VZCZCXRO9041
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #1260/01 1271959
ZNR UUUUU ZZH
P 071959Z MAY 09
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 6402
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHMFIUU/DEPT OF HOMELAND SECURITY WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEABND/DEA HQS WASHINGTON DC
RUEIGE/FEDERAL RESERVE BOARD WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHOT/AMEMBASSY OTTAWA 2587

UNCLAS SECTION 01 OF 03 MEXICO 001260 
 
SENSITIVE, SIPDIS 
 
FED FOR DURDU 
TREAS FOR JARPE 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD KFLU TBIO PINR PGOV PREL MX
SUBJECT: H1N1 ECONOMIC RELIEF PACKAGE - BEST MEDICINE? 
 
¶1. (SBU) Summary:  In an effort to resuscitate an economy laid low 
by the flu, on May 5 the Mexican government unveiled a stimulus 
package totaling 18.8 billion pesos (USD 1.4 billion).  As the 
hardest hit sectors, tourism and SMEs will be the main beneficiaries 
of the plan, although Mexico's pork producers will also receive some 
assistance.  Public reaction to the stimulus package has been mixed. 
 The government has been praised for its swift action and its 
responsiveness, but businesses and  analysts assert that this aid 
package is insufficient.  With Mexico already hit hard by a 
recession, the adjusted government 2009 GDP forecast now stands at 
-4.5 percent.  The H1N1 outbreak has only made a recovery more 
difficult.  End Summary. 
 
THE PACKAGE 
----------- 
 
¶2. (U) On the final day of a five-day shutdown of commercial 
activity meant to slow the spread of the H1N1 virus, Finance 
Minister Carstens acknowledged in a press conference that the flu 
outbreak will have a "significant" impact on Mexico's economy. 
Based on his ministry's study of similar cataclysmic events in other 
countries, he said the impact could be between 0.3 and 0.5 percent 
of Mexico's GDP, which was USD 1.14 trillion in 2008.  Unlike 
similar natural disasters however, Mexico's economic infrastructure 
remains intact and therefore, Carstens stressed, Mexico will likely 
recover quickly.  Many analysts have countered that because of the 
current recession facing Mexico, the recovery could take a little 
longer.  Indeed, the Mexican government's new GDP forecast for 2009, 
adjusted to include the maximum 0.5 percent impact of H1N1, now 
stands at negative 4.5 percent.  Independent analysts believe the 
economy will shrink even further, by as much 5.9 percent. 
 
¶3. (U) Carstens outlined seven economic supports to help Mexico 
recover quickly.  First, the Finance Ministry assumes that given the 
maximum impact of 0.5 percent of Mexico's GDP, tax collection will 
fall by 10 billion pesos (USD 760 million).  However, the Mexican 
government will make no attempt, such as implementing new taxes, to 
recoup these estimated losses.  To foster liquidity, the government 
will allow businesses to deduct around 2 billion pesos (USD 150 
million) in excess business flat tax (IETU) payments from their 
monthly payments of the ISR income tax.  To protect employment, 
businesses will be granted a 20 percent reduction in employee health 
care payments in the IMSS social security system over the next two 
months (an estimated 2.2 billion pesos or USD 167 million). 
 
SHORING UP TOURISM 
------------------ 
 
¶4. (U) The package also proposes a reimbursement to the states for 
businesses in the tourism sector of 25 percent of their losses over 
the next three months (an estimated 500 million pesos or USD 38 
million).  In effect, the government will compensate 25 percent of 
their tax collection losses to those states that authorize tax 
exemptions on the local 2 percent payroll tax and lodging taxes.  To 
assist the airlines and cruise ships, there is a compensation 
package of about 250 million pesos - USD 19 million, consisting of a 
50 percent reduction in air traffic control fees, but only for those 
few airlines that are not behind on their payments.  The government 
also proposes halving the port docking fees for cruise ships and 
migration fees for the next three months.  An additional 200 million 
pesos (USD 15.3 million) will be used to promote tourism in Mexico. 
Finally, 2.2 billion pesos (USD 167 million) in loans and loan 
guarantees will be made available to SMEs in the tourism industry, 
as well as to airlines and pork producers.  Together, with the 
anticipated tax exemptions by state governments for lodging and 
payroll fees (1.4 billion pesos - USD 160 million), the total 
stimulus package amounts to 18.8 billion pesos (USD 1.4 billion). 
 
BUSINESS REACTION IS LUKEWARM 
----------------------------- 
 
¶5. (U) Many in Mexico's business sector have given the stimulus 
package mixed reviews.  The president of Mexico City's National 
Chamber of Commerce (CANACO) told reporters that the government 
assistance was welcome, but he was not sure it was enough.  "We hope 
that this is only the one of the first steps in economic aid," he 
said.  Outside of Mexico City, Nuevo Leon business leaders were 
highly critical of the government's plan to reduce taxes to support 
businesses hurt by H1N1 flu closing, and called the measures absurd. 
 They told the local press that the package was a farce, as the 
 
MEXICO 00001260  002 OF 003 
 
 
government was already unable to collect the taxes that were reduced 
in the relief plan.  In Ciudad Juarez, many business leaders 
welcomed the assistance, but opined that the measures fall far short 
of meeting the needs of the business community.  The 
government-mandated closures, they argue, resulted in millions of 
dollars in lost revenue which will not be fully recovered as a 
result of this relief package. 
 
ANALYSTS SIMILARLY UNIMPRESSED 
------------------------------ 
 
¶6. (SBU) AmCham Mexico's economist told EconOffs May 6 she suspected 
that the plan's impact would be "fairly insignificant."  Since more 
than half of the plan's 18.8 billion pesos were actually simply tax 
reductions, the government's injection of funds into the economy was 
rather limited; i.e., only 8.8 billion pesos (USD 669 million) in 
relief, or a mere .07 percent of Mexico's GDP.  (Note:  By contrast, 
tourism generated $13.3 billion in revenue in 2008, or 7 percent of 
GDP - Mexico's third largest source of foreign income.  Tourism 
Secretary Rodolfo Elizondo has been quoted in the press as saying 
that losses in this sector could exceed 40 percent this year as 
frightened travelers stay away.  End note.)  She pointed out that 
the real difficulties remain the recession, declining production, 
and falling consumption. 
 
¶7.  Other analysts concur that this package is not enough, but given 
that Mexico faces an economic recession, a decline in oil revenues, 
and a shortfall in tax revenues, this is realistically the extent of 
what the government can offer.  The Mexican Congress mandates a 
balanced book; Congress has already authorized a deficit of 1.8 
percent of its GDP.  Carstens and the Calderon Administration could 
appeal to Congress to authorize a deeper deficit, but experts do not 
believe anything above 2 percent as politically viable.  The 
government's domestic debt - 21.5 percent of GDP - and its foreign 
debt - 5 percent - are still manageable, but would become less so if 
encumbered by additional obligations. 
 
PORK PRODUCERS 
-------------- 
 
¶8. (U) The National Organization of Pork Producers in Mexico stated 
that while the package would help offset some of the damage caused 
by H1N1, it alone is not enough.  They estimate their losses at 2.5 
billion pesos, above the 2.2 billion pesos in loans and loan 
guarantees (USD 167 million) to be extended to pork producers, 
SME's, and airlines.  The pork producers encouraged the Agriculture 
Secretariat to grant an additional 100 million pesos (USD 7.6 
million) in lines of credit. 
 
STATES' RESPONSE 
---------------- 
 
¶9. (U) For their part, Mexico's 32 states responded to the federal 
government's stimulus plan through a public request by the 
Association of Economic Development Secretaries.  They called for: 
the expansion of the federal stimulus package; additional economic 
supports for SME's affected by the outbreak through a program of 
direct, timely and flexible credits; the acceleration of the 
government procurement program for Mexican SMEs, and; the 
implementation of an intensive overseas promotion campaign for 
Mexican products. 
 
COMMENT 
------- 
 
¶10. (SBU) Comment:  Reaction to the stimulus package introduced by 
Minister Carstens has been mixed, with hard-hit businesses - 
particularly in the tourism sector - wanting more.  The Mexican 
government appears to be extending as much assistance as it can. 
However, it may not be absorbing all the costs related to the 
outbreak.  Responding to criticism, Carstens stated that should it 
become necessary, the government is leaving the door open for 
additional measures.  However, it will not be easy for the 
government to release more funds during the first half of the year. 
Even using the most sophisticated model to compare this outbreak 
with similar events in other countries, it is still too early to 
know the full extent of the impact of H1N1 on the Mexican economy. 
The worst of the H1N1 epidemic may be over in Mexico, but the 
patient is still suffering from other complications.  End Comment. 
 
 
MEXICO 00001260  003 OF 003 
 
 
BASSETT