VZCZCXRO6654
PP RUEHCD RUEHGD RUEHHO RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHMC #0304/01 2181911
ZNR UUUUU ZZH
P 061911Z AUG 09
FM AMCONSUL MONTERREY
TO RUEHC/SECSTATE WASHDC PRIORITY 3874
INFO RUEHME/AMEMBASSY MEXICO PRIORITY 4944
RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHMC/AMCONSUL MONTERREY 9470

UNCLAS SECTION 01 OF 03 MONTERREY 000304 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR 
 
E.O. 12958: N/A 
TAGS: EFIN ETRD EIND EINV ELAB ECON MX
SUBJECT: MONTERREY ECONOMISTS PREDICT INFLATION; NUEVO LEON CUTS 
BUDGET 
 
REF: A:  MONTERREY 292  B:  MONTERREY 278 
 
MONTERREY 00000304  001.2 OF 003 
 
 
¶1.  (SBU) Summary:  Two noted Monterrey economists cautioned 
about a potential rise in inflation when the Mexican economy 
finally begins to rebound, which one economist predicted would 
occur over the next two to three quarters.  Both believed 
overall year-end GDP would post a significant decline. 
Meanwhile, the state of Nuevo Leon recently announced additional 
austerity measures that will include cutbacks on top officials' 
salaries and on operating hours at non-essential state offices. 
One economist told EconOffs that he believed the economic 
decline had halted, and criticized GoM tax reforms and handling 
of oil revenues.  If the economy does recover soon, the strength 
of that recovery will be dependent on the viability of the U.S. 
economic recovery and the impact of any H1N1 influenza 
resurgence in the fall.  End summary. 
 
 
 
Economic Downturn May Have Halted 
 
--------------------------------- 
 
 
 
¶2.  (SBU) At a recent meeting with EconOffs, noted Monterrey 
economist Salvador Khalifa forecast that economic conditions in 
Mexico will improve over the next 2 - 3 quarters.  However, the 
sustainability of a Mexican rebound will depend on the strength 
of the U.S. economic recovery.  The recent rise in the Mexican 
stock market, he cautioned, should not be viewed as a bellwether 
that the domestic economic climate is improving yet, since many 
multinational companies are listed on the exchange.  Smaller 
domestic companies, with fewer resources, were more deeply 
impacted by the recession and will take longer to recover, he 
noted. 
 
 
 
¶3.  (SBU) At a separate meeting, Agustin Del Rio, Bank of Mexico 
(central bank) representative in Monterrey, relayed that the 
economic situation in the Mexican border states was still 
dismal.  He pointed out that, despite recent reports indicating 
a slight rise in employment in Nuevo Leon, job losses across the 
country continue to surprise economists. 
 
 
 
GDP Predictions 
 
--------------- 
 
 
 
¶4.  (SBU) Khalifa predicted that Mexico's 2009 GDP would post a 
7 to 8 percent decline.  This figure is roughly in line with the 
Bank of Mexico's latest projection of a GDP decline of 6.5 to 
7.5 percent and slightly higher than the State of Nuevo Leon's 
Secretariat of Economic Development (SEDEC) forecast of a 6.3 
percent drop (ref A).  Del Rio was more pessimistic, claiming 
GDP could be down as much as 9 percent by year end. 
 
Inflation on the Horizon? 
------------------------- 
 
¶5.  (SBU) Khalifa forecast an increase in inflation, currently 
at 5.74 percent per June Bank of Mexico figures, as the 
recession ends and companies raise prices in an attempt to 
recoup losses.  In support of his prediction, he referred to a 
steep yield curve for Mexican debentures. 
 
 
 
¶6.  (SBU) Del Rio concurred that inflation could be a future 
threat.  However, he pointed to central bank policy as a 
contributing factor.  He explained that two camps have formed on 
the bank board.  One side, which is prevailing currently, 
believes the central bank has to keep lowering interest rates to 
stimulate the economy.  The other side believes that since banks 
still are not lending, lowering rates will not open a tight 
credit market. 
 
 
 
¶7.  (SBU).  Del Rio opined that lower interest rates could lead 
to additional devaluation of the peso against the dollar, which 
could help fuel inflation.  He added that he did not believe the 
 
MONTERREY 00000304  002.2 OF 003 
 
 
central bank planned any future currency interventions. 
Currency speculation has declined, he noted, due to the size of 
Mexico's currency reserves and the availability of IMF and USG 
lines of credit. 
 
 
 
GoM Cash Strapped 
 
----------------- 
 
 
 
¶8.  (SBU) Mexico has "no (fiscal) room to maneuver" Khalifa 
explained, because the GoM has already spent the majority of the 
revenue it received when petroleum prices were high.  As an 
example, he noted that Mexico's percentage of foreign reserves 
to GDP was significantly lower than that of other countries that 
had benefitted from the oil price boom, such as Russia.  Khalifa 
was alarmed that, instead of showing fiscal restraint, the 
government has increased its size and expenditures during the 
current recession. 
 
 
 
¶9.  (SBU) Khalifa pointed out that to formulate its annual 
budget for 2009, the GoM purchased options to guarantee a price 
of at least US$ 70 per barrel of oil.  While the government's 
hedge could appear prudent if oil prices end below that figure, 
the aggregate cost of buying these options over the past few 
years has negated any current financial benefit, he claimed. 
 
 
 
Nuevo Leon Fiscal Crunch 
 
------------------------ 
 
 
 
¶10.  (SBU) The states, beneficiaries of GoM revenue sharing, 
have not fared any better, Khalifa noted.  Nuevo Leon, for 
instance, spent its increased funding on big ticket items such 
as construction of the Santa Lucia Riverwalk project and hosting 
the 2007 Universal Forum of the Cultures, but did not retain any 
of the funds in reserve. 
 
 
 
¶11.  (SBU) Indeed, on July 27, Nuevo Leon's Secretary of Finance 
and General Treasury Ruben Martinez Donde pointed to a reduction 
in GoM revenue sharing as the root cause behind a US$ 19.5 
million austerity plan that would mandate a 30 percent reduction 
in the salaries of top state officials.  Other measures included 
a cutback on the hours of operation of non-essential state 
agencies and suspension of any projects not "100 percent" 
completed. 
 
 
 
¶12.  (SBU) Martinez was particularly concerned about the 
financial condition of rural municipalities, which he said were 
"practically broke" since they rely wholly on state funding. 
This austerity plan follows on the heels of an earlier reduction 
in the state budget of around US$ 113 million.  Media reports 
since have criticized the state government for increasing 
expenditures prior to the July election. 
 
 
 
Taxes Questioned 
 
---------------- 
 
 
 
¶13.  (SBU) The GoM 'flat tax' on corporate revenue was of 
particular concern to Khalifa.  The tax is levied on the net 
difference between current year corporate revenues and expenses, 
but does not take into account prior year expenditures.  Many 
companies left with excess inventory during the recession will 
be penalized as they begin to sell off inventories after the 
economy recovers, since inventory expenses from previous years 
cannot be expensed from gross current year revenues, he 
explained.  The result will be disproportionately high corporate 
tax liabilities that will hobble Mexican companies' global 
 
MONTERREY 00000304  003.2 OF 003 
 
 
competitiveness.  Nevertheless, Khalifa did not concur with 
maquila association concerns that federal lawmakers will raise 
taxes on the industry to increase government revenue (ref B). 
 
 
 
Economy Hurt by H1N1 Flu Outbreak and Holy Week Closures 
 
--------------------------------------------- ----------- 
 
 
 
¶14.  (SBU) The virtual shut down of the country during Holy Week 
and, later, in response to the H1N1 influenza outbreak, 
contributed to the economy's dismal performance in the second 
quarter, Khalifa noted.  He said that another influenza outbreak 
in the fall could have an equally devastating effect on overall 
economic recovery.  Khalifa accused the GoM of overreacting to 
the outbreak in May by closing Mexico's major cities.  He did 
not believe the government is more prepared for a new outbreak 
and will likely resort to the same blunt measures. 
 
 
 
Comment 
 
------- 
 
 
 
¶15.  (SBU) As in any attempt to forecast the economic future, 
economists hold a wide variety of opinions.  The general 
consensus among those that post has met with is that the Mexican 
economic decline has halted for the time being and may begin to 
recover in the near future.  Given the close economic ties 
between Nuevo Leon and the U.S., the strength of that recovery 
will be dependent on a U.S. economic rebound.  Although they 
could not agree on the final figures, the economists concurred 
that Mexico will post a substantial year-end GDP drop.  The wild 
card in the economic recovery scenario remains the severity of a 
possible H1N1 influenza resurgence in the fall.  While 
employment and other macro economic factors appear somewhat 
stronger in Nuevo Leon, the state is clearly experiencing an 
economic shock that will take some time to remedy. 
WILLIAMSONB