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MAY 1999


Mirrored with permission from Lloyd S.A. de C.V.
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CONTENTS:

WORLD BANK IMPRESSED

The Mexican economy posted the highest economic growth rate in Latin America last year, according to a World Bank survey released in April. One World Bank economist, Uri Dadush, said that the economy has resisted problems in Asia and Brazil and "is now reaping the benefits of the North American Free Trade agreement". Dadush praised the economic reforms put in place in the wake of the problems in 1994 saying that "Mexico's policies in the last two to three years have set the conditions for growth." These policies have been the raising of interest rates to combat inflation, the reduction in government expenditure to offset revenue losses from lower oil prices, and the maintenance of a flexible exchange rate to prevent currency speculation.

FALLING INFLATION

The national consumer price index rose by only 0.93% during March, the lowest monthly rise for 10 months. Figures released by the central bank, Banxico, show that inflation since January 1 has been 4.87%, suggesting that it may still be possible to meet the official target for inflation of 13% over the year.

IS BIGGER ALWAYS BETTER?

According to a Commerce Secretariat survey, major multinational corporations are likely to invest 10 billion dollars in Mexico this year, 8% more than during 1998, generating some 41,500 additional jobs. These are in addition to jobs created by major Mexican companies, which have promised investments totalling more than 7 billion dollars. This all sounds like great news, but as some analysts have pointed out, the average capital investment for each new job created in a major corporation is almost 250,000 dollars, much higher than the capital investment required to create new jobs in smaller companies.

Major corporations may be responsible for most exports of manufactured goods but INEGI figures show that 70% of the national workforce is employed in micro, small and medium-sized companies, each having fewer than 250 employees. Moreover, these INEGI statistics do not include workers in the informal sector, many of them in modest commercial and industrial "street" enterprises that have no fixed place of business. A survey carried out by the National School of Microbusinesses found that more than 1.3 million informal businesses (and at least 1.3 million workers) fall outside INEGI statistics. The average cost of each additional job created in the micro-industry category (definitions vary but most agree that micro-companies employ fewer than 15 employees) is only about 3,500 dollars.

While celebrating massive injections of foreign capital and new high-tech jobs, we also need incentives for micro-businesses where additional jobs can be created more economically. One essential step required for this strategy to succeed is simplifying administrative requirements and procedures. According to Mexico City's Business Center, micro- businesses have to cope with an average of 2.1 government tramites (formalities) per month, with each one taking an average of 3.1 hours. Opening a new retail store, however small, usually requires completing between 12 and 20 different tramites, depending on the nature of the items sold.

ECONOMIC CONVERGENCE

Both the Finance Secretary, Jose Angel Gurria, and the central bank governor, Guillermo Ortiz, have suggested that government policy should be directed towards bringing inflation and budget imbalances into line with the U.S. and Canada. They argue that this "convergence", the latest buzzword in economics, would strengthen Mexico's ability to attract foreign investment and promote economic development. Supporters of convergence argue that it could pave the way for an eventual monetary union between the NAFTA members, similar in nature to the European Community's adoption of the Euro.

PROGRESS IN THE PORTS

Reforms in port administration during the past four years have helped attract investments worth almost 600 million dollars, increasing their capacity by 53%, improving their international competitiveness and reducing port charges. Domestic ports are now operating better than international norms, according to port authorities. Handling charges have been greatly reduced - by amounts ranging from 5.6% in the case of container traffic up to 34.5% in the case of bulk grain. Between 1993 and 1998, and excluding crude oil and salt, there was a 129% increase in the amount of cargo handled from 24 to 55 million metric tons.

Whereas in 1996 only 78 shipping lines served Mexican ports, 118 will provide service during 1999. Productivity is much higher with the port of Veracruz almost doubling its container turn-around from a lethargic 43 containers per hour per ship in 1994 to 74 containers per hour last year. The container terminals at Manzanillo and Altamira also performed better than the 50 containers per hour considered the international norm. Mexican port charges are highly competitive, some 30% less than the port of Houston-Charleston and 60% less than Long Beach and Los Angeles.

AUTOMATIC SUCCESS?

Mannesmann Sachs has opened a new 45-million-dollar plant for the production of torque converters for automatic gearboxes in Ramos Arizpe near the city of Saltillo in northern Mexico. The company already has plants in two other locations in the country (in Guadalajara and Mexico City) and employs more than 3,100 workers. Demand for Mannesmann Sachs' products should not be a problem since some 85% of all vehicles produced in the NAFTA market have automatic transmissions.

WATER SHORTAGE

In what seems to have become an annual event in recent years, severe drought is once again affecting a wide part of northern Mexico. In the state of Sinaloa, the irrigation of 79,000 hectares has had to be curtailed due to the low level of reservoirs. According to figures released by the National Water Commission, Sinaloa's reservoirs are holding only 14.8% of their capacity (15.143 billion cubic meters), their lowest level for a decade. Several small hydro-electric power stations have been shut down and farmers are having to rely completely on water from their own wells. Quite apart from the drought, a document released by the National Water Commission (CNA) warns that Mexico requires investments of between 5 and 10 billion dollars in infrastructure during the next 20 years to guarantee an adequate future supply of water. At present, an estimated 13 million Mexicans have no access to piped potable water.

FOOD IMPORTS LIKELY TO RISE

A government study entitled "The Situation and Outlook of the Agricultural Sector in Mexico" shows that Mexico will need to expand its grain imports by 36% between now and the year 2008, from 5.6 million metric tons of corn to 7.5 million tons. Grain imports have risen steadily since 1990 and cost 8.6 billion dollars last year. Despite predicting increases in the domestic production of corn, sorghum and wheat, the report suggests that imports of wheat, rice, sorghum and soy will all rise rapidly during the next decade.

DONATING TREES TO FIGHT FIRES

Last year, a total of 14,000 forest fires damaged more than 583,000 hectares of woodland across the country, reducing visibility in much of central and northern Mexico and even across the border, in Texas. An estimated two-thirds of all wildfires in Mexico are started by farmers clearing their land. Now, the federal government is budgeting 100 million dollars (1 billion pesos) to help persuade farmers not to use "slash and burn" techniques for clearing land prior to planting. The federal initiative aims to replace burning by conservation and sustainable agricultural techniques. The Environment and Agriculture Secretariats have already carried out trials of alternative methods of clearance on 55,000 hectares in a variety of ecosystems across the nation. This year, a federal program will begin on 310,000 hectares in previously identified "priority" zones. Each farmer joining the program will be offered financial incentives for not setting fires and be given 100 young trees.

EXTRA ROOMS IN CANCUN

One of the world's greatest success stories in fully planned, purpose-built tourist resorts is undoubtedly Cancún, Mexico's premier Caribbean coast destination in the state of Quintana Roo. In 1998, it attracted 2,652,000 visitors, 90.5% of them from overseas; they spent more than 1.8 billion dollars. Occupancy rates for Cancún hotels have fallen slightly in recent years as the city's pool of hotel rooms (23,581 at the end of 1998) has increased faster than its supply of tourists. Even though the number of available hotel rooms is now rapidly approaching the limit of 30,000 set in the city's original development plan, more rooms are still being added. According to Cancún's Department of Urban Development, more than 2,000 additional rooms are currently under construction and the next stage of Cancún's hotel zone development will add another 1,000 new rooms.

By the time the Puerto Cancún megaproject is completed in five years time, its 4,000 rooms will push the total number of available rooms well over the originally proposed limit. If the attractions of Cancún diminish in the face of over-development, then some visitors are likely to choose hotels further south, in the so-called Maya Riviera, the 100-kilometer-long stretch of coastline between Cancún and Tulúm. There are already more than 9,000 rooms on offer in hotels in this zone and a further 3,000 should become available by the end of the year.

RELATED NEWS: More than 300 companies from 50 countries attended Latin America's largest tourism fair, the XXIV Tianguis Turístico, held in Acapulco last month. The Tourism Secretariat estimated that sales worth more than 1.7 billion dollars were finalized during the fair.

NO TIME FOR A SIESTA

In a drive to improve productivity and cut costs, the government has eliminated extended midday "siesta" breaks for its 1.5 million workers. Now, federal government workers must complete their 8-hour shifts between 7 a.m. and 6 p.m., with only one hour off for lunch. The plan, originally proposed by the Treasury Secretariat and the Federal Comptroller's Office, should save almost 200 million dollars in electricity costs, as well as bringing Mexico's office hours more in line with its NAFTA partners. Not everyone is happy about the change. Many government employees have a second job, such as cab-driving, and are far from pleased at the idea of shorter lunchbreaks.

A TEXTILE FOR THE FUTURE

Shell Chemicals and KoSa have signed a letter of intent to form a 50-50 partnership for the marketing of Corterra, the advanced polymer PTT, believed by industry specialists to be likely to have a revolutionary impact on the textile industry in the next decade. Corterra, which combines the relative merits of nylon and polyester, was first developed in 1941, but only recently has Shell developed a cost-efficient process for manufacturing PDO (1,3 propanediol), one of Corterra's principal ingredients. Shell is producing PDO in one of its U.S. chemical plants but plans to manufacture Corterra in the port city of Altamira in the state of Tamaulipas. KoSa, a major polyester producer and distributor, is based in Houston, Texas, and operates 15 manufacturing centers worldwide.

REDUCED OIL EXPORTS

Mexico lowered its crude exports by 125,000 barrels a day (b/d) to about 1.45 million b/d last month as its contribution to a multinational agreement among oil producers to lower production levels until oil prices show a sustained recovery on world markets. Most of the cuts came from lower-value heavy-oil production. This latest cut means that Mexico has reduced its exports by a total of 325,000 b/d over the past year. Since last December, oil prices have risen by more than a third.

SPECIALIZED GLASS PLANT

Later this month, Vitro's new 20-million-dollar glass facility, built in a joint venture with General Electric, will open in Apodaca, in the northern border state of Nuevo León. It will produce specialist components with a variety of uses ranging from diagnostic imaging machines in hospitals to apparatus for turbine cleaning and locomotives.

© 1999 Operadora de Fondos Lloyd, S.A.
© 1999 Allen W. Lloyd, S.A. de C.V.

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