VZCZCXRO6429
RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #2711/01 2582209
ZNR UUUUU ZZH
R 152209Z SEP 09
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 8240
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE

UNCLAS SECTION 01 OF 02 MEXICO 002711 
 
SIPDIS 
SENSITIVE 
 
STATE FOR WHA/MEX, WHA/EPSC, EEB 
NSC FOR RESTREPO, FROMAN 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD 
TREASURY FOR NANCY LEE, IA 
ENERGY FOR WARD, LOCKWOOD AND DAVIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD ENRG ELTN EAIR PGOV SENV MX
SUBJECT: FINANCE SECRETARY BRIEFS AMBASSADOR ON 2010 BUDGET 
 
REFTEL: MEXICO 2709 
 
¶1.  (U) This is an action request for Treasury. See Para 9. 
 
¶2. (SBU) SUMMARY. Finance Secretary Agustin Carstens briefed 
Ambassador on Mexico's 2010 budget, submitted September 8 to 
Mexico's Congress.  . In facing what Carstens described as the 
"double shock" of the cyclical recession as well as the precipitous 
decline in Mexico's oil revenue, the GOM's 2010 economic package 
increases income and excise taxes,  and focuses  on austerity 
measures to stabilize the economy. An important factor looming in 
the executive branch's thinking is the threat of credit-rating 
downgrade.  Carstens said avoiding instability was a necessary first 
step to retain access to financial markets before taking steps to 
sow the seeds of competitiveness that might pull Mexico through the 
recovery and beyond to higher growth levels.  The main elements of 
Mexico's budget include a number of controversial tax increases, 
expenditure cuts and proposed rule changes in energy, 
telecommunications and financial services. The GOM attached a short 
"competitiveness agenda" to the budget, signaling its  intention to 
take on at an undefined time a select number of structural reforms 
and impediments to growth, for example, changes in labor markets, 
deregulation in some sectors, a public-private financing plan for 
infrastructure and strengthening the GOM's antitrust powers. 
However, this agenda was not part of the budget, and it is unclear 
how or when the GOM will push it forward.  Carstens said he thought 
the budget was received "reasonably well" considering it included 
tax hikes, but told Ambassador he expected a lively debate until 
November 15 when approval by Congress is required. On other issues, 
Carstens thanked the USG for its continuing help on financial 
crimes, and welcomed a possible visit by Treasury Secretary Timothy 
Geithner. END SUMMARY 
 
¶3. (U) Ambassador Pascual called on Mexico's Secretary of Finance 
and Public Credit (Hacienda y Credito Publico) Agustin Carstens at 
his office on September 10.  The conversation ranged from the budget 
to Mexico's challenges in improving competitiveness to a possible 
visit by Treasury Secretary Timothy Geithner this fall. Hacienda's 
Director for International Affairs Ricardo Ochoa and EconCouns also 
participated. 
 
¶4.  (U) Mexico's budget, submitted to Congress September 8, calls 
for cuts in spending by 218 billion pesos (USD 16 billion, 
approximately 1.7% of GDP), eliminates three government ministries, 
modifies tax rates and tax laws and proposes changes that would 
create more competition in the energy, telecommunication and banking 
industries. Spending on social programs has increased overall, and 
spending on security remains untouched. Total spending, including 
investments at the state-owned oil company PEMEX, are 3.15 trillion 
pesos.   Non-PEMEX spending would be 2.87 billion pesos.  (More 
details in REFTEL) 
 
FIRST PRIORITY: FISCAL STABILITY AND REFORM 
----------------------------------------- 
¶5. (U) On fiscal reform, the government proposes a 2-3 percent 
increase in personal and corporate income taxes and the imposition 
of a new 2% "anti-poverty" tax on all goods and services, the 
proceeds of which would go to social programs for the extreme poor. 
This tax, dubbed a "VAT in disguise" -- Mexico applies a value-added 
tax of 15% on everything except food and medicines -- has already 
surfaced as a political target by opposition party legislators. 
Income taxes on the agricultural sector, previously capped at 19%, 
would be increased.  Excise taxes on beer, tobacco, 
telecommunications services (internet etc.) and the lottery were 
also proposed.  Carstens told Ambassador that the response to the 
budget had been "reasonably good", despite the "lack of euphoria for 
tax hikes".  Rating agencies such as S&P and Fitch were pleased with 
the proposals, and their seriousness in addressing the government's 
fiscal challenges. 
 
¶6. (SBU) Facing a potential budget shortfall for 2010 of 3.0 percent 
of GDP, compared with 2.1 percent in 2009, Carstens stressed the 
need to increase government revenue and avoid borrowing so as to 
stave off potential downgrades from credit-rating agencies.  Unlike 
other G20 countries, Carstens said Mexico faced a "double shock" 
from both the global recession and from the precipitous decline in 
oil revenue, from which the GOM had previously derived almost 40% of 
its revenues. Carstens said his budget provided an "exit strategy" 
to avoid facing what he characterized as an unmanageable debt burden 
further down the road.   He lamented Mexico's poor performance on 
tax collection, noting that Mexico was last among OECD members and 
one of the lowest in Latin America. 
 
MEXICO 00002711  002 OF 002 
 
 
 
COMPETITIVENESS? 
--------------- 
 
¶7. (U) Without providing many details, Carstens listed a number of 
areas where the government planned either administratively or 
through the Congress to push forward changes that would boost the 
economy's growth and improve its competitiveness. These included 
telecommunications, financial services, increasing access to credit, 
deregulation, the strengthening of the government's antitrust 
efforts, and making the judicial system more business-friendly.  He 
agreed that President Calderon's proposal during the summit for 
regulatory cooperation was important, but passed the bureaucratic 
buck to the Economy Secretary. At this point we have no timeline or 
schedule for any of these possible reforms. 
 
¶8. (SBU) Carstens told Ambassador that he very much appreciated the 
continuing assistance and cooperation by the USG on financial 
intelligence and financial crimes to his Secretariat. Naming 
Treasury, FinCEN and the DEA, Carstens said he especially found the 
Embassy's on-the-ground assistance to Hacienda and the Financial 
Intelligence Unit (UIF in Spanish) very useful and said he hoped it 
would continue. 
 
VISIT BY TREASURY SECRETARY 
--------------------------- 
 
¶9. (SBU) Carstens told Ambassador he welcomed a visit by Treasury 
Secretary Timothy Geithner in the coming months.  He stressed how 
important the U.S. recovery was for Mexico's economic wellbeing and 
that a visit from his U.S. counterpart could demonstrate that Mexico 
was "taking the right steps".  He said he anticipated that Secretary 
Geithner's visit could demonstrate good bilateral relations, 
highlight joint efforts to improve our economies, as well as a 
common vision of the future and a reassurance to our various publics 
that "things were getting better".  Carstens said he was likely to 
propose meetings with parliamentary leaders, business and financial 
leaders, a press event and possibly another event sponsored by the 
American Chamber of Commerce. Ambassador suggested that the 
Secretaries might want to include an event on poverty reduction, as 
well as focus on joint efforts to increase North American 
competitiveness, as highlighted by the Presidents at the August 
North American Leaders' Summit in Guadalajara. 
 
¶10. (SBU) ACTION REQUEST:  Embassy would appreciate guidance/input 
from Treasury regarding a possible visit by Treasury Secretary 
Geithner. 
 
LETTER TO SECTREAS ON SHARING TAX INFORMATION 
--------------------------------------------- - 
¶11. (SBU) Carstens drew the Ambassador's attention to the 
publication of an article based on a private letter that Carstens 
had sent to Treasury Secretary Geithner proposing both sides discuss 
the sharing of tax information, particularly with regard to deposits 
of Mexican citizens in the United States. He said he had not leaked 
the letter to the press, and wondered if the leak had come from the 
U.S. side, either at a lower level or by the Secretary for the 
strategic purpose of launching a trial balloon. He said he 
understood why Treasury might want to float the topic publicly, but 
he wanted to know where the leak came from. 
 
¶12. (SBU) COMMENT. The past several days have witnessed the expected 
loud protests from opposition parties as well as media commentary 
that the package maintains a reasonably balanced budget on the backs 
of the poor and middle class. Amid the protests, some observers 
suggest that the key elements of the budget, notably the tax 
increases, were pre-negotiated by the GOM with the opposition.  Both 
Carstens and his Director of Mexico's Tax Administration Service 
Alfredo Gutierrez have noted publicly that Mexico is one of the 
countries with the lightest tax burden in the hemisphere. 
Nevertheless, vested interests are strong. 
 
¶13. (SBU) Though Carstens insisted it was a "question of timing", 
the budget's main goal, i.e. establishing fiscal stability, is 
clearly the dominant one. Economists we spoke to who had been 
briefed by Carstens and his team praised the fiscal reform measures 
and efforts to plug the deficit.  But many voiced concerns that the 
budget package lacked a long-term vision of how Mexico could improve 
its competitiveness and arrive at growth rates in the next decade of 
over five percent. END COMMENT. 
 
PASCUAL