VZCZCXRO4388
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #0240/01 0292020
ZNR UUUUU ZZH
P 292020Z JAN 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 0292
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 000240
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)
TREASURY FOR IA (ALICE FAIBISHENKO)
DOE FOR INTL AFFAIRS KDEUTSCH, ALOCKWOOD, AND GWARD
NSC FOR RICHARD MILES, DAN FISK
EXIM FOR MICHELE WILKINS
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (ANDREA RAFFO)
E.O. 12958: N/A
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: FEAR OF U.S. RECESSION RATTLES MEXICAN MARKETS
REF: 07 MEXICO 2670
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Summary
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1. (SBU) The Mexican stock market is down 3.3% this month on
fears that the U.S., Mexico's largest trading partner, could
slip into recession. Real GDP growth currently is expected
to slow this year to 1.5-3.0% from an estimated 3.1% in 2007
and 4.8% in 2006, due largely to the economy's tight links to
the U.S. Fortunately, Mexico is better prepared to absorb
economic shocks from the U.S. than it was in 2001. Domestic
demand buoyed by more credit to the private sector, solid
macroeconomic fundamentals, and increased government spending
will help support local growth. The depth and duration of a
recession in the U.S. as well as the Calderon
administration's ability to continue passing much-needed
structural reforms will be key factors in determining how the
Mexican economy fares. End Summary.
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Increased Volatility in Mexican Markets
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2. (U) Mexico's IPC stock index plunged 5.3% on January 21
amid steep losses in European and Asian markets on U.S.
recession fears. While the sell off was blunted by the U.S.
Federal Reserve's decision to cut its benchmark rate 75 basis
points to 3.5% on January 22, the market is still off 3.3%
since the beginning of the month. The Fed's rate cut widened
the spread with Mexico's 7.5% key rate by the most since
January 2006 -- a move that has made Mexican yields more
attractive. The yield on 10-year bonds due December 2016 has
fallen 51 basis points to 7.67% so far this month. The peso
fell 0.53% against the dollar on January 21, but has
strengthened since then on bets the Fed will cut rates again
this week and positive news on durable goods orders in the
U.S.
---------------------------------
Concern Up, Growth Forecasts Down
---------------------------------
3. (SBU) Econoffs have met with several government and
private sector officials over the past week to get their
perspective on recent market volatility and on how the
Mexican economy would handle a recession in the U.S. These
conversations show that while most officials remain
cautiously optimistic about Mexico's growth prospects,
concern has increased notably in recent weeks. Mexico's
economy is simply too closely tied to that of the U.S. to
escape unscathed. A senior Bank of Mexico (BOM) official
told econoffs that the BOM planned to lower its real GDP
growth forecast for 2008 to 2.75% - 3.25%; private sector
forecasts range from 1.5% to 3.0%.
--------------------------------------------- -
Better Positioned to Weather U.S. Recession...
--------------------------------------------- -
4. (SBU) While acknowledging that slower growth in the U.S.
would undoubtedly affect Mexico, Marco Oviedo Cruz, the
Director of Financial Planning at the Finance Secretariat,
told econoff that Mexico is better prepared to handle a U.S.
recession than it was in 2001. He highlighted the country's
solid macroeconomic fundamentals and noted how the
manufacturing sector is more competitive than it was in the
past. Echoing comments from private sector analysts, Oviedo
commented on the importance of domestic demand as a driver of
growth, noting that while credit to the private sector was
MEXICO 00000240 002 OF 003
virtually non-existent seven years ago, it is now growing at
high rates. The 2007 fiscal reform will also help propel the
economy, as it will allow for higher levels of public
investment in infrastructure and social programs. Oviedo
remarked that while Mexico still sends most of its exports to
the U.S., it has made progress diversifying the destination
of its exports thanks to various trade agreements signed in
recent years -- with Europe in particular. He added that
productive sectors have been helped by the fact that the peso
has been following the dollar -- which has been weakening.
5. (SBU) At a presentation in Monterrey on January 24, AmCham
economist Deborah Riner echoed public comments by Finance
Secretary Carstens that high oil prices also will allow the
SIPDIS
government to boost spending. She added that the informal
economy will help buffer Mexico's fall since it is less
dependent on the U.S. economy. Several analysts also have
noted the importance of USG actions, such as interest rate
cuts and the stimulus package.
6. (SBU) When asked how a significant slowdown in remittances
would affect Mexico, Oviedo replied that the impact would be
very limited since remittances represent such a small
percentage of GDP. He noted, however, that poorer households
that rely on the receipt of such transfers would take a hit.
(Comment: Remittances help support many of the poorest
families in Mexico. For them, remittance income is critical,
if not for survival, at least for maintenance of their modest
standard of living. End Comment.)
--------------------------
... But Fallout Inevitable
--------------------------
7. (SBU) While the variables listed above would help Mexico
weather a U.S. recession, a series of other factors will curb
Mexico's growth prospects:
-- Slower growth in the U.S. weakens demand for Mexican goods
in the U.S., the destination of more than 80% of Mexico's
exports, according to Mexican trade statistics. Analysts
note that Mexican exporters that depend on the U.S. for a
significant portion of their revenues, such as Cemex and
Vitro, have already taken a hit.
-- While Mexico's exports to the European Union have nearly
doubled from 2000 to 2006 to USD 11.0 billion, a Director
from the Graduate School of Business at ITESM (Monterrey Tec)
noted that this figure is small compared to the amount of
exports the U.S. buys from Mexico (USD 212 billion in 2006).
-- The head of Economic Research at Bank of America noted
that Mexico is too dependent on the manufacturing sector in
the U.S. to avoid a slowdown. The director from ITESM said
the correlation between these two indicators was
approximately 80%.
-- The Bank of America official and an economist from
Consultores Economicos Espacializados in Monterrey tried to
debunk the government's argument that countercyclical fiscal
policy would help stimulate the economy. They said that the
additional revenues available stem in part from the recent
fiscal reform, adding that increasing taxes dampens rather
than stimulates growth.
-- Several private sector officials also questioned how
quickly the government could begin the infrastructure
projects it is touting as a way to help absorb shocks from
the U.S. The ITESM director said that while construction
spending will help, states are not known to be efficient
spenders of government funds.
MEXICO 00000240 003 OF 003
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Comment
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8. (SBU) The GOM and private sector are closely watching how
the crisis in the U.S. unfolds. If the U.S. slips into
recession, the question is not if, but rather how much,
Mexico will be affected. The answer to this question is
largely tied to the depth and duration of the recession as
well as which U.S. sectors are most affected. It is also
linked to the Calderon administration's ability to continue
passing much-needed economic reforms (energy, labor,
competition, etc.) as mid-term congressional elections draw
near. Such measures would not only improve Mexico's global
competitiveness, they would also bolster investor confidence
in Mexico's future.
9. (SBU) The effects of all this are not just economic.
President Calderon and other political actors probably judge
that lower growth and higher unemployment in Mexico can
potentially influence the outcome of the July 2009
congressional elections. Moreover, the government would face
significant pressure if Mexicans working in the U.S. return
home because they cannot find work (e.g. if a Mexican
employed in the suffering U.S. construction industry -- which
16% of workers of Mexican orgin do -- cannot find work
elsewhere).
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 /
GARZA