VZCZCXRO4528
RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #3382/01 3352002
ZNR UUUUU ZZH
R 012002Z DEC 09
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 9224
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 04 MEXICO 003382 
 
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:  CONGRESS APPROVES 2010 SPENDING LEGISLATION 
 
¶1.  (SBU) Summary.  On November 17, the Mexican Congress 
approved the 2010 budget, voting 437-25 to pass the 
spending bill, which includes MX$3.18 trillion (US$244 
billion) in outlays.  The budget for 2010 implies a 
deficit of 0.75% of GDP excluding debt from state oil 
monopoly Pemex, but with Pemex debt rises to 2.75% of GDP 
-- the largest deficit since 1989.  The spending bill 
moves MX$96.6 billion of spending to infrastructure, 
social programs, health, education, and agriculture. 
Over MX$90 billion of this will be taken from operational 
spending cuts.  In addition, the average price forecast 
for the Mexican basket of crude oil was increased to 
US$59.0 per barrel from US$53.9 dollars per barrel in 
President Felipe Calderon's original legislation.  The 
revenue side of the budget passed earlier this month, 
with legislators watering down tax increases, 
particularly a proposed additional 2% value-added tax 
(VAT) on all goods and services.  Instead, the general 
VAT rate, which excludes foodstuffs, health, and 
education services, was increased from 15% to 16% (from 
10% to 11% at the border).  The approved tax measures 
will give the GOM additional resources equivalent to 1.1% 
of GDP.  The approved spending law was 0.5% lower than 
the approved 2009 budget, with more resources going to 
social development and infrastructure, but slightly fewer 
resources to fund non-drug war-related security.  Funding 
for order, security, and justice will increase.  While 
relatively prompt approval of the budget is a success for 
the GOM, changes to the original proposals highlight the 
strength of the main opposition PRI in Congress.  The 
lack of structural reforms and insufficient tax increases 
resulted in a sovereign debt downgrade from Fitch.  End 
Summary. 
 
Expenditures Budget for 2010 
---------------------------- 
 
¶2.  (U) Public expenditures approved by the Congress 
total MX$3.18 trillion (US$244 billion), which is 0.5% 
lower in real terms than that approved by the Congress in 
2009, but MX$4 billion (US$305 million) higher to the 
initial proposal.   Programmable expenditures allocated 
to social development, transport and communications and 
sustainable development increased in real terms by 4.9%, 
3.7% and 14.9% respectively, to expenditures approved in 
¶2009.  The Finance Secretariat affirmed that the 2010 
budget will help promote growth as it will ensure 
macroeconomic stability; inject additional resources 
obtained from new tax measures into the economy to 
stimulate domestic demand (Note:  Additional resources 
were used to service debt in the past.  End Note), ensure 
security funding to fight against organized crime, and 
promote social development and infrastructure investment. 
 
Impact on Growth, Employment, Inflation and Transparency 
--------------------------------------------- ---------- 
 
¶3.  (SBU) The GOM asserts that with the budget approved 
for infrastructure, more jobs will be created next year. 
Responding to criticism about the lack of transparency in 
public spending and the growth in current expenditures 
during the past years, lawmakers approved provisions to 
force the GOM to submit a program to reduce public 
spending due on March 15th, 2010.  States will also be 
required to adopt performance-based budgeting and submit 
quarterly reports on the evolution of expenditures. 
Embassy contact and respected economist Rogelio Ramirez 
de la O wrote in his opinion column that he doubts the 
economic package will promote growth as the new taxes 
will have a negative impact on aggregate consumption, 
particularly with the current high unemployment rate. 
Echoing Ramirez de la O's concerns, former deputy 
governor of the central bank Everardo Elizondo publicly 
stated that the increase in taxes could affect 
businesses' cash flow and the expected increase in 
inflation could complicate monetary policy decisions for 
next year. 
 
¶4.  (SBU) With regard to inflation, the tax increases 
will have a one-time impact in 1Q10; as a result U/S 
Alejandro Werner revealed that the Finance Secretariat 
 
MEXICO 00003382  002 OF 004 
 
 
may wait to begin increasing energy prices until 2Q10. 
Most analysts do not expect Banxico to begin hiking until 
2Q10, although Banamex speculated that it may implement a 
preventive 25 bps hike in January to anchor expectations. 
A survey conducted by Banamex revealed that inflationary 
expectations for 2010 grew to 4.81% from the previous 
4.54% as a result of the tax increases. 
 
Security, Social Development and Infrastructure Budget 
--------------------------------------------- --------- 
 
¶5.  (SBU) The overall budget of the four GOM security 
agencies - the Attorney General's Office, the Army, the 
Navy and the Secretariat of Public Security - was cut by 
1.8% from 2009.  Total budget for those agencies will be 
MX$103.8 billion (US$8 billion).  However, President 
Calderon kept his vow of protecting security funds aimed 
at combating drug cartels.  The security budget - 
commonly known as "order, security and justice", which 
includes funds for the National Security System, 
Plataforma Mexico, prisons, the fight against organized 
crime, etc. - proposed by Calderon amounts to MX$94 
billion (US$7.2 billion), 4.9% more than what the 
Congress approved in 2009.  An advisor from the budget 
committee of the lower house told Econ FSN that although 
lawmakers have not yet officially issued the total 
security figures, the amount approved by the lower house 
will be quite similar to Calderon's proposal, since 
security remains a priority for all political parties. 
(Note:  The official 2010 Spending Legislation must be 
published in the Official Gazette by December 15 and will 
include the total security figures.  End Note) 
 
¶6.  (SBU) Expenditures for the Social Development and the 
Communications and Transportation Secretariat grew 12.7% 
and 5.9%, respectively.  According to Jaime Hernandez, 
Director General of Budgetary Policy of the Finance 
Secretariat, expenditures in social and economic 
development represent 60% and 35% respectively, of total 
public spending.  Public investment in infrastructure 
will be 3.6% larger in real terms with respect to 2009. 
Investment for Pemex for energy projects will grow 10.5% 
in real terms.  Private investment triggered by public 
spending will grow 0.7% from the previous year.  Total 
investment in infrastructure will represent 4.9% of the 
GDP.  Expenditures for social programs, such as 
Oportunidades and the Popular Health Insurance, grew by 
12%, which will help provide support to a combined 16.4 
million families in 2010.  The approved budget for 
Oportunidades was MX$64.4 million (US$5 million). 
 
PRI and state governors led the budget negotiations 
--------------------------------------------- ------ 
 
¶7.  (SBU) The lower house approved the budget under the 
overwhelming influence of the PRI majority and PRI state 
governors.  Lawmakers prioritized spending and the 
political needs of state governors, especially those 
holding elections in 2010 as well as Enrique Pena Nieto, 
the governor of the State of Mexico, who appears to be 
atop the list of potential candidates in the runup to the 
2012 presidential election.  Lawmakers reshuffled MX$96.6 
billion of spending, about 3% of the total projected 
spending to infrastructure, health, education and 
agriculture programs in the states.  Federalized 
expenditures or resources (participaciones and 
aportaciones) going to the states will be MX$6.3 billion 
(US$480 million) higher than the Executive's proposal, 
but 0.4% lower than what was approved last year. 
Lawmakers also raised other resources transferred to the 
states known as Budget Line 23 for public investment and 
infrastructure programs in states and municipalities by 
46.5% from what the Executive had initially proposed. 
These additional resources were obtained by cutting 
current expenditures and administrative costs in most of 
the Secretariats, including the Office of the President. 
Congress did not approve the elimination of three 
ministries - Tourism, Agrarian Reform and Public 
Administration - as proposed by President Calderon, but 
this represents less than 10% of the expected new tax 
collection. 
 
MEXICO 00003382  003 OF 004 
 
 
 
Fitch takes the first step in downgrading Mexico 
--------------------------------------------- --- 
¶8.  (U) As expected, on November 23rd Fitch downgraded 
Mexico's sovereign debt one notch to BBB from BBB+ with a 
stable outlook.  For Fitch the tax measures were a step 
in the right direction, but insufficient to reduce the 
high reliance on oil revenues, which still accounts for 
over 30% of total revenues.  The rating company is also 
concerned about the GOM debt's reaching 37% of GDP in 
2009, which is above peer median.  (Note:  U/S Werner 
said that total debt would rise to 38% of GDP in 2010 to 
begin falling by 2011.  End Note)  Falling oil production 
has accentuated the weakness in public finances, leaving 
Mexico with limited fiscal manipulation in the face of 
future oil income shocks.  Fitch also noted that chances 
for approval of a more comprehensive tax reform were not 
bright as the opposition controls the lower house and 
political dynamics will be heavily influenced by the 2012 
presidential elections.  Fitch also adjusted the ratings 
in local and foreign currency for development and 
commercial banks: Nafin, Banobras, Bancomext and HSBC. 
It is unlikely that Moody's will downgrade Mexico in the 
medium term as its Mexico City branch director Alberto 
Jones recently stated the likelihood for Mexico to be 
downgraded is very low.  It is still uncertain whether 
S&P will follow Fitch.  S&P gave Mexico a negative 
outlook early in the global recession (March 2009).  Now 
that Mexico is on the recovery path, there is more 
justification for S&P to avoid a downgrading.  S&P could 
also take into consideration President Calderon's 
considerable effort in securing an unpopular reform in 
the middle of a recession and with a Congress controlled 
by the opposition. 
 
Implications of a downgrade 
--------------------------- 
 
¶9.  (SBU) A downgrade will likely cause the peso to 
depreciate temporarily and increase GOM borrowing costs. 
For JP Morgan analysts markets had already "priced-in" a 
downgrade from Fitch.  On November 23, right after 
Fitch's pronouncement, the IPC - the Mexican Stock 
Exchange's main index - rose 1.50% and the peso 
appreciated 0.05% to 13.10 pesos to the dollar.  However, 
JP Morgan notes that markets have not priced-in a 
downgrade from the other two rating companies.  A 
downgrade could have important implications for major 
Mexican corporations.  The lower rating will make it more 
costly for Mexico to borrow abroad, and sovereign debt 
downgrades generally hurt companies based in emerging 
markets by increasing their cost of capital.  Investors 
tend to demand higher yields from emerging market 
companies when their home government's ratings are cut, 
which increases borrowing costs.  Sometimes emerging 
market companies can be better rated than their own 
governments, although this is generally limited to those 
that have exceptionally strong balance sheets or 
extensive operations outside the country where they are 
based.  The week of November 16, after meeting with 
rating companies Finance Secretary Carstens said that a 
downgrade would not be good, but would not be disastrous. 
He later acknowledged that the country's opportunities to 
get financing from abroad would be narrowed.  Several 
experts have noted that Mexico will still be two notches 
above investment grade, although closer to Brazil. 
 
GOM Announces New Infrastructure Projects 
----------------------------------------- 
 
¶10.  (U) On November 19, the GOM held a joint conference 
in New York City with the Mexican-American Chamber of 
Commerce to present new infrastructure projects.  The GOM 
announced that there will be 480 infrastructure projects 
in toll roads, ports, water treatment plants, etc. which 
will require public-private investment.  Mexico's 
Infrastructure and Public Services Development Bank 
(Banobras) expects to spend about MX$45 billion (US$3.5 
billion) in 2010.  The GOM had hoped that this event and 
the 2010 budget could shield Mexico from a downgrade 
since it would show that the GOM was doing something to 
 
MEXICO 00003382  004 OF 004 
 
 
stimulate domestic demand, economic activity, and job 
creation. 
 
¶11.  (SBU) Comment.  The main signal to financial markets 
was that even in times of economic hardship, a fragmented 
Congress is unwilling to rein in spending, and Calderon's 
cabinet was unable to achieve a more comprehensive tax 
reform to reduce long-term oil dependence.  The GOM was 
unable to mount a political counteroffensive when the PRI 
shot down the central plank of its revenue proposals, a 
general 2% VAT rate.  There was broad disappointment with 
the outcome and the intense politicization of the whole 
budget process.  While some applauded the fact that the 
new taxes will be recycled into the economy, others 
lamented that the reform did not eliminate tax loopholes 
or increase efficiency of public spending.  The general 
view going forward is that Mexico will not collapse, nor 
will it achieve its growth potential, and it will 
continue to take short-term measures to salvage the next 
year rather than making medium- or even long-term 
reforms.  Mexico has been deemed as "the champion of 
muddling through," and unless the GOM is willing to 
undertake structural reforms in the energy, 
telecommunications, financial sectors as well as sound 
improvement in competition and tax collection, Mexico 
will continue to lose its appeal compared to other 
emerging economies such as Brazil.  End comment. 
 
PASCUAL