Cablegate: Despite Upbeat State Forecast Challenges Remain to Nuevo

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TO RUEHC/SECSTATE WASHDC 0039
INFO ALL US CONSULATES IN MEXICO COLLECTIVE
RHMFIUU/DEPT OF HOMELAND SECURITY WASHINGTON DC
RHMFIUU/FBI WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHME/AMEMBASSY MEXICO

UNCLAS MONTERREY 000060

SENSITIVE
SIPDIS
STATE PASS USTR

E.O. 12958: N/A
TAGS: EFIN ETRD EIND EINV ELAB ECON MX
SUBJECT: DESPITE UPBEAT STATE FORECAST CHALLENGES REMAIN TO NUEVO
LEON'S FUTURE ECONOMIC GROWTH

REF: 09 MONTERREY 386; 09 MONTERREY 378; 09 MONTERREY 453

1. (SBU) Summary: A recent Nuevo Leon Secretariat of Economic
Development (SEDEC) report predicted that state growth would
continue to surpass that of Mexico as a whole, moving 2009 state
per capital nominal GDP from US $12,445 to US $25,426 by 2015, 104
percent above the predicted national average at that time.
However, a slowdown or reversal of a U.S. economic recovery could
stymie growth of the state's heavily export dependent economy.
Monterrey's rising cost of living could also negatively impact
growth. In the end, investor concerns over rising insecurity and
the impact of a large state debt on future governmental operations
loom large in any projection of the state's financial future.

Rosy Forecast for State's Economic Future

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2. (SBU) A February 22 report released by the Nuevo Leon State
Secretariat of Economic Development (SEDEC) predicted that GDP
growth in the state would outstrip that of Mexico as a whole,
reaching 8.3 percent by 2015 (vs. 7.3 percent countrywide). The
report estimated that nominal per capita GDP would escalate 60
percent in the next six years, reaching US $25,426 or 104% greater
than Mexico as a whole (US $12,445), driven predominantly by the
manufacturing industry. (Note: Nuevo Leon nominal per capita GDP
in 2009, US $15,794, topped the average for Mexico, US $8,166, by
around 93 percent. End note.) As the state is heavily dependent
on manufactured goods exports, mostly to the U.S. market, SEDEC
caveats its predictions based on the speed and durability of a
worldwide economic recovery and, in particular, on a U.S. economic
rebound.

3. (SBU) Around 4.1 percent of the country, according to the
report, lives in Nuevo Leon, yet the state accounts for 8 percent
of the country's GDP, 10.2 percent of its manufacturing, and 9.3
percent its exports. The state is the home to several major
multinationals, such as ALFA, CEMEX, and VITRO. Over 2,200 foreign
companies - about 1,200 from the U.S. - have established operations
in the state, and its auto parts manufacturing industry was among
the first in Mexico to show signs of life after the worst of the
recession had passed.

4. (SBU) However, SEDEC's optimistic predictions aside, the state
faces a number of hurdles to its fiscal future:

Cost Of Living Escalates

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5. (SBU) In its annual Mexico cost of living survey released on
February 2, Mercer Consulting named Monterrey as having Mexico's
highest cost of living - ahead of Los Cabos, Baja California,
Cancun, Mexico City and 37 other Mexican cities. While other
cities showed a decrease in housing rentals of up to 8.21 percent,
Monterrey's rents increased 3.37 percent. Nationally, the cost of
food in 2009 rose 7.74 percent, but in Monterrey it increased 10.47
percent compared with 2008. This is the third consecutive year
that Monterrey has topped Mercer's list.

Security - An Elephant in the Room

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6. (SBU) While Monterrey has yet to reach the levels of violence
found in many border towns such as Ciudad Juarez, Reynosa, or
Tijuana, any discussion of the state's business future must factor
in what appears to be a deteriorating security situation. In
Monterrey and its environs, home to most of the state's population
and businesses, stories of violent criminal activity fill the local
media. For example, car hijackings have surged and home break-ins
have jumped 300 percent in the Monterrey suburb of San Pedro de
Garza Garcia, Mexico's most affluent.

7. (SBU) Compounding citizen concerns have been several high
profile shootouts. In December a bloody battle between Mexican
marines and drug cartel members, coupled with a prison breakout,
left 17 dead and closed the city's main northern roads (ref C). In
October, a violent shootout between police and drug cartel members
shut down a main Monterrey thoroughfare for several hours (ref A).
Corruption-riddled state and municipal forces are often in league
with the drug cartels or fail to respond in force to these
incidents, leaving security in the hands of the military. The
impact on economic activity is becoming apparent. Many executives
from foreign-based companies have told EconOff that their parent
companies plan to defer or change investment plans in Mexico due to
fears about the crime situation (septel).

State Indebtedness - The Other Elephant in the Room

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8. (SBU) During the six-year term of former Nuevo Leon Governor
Gonzalez Paras (PRI), the media and opponents pointedly criticized
him for his spendthrift approach to managing the public coffers.
Indeed, during his administration, public indebtedness increased
over 74 percent (the state incurred US $ 250 million alone during
September 2009, his last month in office). Much of the proceeds
were used to fund over US $ 3.1 billion in big ticket public works
items such as metro line and highway expansion, construction of
Monterrey's "Riverwalk," Nuevo Leon's Command, Control,
Communication and Coordination Center (C5), the state's new
Innovation and Investigation Park (PIIT) an administration tower,
and a pediatric hospital.

9. (SBU) The incoming administration of Governor Rodrigo Medina
(PRI) appeared to have little financial room with which to maneuver
after taking office in October. Nevertheless, during the state's
December budget deliberations, Nuevo Leon State Congress President
Sergio Alejandro Alanis Marroquin (PRI) told EconOff that he
anticipated more big-ticket capital improvements. He described
ongoing and projected highway projects, including future plans for
expanding the state road north from Monterrey to the Colombia
border crossing to facilitate trade. The state's revenue transfer
budget request, estimated to be six percent higher than the 2009
budget, is currently awaiting federal approval.

Comment

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10. (SBU) Nuevo Leon has a number of significant advantages that
make it an economic powerhouse, particularly in the age of NAFTA.
It is close to the U.S. border, has an educated and motivated
workforce, and a U.S.-centric business ethic. It has weathered the
recession relatively well and was one of the first Mexican states
to report employment gains at the end of 2009. From all
indications, international companies overall still view their
current operations in the state as productive and profitable.

11. (SBU) However, a number of hurdles face actualization of
SEDEC's optimistic economic outlook. In real terms, the rising
cost of living in Monterrey will temper actual gains in the earning
power of employees and increase the cost of doing business in the
state. The SEDEC projection for 2015 notes the importance of a
sustainable U.S. economic recovery to the state, but Post believes
that, should the security situation (or perception thereof by
foreign companies) continue to worsen, the impact on the economy
could become significant as companies defer or cancel investments
and hesitate to send expatriate workers to oversee operations.
Equally worrisome is the high debt load the state continues to
incur and indications that the new state administration plans to
continue spending at previous rates. Since Nuevo Leon depends on
federal funding for the majority of its budget, a significant
federal budget crunch could hamper the state's ability to meet
creditor payment schedules. While the state continues to have
tremendous future economic potential, its ability to realize that
potential will be dependent of a variety of factors, some beyond
its control.
WILLIAMSON

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