Cablegate: Fiscal Reform and Other Economc Developments In

VZCZCXRO7333
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #5418/01 2841938
ZNR UUUUU ZZH
P 111938Z OCT 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 9185
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEHNSC/NSC WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUEHC/DEPT OF LABOR WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 MEXICO 005418

SIPDIS

SENSITIVE
SIPDIS

STATE FOR A/S SHANNON
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH
STATE FOR EB/ESC MCMANUS AND IZZO
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD
USDOC FOR ITS/TD/ENERGY DIVISION
TREASURY FOR IA (ALICE FAIBISHENKO, ANNA JEWEL)
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND ALOCKWOOD
NSC FOR RICHARD MILES, DAN FISK
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA)

E.O. 12958: N/A
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: FISCAL REFORM AND OTHER ECONOMC DEVELOPMENTS IN
MEXICO

REF: MEXICO 5044

1. (SBU) SUMMARY: The Finance Secretariat is preparing a
presidential decree that it says will "refine some of the
details" of the recently passed fiscal reform package. The
decree will adjust the way inventories accumulated by yearend
are treated, and gives special treatment to maquiladoras.
The government published five of the seven components of the
fiscal reform in the Official Gazette on October 1. The two
remaining parts pertain to federalism and constitutional
reforms. The former will be published in mid-December so the
5.5% gasoline and diesel tax hike will come into effect on
January 1, 2008, and the latter is in the process of being
ratified in the state legislatures. A Hacienda official told
econoff that he does not see another tax reform during
President Calderon's term. Standard & Poor's on October 8
upgraded Mexico's sovereign debt rating, citing an improved
outlook for tax collection, a better debt profile, and the
recent cooperation among political parties pushing reforms
through Congress. Consumer price inflation rose a slightly
less-than-expected 0.78% in September, bringing the annual
inflation rate to 3.79%. The Chamber of Deputies will vote
on the revenue portion of the 2008 budget package by next
week. END SUMMARY.

Government To Issue Supplemental Decree on Fiscal Reform
--------------------------------------------- -----------

2. (SBU) The Finance Secretariat (Hacienda) is preparing a
presidential decree that will include new deductions for the
Single Rate Corporate Tax (IETU), which will mainly benefit
maquiladoras and the concessionaires of the highway system,
according to local press reports. A mid-level Hacienda
official told econoff on October 10 that the decree is needed
to "refine some of the details" of the recently passed fiscal
reform package (see reftel). He explained that the decree
has two main parts. First, Hacienda is going to adjust the
way inventories accumulated by December 31, 2007 are treated.
Second, they are going to give special treatment to
maquiladoras. Agreement has been reached on the former
initiative, but the latter is still under discussion. The
Hacienda official remarked that the decree will be published
in the coming weeks.

3. (SBU) This decree should come as no surprise to the
private sector. During an Ernst & Young-sponsored tax
conference on September 25, companies called on Hacienda to
clarify some aspects of the fiscal reform, including parts
related to inventories and how companies will report fiscal
losses before 2008. At the conference, Ernst & Young
representatives said they expected the government to issue
changes and clarifications through decrees, reforms to tax
laws, or changes to the "Miscelanea Fiscal" -- tax
regulations that will be approved along with the budget
package in November.

Additional Tax Reforms on Hold Until Next Sexenio?
--------------------------------------------- -----

4. (SBU) Despite the Finance Secretary's public calls for
additional reforms, the same mid-level Hacienda official told
econoff that he does not see the need for another fiscal
reform at this time. He believes tax reform will be
addressed again in five years when another president with
more political capital is in office. He remarked that
collection of the value-added tax (VAT) will improve due to
changes implemented in the fiscal reform. He added that if
tax evasion continues at the current rate, then the
government would be forced to take action before it leaves
office. He remarked that the next fiscal reform initiative
would have to include efforts to tax consumption through the
VAT. Businessmen have argued that the recently passed reform

MEXICO 00005418 002 OF 003

hit them particularly hard because the government did not
want to tackle the politically sensitive VAT.

Part of Fiscal Reform Published in Official Gazette
--------------------------------------------- ------

5. (U) The government published five of the seven components
of the fiscal reform in the Official Gazette on October 1.
The two remaining parts pertain to federalism and
constitutional reforms. The former will be published in
mid-December so the 5.5% gasoline and diesel tax hike will
come into effect on January 1, 2008, and the latter is in the
process of being ratified in the state legislatures.

S&P Upgrades Mexico
-------------------

6. (U) Standard & Poor's on October 8 upgraded Mexico's
sovereign debt rating, citing an improved outlook for tax
collection, a better debt profile, and the recent cooperation
among political parties pushing reforms through Congress.
S&P raised Mexico's long-term foreign currency credit rating
from BBB to BBB -- the third-lowest investment grade rating
-- bringing S&P's rating in line with ratings from Moody's
and Fitch. It also increased Mexico's long-term local
currency credit rating from A to A . The move was discounted
by markets. Bank of Mexico Deputy Governor Guillermo Guemez
said publicly that the upgrade would help reduce interest
rates.

Inflation Falls Slightly in September
-------------------------------------

7. (SBU) Consumer price inflation rose a slightly
less-than-expected 0.78% in September, bringing the annual
inflation rate to 3.79%, down from 4.03% the previous month.
The figure was driven by higher food prices and seasonally
high educational costs. Annual core inflation fell from
3.86% in August to 3.80% last month. These readings, along
with government policies aimed at containing energy and bread
prices this year, reduce pressure on the Bank of Mexico (BOM)
to tighten monetary policy. Nonetheless, market analysts
have not ruled out a 25-50 basis point rate hike by December.
An economist at HSBC told econoff that he does not see the
BOM lifting rates at its policy meeting on October 26, but
rather waiting to see if the U.S. Federal Reserve cuts rates
on October 30/31. He added that if the BOM decides to hike
rates this month, it will be because it wants to send the
message that it will not tolerate concerns about high food
prices contaminating wage settlements or other prices in the
economy.

Budget Negotiations on Track
----------------------------

8. (SBU) The mid-level Hacienda official told econoff that
the Chamber of Deputies will vote on the revenue portion of
the 2008 budget package late this week, or early next week
(Note: local press reports say the vote will take place on
October 18. The Chamber of Deputies has until the 20th to
approve the Revenue Bill and send it to the Senate, which has
until October 31 to ratify it. End Note.) He remarked that
negotiations have centered on how to spend the revenue
generated from fiscal reform. He noted that some members of
Congress were trying to increase the oil price estimate used
in the government's budget proposal (US$46.60 per barrel) to
around US$50 per barrel. He said they were incorrectly using
the formula specified in the budget law for setting the price
of oil. In the end, he said they agreed to increase the oil
price estimate by approximately US$1 per barrel, which would
boost total revenues by $7 billion pesos.

MEXICO 00005418 003 OF 003

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