETRD EAIR MX
SUBJECT: TIGHTENING BELTS, NOT TOURNIQUETS:  WESTERN MEXICO AND THE 
RECESSION 
 
REF: GUADALAJARA 0077 
 
GUADALAJAR 00000131  001.2 OF 003 
 
 
¶1.  Summary:  The economy of western Mexico, anchored on the 
state of Jalisco and the city of Guadalajara, appears to be 
withstanding the global economic crisis better than many other 
regions of the country.  Key sectors such as agribusiness and 
high technology have proven to be fairly resilient in the face 
of financial turbulence, the depreciation of the peso, and 
ongoing security challenges.  Other areas such as real estate, 
manufacturing, and tourism have been hit harder. Foreign 
remittances, an important element of the local economy, have 
fallen less than feared in real terms.  The Jalisco State 
Government is planning a lavish investment program in public 
infrastructure, partly for political reasons.  While the local 
business community is certainly anxious over ongoing national 
and world developments, there are no signs of panic.  End 
Summary. 
 
--------------------------------------------- --------- 
REMITTANCES:  Down, But Not Out 
--------------------------------------------- ---------- 
 
¶2.  Following a national trend, remittances peaked in 2006 and 
have been fluctuating around USD$750 million since, dropping 
slightly each of the last two years.  Though there had been 
continual slight growth in remittances to the states of 
Aguascalientes, Colima, Jalisco and Nayarit every year since 
Banxico began tracking by state in 2003, remittances have been 
stagnant since the start of 2006.  Jalisco, which takes in twice 
as much as the other three combined, has seen the largest drop, 
falling 3.3 percent in 2008.  Growth has declined in dollar 
terms, but the recent depreciation of the peso has enabled 
Mexicans to get more out of each remitted dollar.  These funds 
disproportionately benefit rural areas, which have seen the 
largest out-migration to the United States.  In Jalisco, over 
9,000 rural families rely on remittances as their main source of 
income, with the majority of payments made to parents by their 
working children.  Rising unemployment in the United States is 
therefore a significant concern for the future stability of 
remittance payments. 
 
--------------------------------------------- --------------- 
INFRASTRUCTURE:  Opening the Public Purse: 
--------------------------------------------- --------------- 
 
¶3.  Jalisco's State Government, aided by a record contribution 
from federal coffers and over USD$350 million in new public 
debt, has a wide range of public works projects planned or 
underway.  Many of the projects focus on road improvements and 
construction, including the completion of the last segment of 
the Guadalajara beltway, a city by-pass route for trucks, and 
improvements to the freeway between Guadalajara and Puerto 
Vallarta.  President Calderon joined Jalisco Governor Emilio 
Gonzalez Marquez on March 10 to inaugurate Guadalajara's first 
bus rapid transit route and promised funds for several 
additional lines.  The two leaders also came together to open 
the second phase of a hydroelectric dam on the Jalisco and 
Nayarit border.  When completed in 2012, the La Yesca dam will 
be the largest in Western Mexico and should create five thousand 
direct jobs, with up to an additional fifteen thousand indirect 
jobs.  While the Governor has heavily publicized these 
investments as an economic stimulus effort, opposition parties 
claim the surge in spending is also meant to influence this 
summer's municipal and legislative elections. 
 
--------------------------------------------- ---- 
MANUFACTURING:  Feeling the Pain: 
--------------------------------------------- ---- 
 
¶4.  As in other parts of the country, manufacturing has suffered 
in the region, with the automotive sector hit particularly hard. 
 Though layoffs have been limited so far, a local factory of 
around 700 employees creating electronic components for cars 
recently announced its liquidation in a restructuring effort 
that will move production to China.  In addition, a director of 
Nissan's Aguascalientes assembly plant told us that to avoid 
layoffs the company may begin to cut employee work hours; the 
plant also stopped production temporarily in January.  The Honda 
plant in suburban Guadalajara has also announced plans for a 
temporary production "holiday."   Furniture, another bedrock 
Jalisco industry, is also showing mixed results.  While the 
number of exhibitors at Guadalajara's National Furniture Show 
was 11 percent larger this year, and the declining peso makes 
Mexican furniture more attractive to foreign buyers, the weak US 
economy is undermining demand in the sector's largest export 
market.  Several furniture producers have experienced financial 
difficulties as a result.  Also hurting are companies that sell 
imported manufactured goods.  TRACSA, the local agent for 
Caterpillar and other US farm machinery makers, has reported a 
20 percent decline in sales over the past six months. 
 
--------------------------------------------- ---- 
 
GUADALAJAR 00000131  002.2 OF 003 
 
 
HIGH TECHNOLOGY:  A Bright Spot 
--------------------------------------------- ---- 
 
¶5.  Major players in "Mexico's Silicon Valley" are cautiously 
optimistic regarding the  potential growth of their sector this 
year. The President of the local Electronics Trade Association 
(CANIETI) estimated that 15% of the high-tech industry is 
suffering losses, while another 15% is booming, with the rest 
more or less stable.  Companies associated with the automotive 
industry are suffering, while those developing software and 
multimedia technologies, or handling outsourced "back office" 
operations for foreign companies are doing well.  Hewlett 
Packard, for example, is planning to expand its operations in 
the latter category this year after acquiring EDS.  For the most 
part, skilled employees in this sector who have been laid off by 
struggling enterprises have been able to find similar jobs at 
other high tech firms.  The State of Jalisco has also provided 
financial assistance to attract and support companies in this 
field, which it views as a motor for future development in the 
state.  With much of this sector's output destined for US 
buyers, the weak US economy remains a major concern. 
 
--------------------------------------------- -- 
REAL ESTATE:  A Softening Market 
--------------------------------------------- -- 
 
¶6.  After a more than ten year boom, the Jalisco real estate 
market is definitely softening.  In Guadalajara, at least three 
major commercial building projects have been put on hold by 
developers until they determine what impact the current 
financial downturn will have for the investors.  The city's 
ambitious plan to build a Latin American branch of the 
Guggenheim Museum also appears to be dead, given the uncertainty 
in locating private financing and the need to invest public 
funds in required infrastructure for the 2011 Pan American 
Games.  These decisions have had ripple effects in the 
construction and labor markets, with a reduction in employment 
opportunities.  On the residential side, the Consulate is 
finally seeing lower rents after more than ten years of 
increases and tough bargaining with landlords.  Sales prices are 
also declining, but in a gradual rather than abrupt manner. 
Guadalajara is not suffering from the kind of mortgage crisis 
that has depressed prices in many parts of the US.  Indeed, the 
local market can best be described as a slowly deflating soccer 
ball rather than a bursting "bubble." 
 
--------------------------------------------- --------------- 
AGRICULTURE:  "People Gotta Eat, But~~." 
--------------------------------------------- ---------------- 
 
¶7.  Commercial agriculture has long been a mainstay of the 
economy in western Mexico, and tends to be more stable than 
other sectors because demand for food products is less elastic 
than for many other goods.  Exports of avocados, mangoes, and 
citrus fruit (reftel) are a real success story, earning over 
US$850 million in 2008, with good prospects for future growth. 
On the other hand, agricultural imports (principally from the 
United States)  have been negatively affected by the decline of 
the peso, and by new tariffs imposed on products such as grapes, 
pears, and cherries in retaliation for the US decision to bar 
Mexican trucks.  Local producers who rely on imported inputs 
(such as feed grains, oil seeds, or fertilizer) have also seen 
their cost of production rise in recent months, leading to 
reduced purchases.  The Guadalajara office of the American 
Soybean Association reported a 19 percent decline in soybean 
exports to Mexico so far this year, as well as a 23 percent drop 
in soybean oil sales (partially offset by a 22 percent rise in 
soy meal exports).  On the plus side, western Mexico also 
continues to attract foreign investor interest in 
non-traditional crops, such as winter vegetables, cherry 
tomatoes, and ornamental plants. 
 
--------------------------------------------- -------- 
TOURISM:  Good Deals vs. the Fear Factor 
--------------------------------------------- -------- 
 
¶8.  While the decline of the peso makes vacations to beach 
resorts in cities such as Puerto Vallarta, Manzanillo, and 
Mazatlan attractive to foreign visitors, the media coverage of 
narco-inspired violence in other parts of Mexico, as well as 
rising unemployment and economic problems in the United States, 
have combined to counteract much of the price benefit.   Pacific 
Airports Group (GAP) reported an 8 percent decline in 
international traffic at the 12 airports it manages in western 
Mexico, and Jalisco Secretary of Tourism Aurelio Lopez Rocha 
conceded that the State fell short of its 2008 goals both in 
numbers of tourists attracted and the amount of income 
generated.  Initial reports indicate that the number of Spring 
Break visitors this year will also be below last year's level. 
Hotel occupancy rates have dropped, but according to an 
executive at one major national chain, the decline in western 
 
GUADALAJAR 00000131  003.2 OF 003 
 
 
Mexico is less steep than in cities like Monterrey, which are 
more dependent on business travel.  Some bright spots in the 
sector include the start-up of a new regional airline based in 
Guadalajara, Mexicana Link, as well as the decision by a Spanish 
company to homeport a cruise ship in Puerto Vallarta beginning 
in May. 
 
¶9.  Northbound travel has been severely affected by the exchange 
rate and economic crisis.  The number of visa cases processed in 
Guadalajara in the first three months of 2009 was approximately 
20 percent lower than the same period last year.  Delta Airlines 
temporarily suspended its Los Angeles flight, and several other 
carriers have reduced capacity on routes between Guadalajara and 
the United States. 
 
--------------------------------------------- ------------------- 
RESTAURANTS AND SCHOOLS:  Mixed Signals: 
--------------------------------------------- -------------------- 
 
¶10.  The contracting economy has also had a negative impact on 
the restaurant sector, with overall sales down by about 15 
percent according to the Jalisco Restaurant Association.  The 
declining peso has affected US franchise holders, such as 
Outback and Carl's Jr, which import the majority of their main 
ingredients from the United States.  Their owners, while working 
to cut costs, are also guardedly optimistic about their future 
prospects.  Outback, for instance, opened its fourth and largest 
restaurant in Guadalajara's newest and most upscale mall last 
December.  Private schools and universities so far have seen 
only a small number of departures due to economic issues, and 
competition for enrollment in expensive institutions like the 
American School Foundation of Guadalajara remains keen. 
 
--------------------------------------------- --------------- 
COMMENT:  Riding Out the Storm 
--------------------------------------------- ---------------- 
 
¶11.  Despite the economic turbulence, there are no signs of 
panic in the local business community.  Both the high-tech and 
agricultural sectors are continuing to attract investor 
interest, with encouragement from the various state and local 
governments in the region.  Nevertheless, business leaders 
continue to cast a wary gaze northward, both to the 
violence-plagued frontier and to developments in the United 
States itself.  More bad news on the security front could 
further undermine a weakened tourist industry and discourage 
foreign investment, thereby costing thousands of jobs.  The 
anemic US economy has depressed demand for Mexican exports such 
as furniture, and the depreciated peso plus new punitive tariffs 
are hurting US exports to one of America's best customers.  A 
further decline in remittances from Mexicans in the United 
States would also hurt the region.  While belt-tightening is the 
order of the day in most economic sectors here, it has so far 
been gradual and orderly.  Barring any unexpected sudden shocks, 
most observers expect it to remain that way until a global 
economic recovery begins. 
RAMOTOWSKI