Cablegate: Finance Secretary Briefs Ambassador On 2010 Budget

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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

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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

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