VZCZCXYZ0009
RR RUEHWEB

DE RUEHME #2639/01 2471314
ZNR UUUUU ZZH
R 041314Z SEP 09
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 8139
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHMFIUU/DEPT OF JUSTICE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFISS/CDR USSOUTHCOM MIAMI FL
RHMFIUU/HQ USNORTHCOM
RUEAHLA/DEPT OF HOMELAND SECURITY
RUEABND/DEA HQS WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC

UNCLAS MEXICO 002639 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV PREL PINR MX
SUBJECT: MEXICO'S ECONOMIC OUTLOOK IMPROVES SLIGHTLY; 
CONCERNS REMAIN 
 
REF: MEXICO 2537 
 
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Summary 
-------- 
 
1.(U)  While recent data shows encouraging news for the 
Mexican economy, many observers recognize that other less 
positive elements prevail that could materialize into a 
weaker economy.  Recent positive data includes increased 
consumer confidence, retail sales, purchaser manufacturing 
indexes, as well as oil prices.  Many economists have revised 
upward their 2009 and 2010 growth forecasts.  In his annual 
"State of the Union" speech, President Calderon signaled that 
he plans to pursue a relatively ambitious agenda, despite his 
party having been weakened in Congress as a result of the 
mid-term elections.  In the speech, the President indicated 
that the recession had touched bottom, and presented his 
plans for continued economic reforms and proposals for 
increasing the country's competitiveness. As negotiations 
over the 2010 budget proceed in Congress, and both branches 
of government examine possible solutions to Mexico's public 
finance challenges and anemic growth, analysts say the 
economy could still exhibit some further downside trends that 
might threaten the otherwise improved outlook.  Analysts 
point to the continued dependence on oil revenues, the 
negative impact of expenditure cuts (particularly on 
infrastructure), the likelihood of suboptimal solutions to 
much needed tax reform/increased tax revenues, and the new 
dominance (and highly politicized actions) of the opposition 
PRI in Congress as elements which could weaken the economy. 
End Summary. 
 
------------------------- 
Slightly Improved Outlook 
------------------------- 
 
¶2. (U) In light of the latest global and domestic economic 
indicators, many analysts are now forecasting slightly more 
optimistic trends for the Mexican economy in 2010.  The 
outlook improves because of the U.S. recovery, alongside 
better-than-expected data for key domestic indicators, such 
as consumer confidence, retail sales, purchaser manufacturing 
indexes, etc.  Oil prices, a key commodity for Mexico, have 
also been strengthening as of late. The central bank's August 
survey of economists indicates a higher GDP growth forecast 
of 2.9 percent (from 2.5).  HSBC has also revised their 
growth estimate for 2010 to 3.6 percent (from 2.9). 
Likewise, Banamex projects 3.6% growth. 
 
--------------- 
Concerns Remain 
--------------- 
 
¶3. (SBU) Nevertheless, while recent information shows 
encouraging news, other less positive elements prevail that 
could generate a weaker economy.  Some of the points of 
concern raised by economic/market analysts include: 
 
-- The PRI's increased congressional presence and higher 
profile at the state level (PRI holds 19 of 32 governorships) 
following the July midterm elections puts the GOM and the PAN 
in a weaker position going into budget negotiations this 
fall.  The markets perceive the PRI as reluctant to pass any 
significant tax reform or subsidy reductions.  Moreover, the 
PRI will try to secure a larger share of the federal budget 
going to state and local governments in advance of ten 
gubernatorial races in 2010 and the 2012 presidential 
elections, which could deprive the federal government of 
resources for social expenditures.  State finances are also 
generally perceived as lacking in adequate accountability 
measures.  A well-connected Mexican analyst told econoffs the 
PRI will likely push for a lower benchmark oil mix price, 
sending a greater portion of the resulting surplus to states 
for discretionary spending. 
 
-- High dependency on oil revenues continues.  Approximately 
35-40 percent of total revenues come from petroleum sales. 
The combination of lower-than-anticipated oil production, a 
biased tax structure, an overblown bureaucratic structure, 
and important subsidy expenditures, have resulted in fiscal 
 
deterioration.  (See reftel.) 
 
-- This deterioration has prompted the urgency for 
additionally revenues and cutting expenditures.  Most 
analysts anticipate the likelihood of an increased deficit in 
the 2010 budget of between 2 and 4 percent of GDP.  Note: 
About an additional 1.2 percent of GDP is an off-budget 
deficit (long-term infrastructure debt, debt from the 1995 
financial bailout, and pension obligations). End Note. 
 
-- With respect to higher revenues, the prevailing view is 
that substantive fiscal reform is not viable and suboptimal 
solutions will likely be adopted.  (Septel on prospects for 
fiscal reform.) 
 
-- There is speculation that increased revenues may be 
generated from price increases in goods and services provided 
or controlled by the public sector, particularly in gasoline 
and diesel prices.  There have already been some price 
increases in high-end consumer electricity tariffs and 
highway tolls.  There is more uncertainty regarding changes 
in income taxes or the VAT. 
 
------------ 
GOM Response 
------------ 
 
¶4. (U) On September 2, President Calderon offered proposals 
to boost growth and shore up the fiscal accounts in its 
annual "state of the union" speech.  Without providing many 
details, Calderon unveiled a 10-point plan to "transform" 
Mexico.  On the fiscal front, the plan would include 
expenditure cuts, tackling tax evasion and broadening the tax 
base.  Of note, he said his budget proposal would seek to 
free up funds for social spending by reducing outlays on 
bureaucracy and that a second new oil-sector reform was 
necessary.  (Comment:  Aside from any change to inefficient 
oil and electricity parastatals Pemex and CFE, this may be 
referring to the intention of the Finance Secretariat to make 
the fuel pricing structure more flexible as part of the tax 
reform.  End Comment.)  Other proposals include universal 
health care, education, labor reform, enhanced competition in 
telecoms, and expanding the war on crime and political reform 
(septel). Calderon added that only a comprehensive fiscal or 
energy reform would translate into an improvement in Mexico's 
credit outlook. 
 
------------------- 
Opposition Response 
-------------------- 
 
¶5. (U) Meanwhile, on September 2 the PRI presented to 
Congress their own plan to reactivate the economy which 
included proposals to "re-consolidate the development banks," 
cut expenditures (mainly at the federal level) and a revision 
of the so-called special regimes (loopholes, subsidies) which 
currently represent an estimated 3.9 percentage points of GDP 
in foregone revenue; the PRI reiterated that it will not 
support broadening the VAT to include food and medicine. 
 
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Comment 
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¶6. (SBU) As negotiations proceed in Congress, further 
concerns  -- outlined in paragraph 3 -- could develop. This 
could present a significant downside risk to an otherwise 
improved outlook.  Calderon has signaled that he plans to 
pursue a relatively ambitious economic and social agenda, 
despite his party being weakened in Congress. While the PRI 
may be willing to broker deals with the GOM, 2012 electoral 
considerations mean they are unlikely to support extensive 
fiscal and energy reform moves. Most immediately, they may 
well seek to drive or obstruct the 2010 budget legislation, 
which is likely to include plans to increase tax collection 
and debt, and cut spending.  If the PRI succeeds in their 
pursuit of obtaining more federal transfers, the GOM may 
weaken politically, as they will have fewer resources under 
their control for social expenditure.  Other serious 
considerations to keep in mind include inflationary pressures 
caused by GOM price hikes and market reactions to anticipated 
 
cabinet changes, including Finance, Economy, as well as the 
Central Bank. 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity and the North American 
Partnership Blog at http://www.intelink.gov/communities/state/nap / 
 
PASCUAL