Cablegate: Mexico Stocks Drop, Peso Weakens After House Bailout Vote

VZCZCXRO9632
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #2977/01 2801846
ZNR UUUUU ZZH
P 061846Z OCT 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 3501
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RHMFIUU/HQ USNORTHCOM
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC

UNCLAS SECTION 01 OF 02 MEXICO 002977

SIPDIS

STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA
STATE FOR EB/ESC MCMANUS AND IZZO
USDOC FOR ITS/TD/ENERGY DIVISION
TREASURY FOR IA (RACHEL JARPE)
DOE FOR INTERNATIONAL AFFAIRS (SLADISLAW)
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA)
NSC FOR DAN FISK

E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV MX
SUBJECT: MEXICO STOCKS DROP, PESO WEAKENS AFTER HOUSE BAILOUT VOTE

1. SUMMARY. The IPC, Mexico's stock market index, plummeted on
Friday Sept. 31, despite the approval of a financial bailout by the
U.S. House of Representatives. The IPC plunged 4.32% on Friday,
totaling a 10.2% weekly decline, one of the worse performances since
2000. The peso also fell to 11.21 to the dollar. Economists agree
the country's main sources of foreign currency, i.e. oil,
remittances, foreign direct investment (FDI), and manufacturing
exports will suffer the most. Economists say FDI is unlikely to
reach 2007 levels. Remittances are already down over 12% yoy (year
over year). Nevertheless, the Finance Minister has maintained that
Mexico's fundamentals are solid, that public finances are healthy
and foreign debt represents only 4.2% of GDP. Despite some worry
over credit card debt, Mexico holds very little in the way of
mortgage-backed securities. In addition, mortgages in Mexico are
issues under stricter conditions. The challenge for Mexico will be
how to expand financial access and banking services necessary for
growth in an otherwise sluggish economy. END SUMMARY

2. The IPC, Mexico's stock market index, plummeted on Friday Sept.
31, despite the approval of a financial bailout by the House of
Representatives. The IPC plunged 4.32% on Friday, totaling a 10.2%
weekly decline, one of the worse performances since 2000. The peso
also fell to 11.21 pesos to the dollar in retail operations. The
Bank of Mexico's exchange rate closing the week at 11.11 pesos to
the dollar. The risk premium closed the week at 258 basis points, 24
basis points up from the previous week. Paradoxically,
international reserves kept growing and stood at US$83.5 billion.

3. Mexican authorities and the private sector have generally
acknowledged that the U.S. recession will have a negative impact on
Mexico's economy. Economists we have spoken to say the country's
main sources of foreign currency, oil, remittances, FDI, and
manufacturing exports will suffer the most. Observers say lower
economic growth and demand will likely push oil prices down. The
Finance Secretariat's US$80.3 per barrel oil reference price
projected in the 2009 budget seems already too high, with the
Mexican oil mix closed at $83.8 per barrel last week. The
optimistic view among economists we spoke to is that FDI will only
reach US$ 20 billion this year, compared to the US$ 25 billion
received in 2007. Exports have grown slightly, 5.6% yoy. However,
this figure is largely due to high oil prices. Actually,
manufacturing exports fell 3.8% yoy in August.

CARSTENS SAYS FUNDAMENTALS SOLID
--------------------------------

4. Although the plan approved by the U.S. Congress sends a positive
message to the Mexican market about the USG's support for the U.S.
financial system, Mexican investors are concerned about the time it
will take for markets to see its effects, as well as the length and
depth of the U.S. economic recession and its impact on the Mexican
economy. Trying to smooth investors' concerns, Finance Secretary
Agustin Carstens stated on several occasions that the Mexican
government remains prepared to respond to the crisis, and that the
country's strong economic fundamentals and solid financial
institutions will help Mexico face the economic downturn. He said
public finances are healthy, foreign debt represents only 4.2% of
GDP, inflationary pressures are under control due to the
government's monetary policy and those pressures are expected to
recede soon.

IMPACT ON INFRASTRUCTURE?
------------------------
5. The current economic situation will likely impact negatively on
one of the countercyclical tools that was supposed to stimulate the
economy, the National Infrastructure Plan (NIP). The NIP, announced
with great fanfare last year by President Calderon, includes plans
for domestic and foreign investment in airports, ports, bridges and
highways. It was slow to take off due to bureaucratic obstacles.
The private sector now fears that with the financial crunch,
business will be unable to obtain the financing to launch the
projects. In an attempt to keep the economy on track, Guillermo
Zamarripa, the Head of the Banking and Savings Unit of the Finance
Secretariat, publicly asked bankers to keep on lending.

NO ALARMS OVER MORTGAGES

MEXICO 00002977 002 OF 002

-----------------------
6. Regulators and financial authorities have not sounded any alarm
bells about overdue mortgage payments. The non-performing housing
loans ratio in Mexico is currently only 3%. Mexican mortgage-backed
securities, called BORHIS by their Spanish acronym, are structured
differently than the troublesome U.S. instruments. Other significant
differences between U.S. sub prime mortgages and Mexican mortgages
are that all housing loans in Mexico are at fixed rates and require
a minimum 20% down payment. Moreover, most of the financial
institutions include unemployment insurance policies in the cost of
the loan. Since the 1995 "Tequila" crisis, loan origination
criteria for mortgages has become considerably stricter. The Bank of
Mexico's Governor Guillermo Ortiz confirmed last week that Mexican
banks had not acquired any of the toxic instruments that caused
problems in the U.S. In Mexico, the only contagion will likely be
felt in the very small number of issuances of mortgage-backed
securities, which could have a negative impact on housing developers
and some non-bank financial institution (sofoles). Mexico has a
current demand of around 5 million houses.

CREDIT CARDS NEXT?
------------------
7. There is concern in Mexico about non-performing credit card
loans, where the ratio currently stands at 7%. Since interest rates
in credit cards are already high (around 34%) and variable, analysts
are concerned about the impact that a deep economic deceleration
could have. Banks have reportedly begun to restrict the issuance of
credit cards. They have also implemented financial education
programs beginning with larger debtors to show them how to make the
best use of their credit cards and loans. Most banks have also
increased their reserves and their capitalization index, which is
currently more than 16%. The challenge for Mexico will be how to
expand financial access and banking services in a sluggish economy
without deteriorating loan portfolios and credit origination
criteria.

REMITTANCES ALSO DOWN
--------------------
8. The Bank of Mexico reported last week the worst decline in
remittances ever since the central bank began keeping record of
them. In August, remittances fell 12.2% year over year. The
unemployment in the construction and manufacturing sectors has hit
harder on Mexicans, who are unable to send money to their families.
Some are beginning to worry about a massive return of Mexicans.
Given the low job creation in Mexico, it would be impossible to
absorb this additional workforce in the formal and informal
economy.
GARZA

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