Cablegate: Challenges Facing Mexico's Stock Exchange

VZCZCXRO7755
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #5858/01 3192229
ZNR UUUUU ZZH
P 152229Z NOV 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 9585
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 04 MEXICO 005858

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 ITA (ISRALY ECHEGARAY)
TREASURY FOR IA (ALICE FAIBISHENKO, ANNA JEWEL)
TREASURY FOR OCC/IBF (SUSAN QUILL)
TREASURY FOR IBSMO (WILBUR MONROE, BILL FOSTER)
EXIM FOR MICHELE WILKINS
CFTC FOR OIA (WARREN GORLICK)
NSC FOR RICHARD MILES, DAN FISK
SEC FOR OIA (SHAUNA STEELE)
STATE PASS TO USTR (EISSENSTAT/MELLE/SHIGETOMI)
STATE PASS TO FEDERAL RESERVE (ANDREA RAFFO/ANN MISBACK)

E.O. 12958: N/A
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: CHALLENGES FACING MEXICO'S STOCK EXCHANGE

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Summary and Introduction
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1. (SBU) On October 29, 2007, the Mexican Stock Exchange
(BMV) held its 18th annual convention, which centered on the
need to "democratize" the stock market and to increase
medium-sized companies, access to capital markets. Finance
Secretary Agustin Carstens and Bank of Mexico Governor

SIPDIS
Guillermo Ortiz participated in the event, and pledged more
competition in the stock market, the issuance of more initial
public offerings (IPOs), the elimination of entry barriers,
and the adoption of international standards by the BMV.
President Calderon highlighted his administration,s efforts
to consolidate macroeconomic stability, as well as his
commitment to fight organized crime and to support reforms of
the judicial system, energy, labor, and telecommunications
sectors, as well as deregulation to help Mexico become more
competitive. End summary.

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Modernizing the Mexican Stock Exchange
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2. (U) Stock exchanges in developing countries have abandoned
the organic-growth model to make way for a wave of mergers,
acquisitions, and IPOs from the stock exchanges themselves.
Resources obtained from these IPOs have been channeled to the
construction of global stock exchanges. The Mexican Stock
Exchange (BMV) does not want to be the exception. Following
the successful mergers and the IPOs of the Montreal and
Brazilian Stock Exchanges, the BMV's board decided to
reorganize its structure and implement corporate governance
standards for an eventual IPO issuance. They also have
understood the importance of developing products for more
aggressive investors, such as hedge funds and private pension
funds. Thanks to the reforms of the private pension funds'
investment regime, the participation of these institutional
investors has grown from 8% of GDP in 2000 to 21% of GDP in
2007. Currently, 37 million Mexicans are investing their
pension funds in the stock market through private pension
funds called Siefores. In view of this, the BMV has issued
more derivatives, structured products, and new asset classes.

3. (U) BMV President Guillermo Prieto explained that the
exchange's modernization strategy is based on four pillars:
1.) innovating by offering derivatives, futures, swaps, and
very soon Mexico's version of real estate investment trusts
(called FIBRAS); 2.) improving operations by updating
technology; 3.) broadening ownership to increase transparency
(Note: the BMV now has more independent members on its board
and on its auditing, securities registration, and regulation
committees than in the past.); and 4.) creating a larger
social impact. The BMV's role as a facilitator in channeling
resources to social welfare has been significant. From 2001
to date, the accumulated debt placed by the Federal Mortgage
Corporation, the Private Sector Workers' National Housing
Development Institute (Infonavit), and mortgage sofoles
(non-bank banks) totals USD 7.7 billion. Around USD 4.6
billion of public works in states and municipalities have
been financed through the BMV.

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Democratization of the Mexican Stock Exchange
---------------------------------------------

4. (U) All of the speakers attending the convention agreed
that one of the most significant challenges for the sector

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was to "democratize" the BMV and facilitate medium-sized
businesses' access to financing. Thanks to the new
Securities Market Law approved in 2005, it is easier for
medium-sized businesses to have access to financing through
the stock market, provided they comply with basic corporate
governance requirements. The BMV has also implemented a
program to facilitate their progressive access. The sector
understands that it has to work harder to promote the listing
of more issuers and to achieve a deeper local capital market.
As the Vice Chairman of the Mexican Financial Intermediaries
Association said: "The Mexican secondary market will only
strengthen to the extent that the primary market grows."

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Regulation, Supervision and Competitiveness
--------------------------------------------

5. (U) Guillermo Babatz, President of the National Banking
and Securities Commission (CNBV), spoke about the
modernization process that the securities law has undergone
in recent years to incorporate international standards.
Babatz noted that the challenge currently lay in implementing
the law and regulations adequately to stimulate the sector's
development. He pledged to strengthen sanctions against
violations and to protect minority stockholders. The CNBV
will continue cooperating with its counterparts in other
countries regarding supervision. Babatz noted that Mexico
should be prepared to face more aggressive competition
worldwide by promoting the entry of more financial
intermediaries in specific niches, and by reducing placement,
operation, and regulatory costs. The CNBV announced it will
reduce its fees for securities and debt issuance by 20% and
40%, respectively, beginning on January 1, 2008. Finally,
Babatz called for a reduction in placement fees charged by
brokers.

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Use of FIBRAS To Boost Infrastructure
--------------------------------------------

6. (U) BMV Deputy Director Alejandro Reynoso announced that
Mexican Real Estate Investment Trusts (FIBRAS for the acronym
in Spanish) were ready to be launched. Legislation allowing
for FIBRAS was passed in 2003. He explained that authorities
approved several tax benefits for FIBRAS, including the
deferment of income and real estate acquisitions payments, no
tax withholdings, and no tax for change of control. However,
he also explained that there are some restrictions to prevent
taxpayers using FIBRAS only for tax planning and tax evasion
purposes. Recent changes to the pension law will create five
different Siefores (private pension funds), which will be
able to diversify their portfolios and risk levels depending
on the age of the worker. Reynoso said that, ideally,
Siefores and insurance funds should be able to invest in
infrastructure projects during the construction stage -- that
is, investing more with capital than with debt to give
workers more value added on their investment. Fitch Ratings
will assign a rating to the FIBRAS based on several factors,
including their debt level, experience in the sector, and the
value of the land in question.

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Challenges Ahead
----------------

7. (U) For Bank of Mexico Governor Guillermo Ortiz, the
financial markets' most significant challenges are:
increasing savings, expanding access for households and SMEs,
providing incentives to increase participation in debt and

MEXICO 00005858 003 OF 004

capital markets, and having the financial system play a
greater role in promoting the country's productivity and
economic growth. For the sector, it is necessary to foster
the development of capital formation and strengthen the BMV,
both economically and institutionally, so that it is able to
compete globally. It should also eliminate obstacles and
entry barriers for new issuers. To illustrate the growth
potential of the BMV, Ortiz compared the number of listed
companies on the exchange (156) against the number of
companies listed on the Brazilian Stock Exchange (350). The
number of companies registered with the Secretariat of
Finance for tax purposes is 11,000. During the past year,
Mexico only had five IPOs, whereas Brazil has had 60. He
also said that the BMV's capitalization ratio was 47% against
60% of the Brazilian Stock Exchange's, not to mention the
existing high level of concentration of the largest ten
companies in the BMV, which represent 80% of the total market
value.

8. (U) Finance Secretary Carstens noted that while the
securities market helped make up for commercial banks' lack
of lending after the 1994-95 economic crisis, it is now
necessary to reevaluate the securities market's role. For
Carstens, the securities market's primary role is not to
satisfy the daily financial needs of businesses, but to
provide capital to entrepreneurial and productive projects
needed to stimulate job creation and economic welfare -- in
other words, "to democratize the capital." Carstens
considered that the size of the Mexican stock market does not
correspond to the economy's size and potential. He called
for more IPO's taking advantage of the existing macroeconomic
stability and modern legal framework. He also urged the BMV
to adopt international governance standards for the issuance
IPOs.

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Calderon Promises More Reforms
------------------------------

9. (U) During his presentation, President Calderon praised
the BMV's performance, the consolidation of macroeconomic
stability, and the consensus achieved among different
political actors on the ISSSTE (the social security institute
for government workers), fiscal, and electoral reforms
approved during his eleven months in power. He pledged to
continue fighting organized crime and to support reforms of
the judicial system, energy, labor, and telecommunications
sectors, and a deregulation process to help Mexico become
more competitive and attractive to investors. He added that
the BMV should become an investment option, not only for
large corporations, but also for businesses in need of credit
or capitalization. In other economic issues, President
Calderon highlighted the need to diversify exports to reduce
Mexico's vulnerability to the performance of the U.S.
economy. He also announced that in the coming year the
government will channel 70% of its programmable spending to
social programs, and 65% of the additional resources obtained
from the recently approved fiscal reform to infrastructure
projects.

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Comment
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10. (SBU) There has been a general call from various sectors,
the public, politicians, and international organizations to
take on Mexico's public and private monopolies. The BMV is
no exception. There is an urgent need to break down
resistance and reduce the concentration of conglomerates

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owned or controlled by powerful families to help SMEs go
through the entire process of listing their assets and
obtaining more capital. One of the sector's short-term goals
would be implementing and taking advantage of modern
regulations, the new securities law, which protects minority
shareholders, as well as macroeconomic stability to stimulate
the issuance of more IPOs, and to satisfy their need for
capital and implement the productive projects that Mexico so
badly needs. End comment.

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