VZCZCXRO2316
RR RUEHRS
DE RUEHME #0690/01 0551758
ZNR UUUUU ZZH
R 241757Z FEB 10
FM AMEMBASSY MEXICO
TO ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/SECSTATE WASHDC 0620

UNCLAS SECTION 01 OF 04 MEXICO 000690 



SENSITIVE 

SIPDIS 

SIPDIS 

STATE/TREASURY PASS TO EX-IM BANK 



E.O. 12958: N/A 

TAGS: ECON EFIN ETRD MX OVIP
SUBJECT: Scenesetter for Ex-IM Chairman Fred Hochberg 



1. (SBU) Summary. Your visit comes at a crucial moment in our 
efforts to deepen our bilateral relationship with Mexico, our third 
largest trading partner after Canada and China. As we 
institutionalize our security agenda we will also need to give more 
attention to the economic and social agendas in a country whose 
economic and social well-being affects ours directly. The United 
States' global competitiveness depends increasingly on a more 
competitive Mexico. Efforts to strengthen our mutually beneficial 
competitiveness in 2010 will focus on spurring innovation, creating 
jobs on both sides of the border, building a modern 21st century 
border, encouraging the requisite regulations and infrastructure, 
and supporting a sustainable energy and environment agenda. All 
these are top priorities for the Calderon administration and offer 
huge potential for future U.S. investment and economic development. 
Mexico's and our economic recovery go hand in hand, and U.S. 
export-led successes depend increasingly on partnering with 
Mexico's lower-cost manufacturing capability. President Calderon 
is personally devoted to the issue of climate change and renewable 
energy, opening the possibility for trade and investment 
opportunities that benefit both countries. End Summary. 





Political Context 


-------------------- 





2. (SBU) Present Calderon enters the last three years of his 
six-year term facing a complicated political and economic 
environment. His PAN party emerged seriously weakened from a 
dramatic 2009 mid-term election in which the opposition (PRI) 
gained control of the Mexican Congress. His popularity numbers 
have dropped 10-points since the beginning of last year, yet they 
still hover solidly over 50 percent. He is by no means a lame 
duck. Still, the opposition PRI party is in the ascendancy, 
cautiously managing its illusory unity in an effort to dominate the 
ten gubernatorial contests that are up in the coming year, and to 
avoid any missteps that could jeopardize its front-runner status in 
the run-up to the 2012 presidential elections. In addition, the 
public's deepening economic worries have begun to counterbalance 
their concern about security. 





Economic Context 


---------------------- 





¶3. (SBU) Following the 2009 electoral setback, Calderon made 
creating jobs and eradicating poverty his top two priorities for 
2010, sharing the agenda with security issues that have become 
acutely sensitive in the past weeks due to the persistent violence 
in Ciudad Juarez. It is important that Calderon succeed in making 
real progress on the economy and security in the last three years 
of his term. The economic and security agendas are time-sensitive 
and volatile, and the more momentum that can be achieved now, the 
greater the prospect for continuity into a new administration. 
However, the complexities of pushing viable economic reforms 
through an opposition Congress complicate advancing such an agenda. 
If Calderon is unable to strengthen Mexico's competitiveness in 
order to promote jobs and eradicate poverty, the United States will 
also feel the impact through immigration pressures and greater 
volatility in high-violence cities that have been the battleground 
for narco-traffickers. A stable and growing Mexico is in both our 
security and economic interests. 





4. (SBU) The oil sector is a crucial component of Mexico's economy 
and is the largest source of export earnings for the country, 
accounting for 10 percent of all export earnings. However, 
Mexico's oil production has declined rapidly from a peak of 3.4 
million barrels per day in 2004 to a projected 2.5 million barrels 
per day in 2010. Despite some optimistic GOM forecasts, there are 
no realistic options for reversing this decline in the short to 
medium term. Mexico has relied heavily on the Cantarell oil field, 
one of the largest in the world. Despite nitrogen injection and 
other enhanced oil recovery techniques, the Cantarell field has 
entered a stage of long-term decline with production falling by 
more than 70% from its peak of over 2 million barrels a day in 2004 

MEXICO 00000690 002 OF 004 


to less than 650,000 barrels per day in 2009. 





¶5. (SBU) The Mexican government's reliance on oil revenue to 
finance over one third of the federal budget has deprived Mexico's 
state owned oil company, PEMEX, of much needed capital for 
exploration, production, and infrastructure projects. As a result 
of decades of underinvestment, PEMEX today finds itself without 
alternative oil fields which could compensate for Cantarell's 
decline. PEMEX accelerated the development of the giant 
Chicontepec oil basin in 2009, investing $2 billion with the goal 
of increasing production from 29,000 to 90,000 barrels in 2009. 
With 750 new wells drilled over the past year, overall production 
remains stagnant and production per well has fallen dramatically. 
Although the Chicontepec fields are estimated to contain almost 9 
billion barrels of reserves, Chicontepec is a complex reservoir 
which involves technical challenges and significant operational 
costs. Exploiting Chicontepec will require high-risk investments 
and the drilling of a large number of wells for relatively small 
returns. Many experts believe that even with substantial 
investments, PEMEX will have a difficult time reaching its 600,000 
barrel a day production goal by 2021. Other fields Mexico is 
currently exploiting include Ku Maloob Zaap, which has reached peak 
production levels; Crudo Ligero Marino and other smaller fields in 
the south which are largely enhanced oil recovery projects will do 
little to reverse Mexico's production decline. 



U.S. 

Exports to Mexico 


---------------------------- 





¶6. (SBU) Mexico is the U.S.'s 3rd largest trade partner and 2nd 
largest export market for U.S. products. U.S-Mexico bilateral 
trade increased from USD 88 billion in 1993 to USD 301.87 
(projected) in 2009. Mexico depends heavily on trade with the U.S. 
with the U.S. supplying as much as 60% of total Mexican imports. 





National Infrastructure Plan (NIP) 


---------------------------------------- 





¶7. (SBU) The National Infrastructure Program (NIP) was launched by 
Mexican President Calderon in July 2007 to dramatically increase 
infrastructure investment, in energy, transportation and the 
environment. The NIP is being financed using public-private 
partnerships, with significant Mexican public sector investment. 
The NIP aims to increase infrastructure investment by 50 percent 
that, if sustained, according to Mexican government officials could 
place Mexico in the world's top 20 countries for infrastructure 
competitiveness by 2030. Mexico currently ranks of 68 out of 125 
countries worldwide in infrastructure. 





8. (SBU) However, the economic crisis has impacted availability of 
financing and many projects have been delayed. In an effort to 
invigorate the program and generate interest among U.S. investors 
and exporters in key NIP projects, Mexico's Secretary of Finance, 
Agustin Carstens, (he is now President of the Central Bank) led a 
group of Mexican government officials including, BANOBRAS Director, 
Alonso Garcia, to New York in November 2009. The group made a 
formal presentation that included distribution of a list of 
priority infrastructure projects that Mexico is pursuing. 





BANOBRAS 


-------------- 





9. (SBU) BANOBRAS, Mexico's public works bank, provides financing 
and technical assistance for infrastructure projects or public 
services directly or through concessions, permits or operating 

MEXICO 00000690 003 OF 004 


contracts with private companies. BANOBRAS financing reached 
approximately USD 5 billion in 2009. In 2010, it will be over USD 
3 billion. FONADIN (Fond Nacional de Infraestructura) was 
established in February 2008, by the decree of President Calderon, 
for infrastructure development in communications, transportation, 
water, natural resources and tourism. FONADIN is attached to 
BANOBRAS, which in turn reports ultimately to the Secretariat of 
Finance. 





Pension Funds and Capital Development Certificates 

--------------------------------------------- ------------------- 





10. (SBU) Institutional investors such as pension funds have 
recently entered the infrastructure project finance game with eased 
restrictions and the development of Capital Development 
Certificates (Cecades). In October 2009, President Calderon 
announced that this new debt instrument will make a total of USD 10 
billion available for infrastructure projects by the end of his 
presidency in 2012. Soon after the announcement, Goldman Sachs 
Infrastructure Partners sold a 6.55 billion peso (USD 477.3 
million) stake in a toll road concession to Mexican pension funds. 
The purchase made institutional investors a 32% stakeholder in Red 
de Carreteras de Occidente, or RCO, which operates four toll roads 
in central Mexico. 





¶11. (SBU) Australian investment bank, Macquarie, followed with the 
creation of the Macquarie Mexican Infrastructure Fund with 
approximately USD 408 million in initial commitments from Mexican 
pension funds, FONADIN and Macquarie. This fund is the first 
peso-denominated fund solely focused on investment opportunities in 
Mexican infrastructure projects. FONADIN's current commitment to 
the fund is USD 80 million of the total. 





12. (SBU) The involvement of pension funds (with USD 100 billion 
under management), is an important attempt by the Mexican 
government to stimulate investment in infrastructure given the 
shortfall in international financial markets. Ex-Im Bank's 
proposed Memorandum of Understanding comes as the Mexican 
government is aggressively pursuing financing sources. 





USG support of the NIP 


---------------------------- 





¶13. (SBU) Since the announcement of the NIP the U.S. Embassy in 
Mexico has coordinated USG resources including USTDA, EX-IM Bank, 
USDOC to name a few in support of NIP projects. Specifically, the 
U.S. Embassy has facilitated on-going discussions between Ex-Im 
Bank and FONADIN toward the establishment of a closer working 
relationship. The MOU that you will sign with BANOBRAS during your 
visit is a significant statement of USG support for Mexico's 
Infrastructure development. 





¶14. (SBU) Overall, your visit comes at a critical time as project 
and export financing is needed to support the development and 
completion of the projects identified in the NIP. It is also 
important to keep in mind that increased investment in Mexico's 
infrastructure supports regional competitiveness and furthers 
economic development of both the United States and Mexico. 





Renewable Energy 


---------------------- 





¶15. (SBU) Advancing bilateral cooperation on renewable energy, 

MEXICO 00000690 004 OF 004 


energy efficiency and the environmental agenda has been a top 
priority for both President Obama and President Calderon since 
their first meeting January 2009. This agenda was formalized when 
the Bilateral Clean Energy and Climate Change Framework was 
announced during President Obama's April 2009 visit to Mexico. On 
January 25-26 a senior level working group met in Washington to 
discuss pragmatic steps to advance this collaboration. The working 
group agreed to establish a bilateral task force which will work to 
create a renewable energy market between Baja California and 
California. The task force will consider standards, transmission 
capacity, regulatory issues and financing. This pilot project 
could be able more broadly across the border, creating significant 
opportunities for U.S. companies to export green technology to 
Mexico. The January 25-26 meeting also helped advance cooperation 
on the Framework Convention on Climate Change 16th Conference of 
the parties (COP-16) which Mexico is hosting in late 2010. 





¶16. (SBU) You could also stress President Obama's personal 
commitment to advancing a joint agenda on climate change and 
renewable energy. As well, your interlocutors would benefit from 
hearing the administration's commitment to use all available policy 
and financial tools, drawing on DOE, EPA, State, TDA, USAID, OPIC, 
Ex-Im, and USTR to create a viable renewable energy market between 
both countries. 

FEELEY