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Lloyd Mexico Economic Report February 2003

Table of Contents

RISE IN MINIMUM WAGE
CABINET RESHUFFLE
RECORD FOREIGN RESERVES
BONOS ADDED TO GOVERNMENT BOND INDEX
DOLPHIN-SAFE TUNA
ACAPULCO TOURIST TIANGUIS
HIGHWAY UPGRADES
LAZARO CARDENAS CONTAINER TERMINAL
MORE VOLKSWAGENS, FEWER BUGS
MULTIMEDIA MESSAGING SERVICES
PIPELINE INVESTMENT NEEDED
RECORD SALES FOR WAL-MART
TOYOTA EXPANDS NETWORK
ENVIRONMENT PROJECTS
CONSOLIDATION IN SOFT DRINKS SECTOR

RISE IN MINIMUM WAGE

The National Minimum Wage Commission has announced new minimum wages. The minimum rates rose an average of 4.5%, the lowest rise since 1994, and took effect January 1. The minimum wage is used as the basis for many rental and labor agreements as well as for calculating numerous other fees and charges.

The minimum wage in Zone A (Mexico City, Baja California, Baja California Sur, Acapulco, several major border cities and parts of Veracruz) rose by 3.56% to 43.65 pesos a day. In Zone B (Monterrey, Guadalajara, Tampico, Altamira and some other medium-sized cities) the daily rate has risen 4.36% to 41.85 pesos, and for Zone C (the remainder of the country) the rate has increased by 5.22% to 40.30 pesos.

This year's increases continue to reduce the differentiation between regions. The minimum wage is paid to about 8 million workers in Mexico's 40-million strong workforce.


CABINET RESHUFFLE

President Vicente Fox has appointed Luis Ernesto Derbez as Foreign Secretary to replace out-going Jorge Castañeda. Derbez's former position as Economy Secretary will now be occupied by Fernando Canales Clariond, former governor of the state of Nuevo León. This is the first cabinet reshuffle since President Fox took office in the year 2000.


RECORD FOREIGN RESERVES

Mexico's foreign reserves stood at an historic high at the beginning of this year. As of January 3, foreign reserves totaled 497.795 billion pesos (about 49.78 billion dollars). Much of last year's increase was due to higher than anticipated oil prices, resulting in additional revenue from oil exports. The strength of Mexico's foreign reserves is particularly noteworthy given that it has not been one of the central bank's priorities in recent years.


BONOS ADDED TO GOVERNMENT BOND INDEX

Two recent developments demonstrate that the global financial community has plenty of confidence in the strength and stability of the national economy. First, one of the world's leading financial firms, JPMorgan, has added Mexican bonds to its Government Bond Index (GBI).

The GBI is one of the leading instruments used by fund managers for deciding portfolio allocations and includes the government-issued debt of most of the world's major economies. Many international funds that allocate their investments in line with the index will now purchase Mexican "Bonos" (fixed-rate, local currency-denominated coupon bonds) for their portfolios. In turn, this strong demand should help to keep their interest rates down.

The second development that shows investor confidence is the successful issue last month of 2 billion dollars of 10-year global bonds. The bonds have a coupon of 6.375% and a yield-to-maturity of 6.639%, a spread of only 2.46 basis points over the 4.17% return of 10-year U.S. Treasury Bonds. This bond issue means that the government has already covered all its refinancing needs for the year. In addition, 500 million dollars in Brady Bonds will be retired, saving 37 million dollars in interest.


DOLPHIN-SAFE TUNA

Mexico produced about 150,000 metric tons of yellowfin tuna in 2002, and exported 20,500 tons, most of it to Spain. Tuna fishermen have welcomed a U.S. Commerce Department decision that will allow them to stamp "dolphin-safe" on tuna exported to the U.S.

Tuna consumption in the U.S. market exceeds 600,000 tons a year. The labels certify that tuna fishing is in compliance with the International Dolphin Protection Program. Mexican tuna fishers will continue to employ their encirclement method, which involves locating tuna by chasing dolphins that swim with tuna schools. Dolphins trapped in the nets are released by hand and returned (alive) back into the ocean.

The tuna catch, worth about 100 million dollars a year, is expected to rise substantially following the approval of dolphin-safe status. This is good news for the 20,000 families in Mexico who are dependent on tuna fishing for their livelihood.


ACAPULCO TOURIST TIANGUIS

The 28th Tianguis Turístico will take place in Acapulco from March 30 to April 2. More than 1,500 buyers, from all over the world, are expected to attend Latin America's most important tourist trade fair.

Last year's Tianguis attracted 1,264 buyers from 29 countries, who looked at the offerings of 2,452 domestic tourist providers. Last year, about 18 million visitors chose to vacation in Mexico, and revenue from tourism exceeded 8.65 billion dollars. Both the number of visitors and the total revenue are predicted to rise about 3% this year, with the federal Tourism Secretariat placing increased emphasis on meeting the demands of those travelers who prefer to enter the country by road.


HIGHWAY UPGRADES

This year, the Secretaría de Comunicaciones y Transportes (SCT) will award some 40 concessions for highway construction on major trunk routes, including the 40-million-dollar Matehuala by-pass, construction of which is due to begin in June.

Elsewhere, similar by-pass projects should improve traffic flows around Ixmiquilpan (in the state of Hidalgo), Toluca, Mazatlán, Reynosa and Veracruz. In total, these concessions will require an investment of around 2.8 billion dollars to complete.

In addition, various major highways are due to be upgraded this year, including the federal highways near Escarcega, in the state of Campeche, and the Durango-Mazatlán highway in the north of the country.


LAZARO CARDENAS CONTAINER TERMINAL

A 30-year concession to build and operate a specialized container terminal in the Pacific coast port of Lázaro Cárdenas has attracted the attention of several major corporations, including Hutchinson Port Holdings (based in Hong Kong), P&O, APL (a subsidiary of Singapore-based Neptune Orient Lines), Burlington and Grupo Mexicano de Desarrollo (GMD).

Their interest underlines the highly significant role that the port could play in future trade links between North America and Asia. When complete, the terminal is scheduled to have a capacity of up to a million containers a year, making it the largest in Mexico.

The port offers a unique combination of depth (accommodating vessels drawing up to 16.5 meters or 54 feet), room for expansion, and convenient links by railroad to the center and north of the country, providing a gateway to the U.S. rail network via Nuevo Laredo. The port's excellent rail links are seen as making it the ideal choice for firms on the eastern seaboard of the U.S. that want to develop their trade with Asian ports such as Hong Kong, Singapore and Shanghai.


MORE VOLKSWAGENS, FEWER BUGS

Volkswagen de México has announced that its new Bora model - a medium-sized sedan - will be manufactured at its plant in the central state of Puebla. The first Bora is expected to roll off the assembly line in 2005, and the plant will make 100,000 Boras a year when operating at full capacity, all of them for export to Europe.

Investments at the plant, as it gears up to produce the new model, will total 2 billion dollars over the next 5 years and will add around 1,500 new jobs to the current workforce of 16,000.

The plant produced 332,000 vehicles in 2002, 270,000 of them for export. Apart from being the only Volkswagen plant worldwide making the New Beetle, it is also the only plant continuing to make the Old Bug, some 70,000 of which are in use as taxis in Mexico City. Within a few years, the Bug may be an endangered species on Mexico City's streets. In the interests of improving air quality, the city government has introduced a program of loans to owners of Bug taxis if they exchange their vehicles for more fuel-efficient vehicles.


MULTIMEDIA MESSAGING SERVICES

Telcel, a subsidiary of América Móvil, one of Latin America's largest cellular communications providers, is the leading wireless services provider in Mexico with more than 20 million clients and 75% of the Mexican wireless market. It will soon become the first cellphone provider in the country to offer its clients Multimedia Messaging Services (MMS).

Using technology developed by Ericsson, the MMS service will be offered through Telcel's existing GSM/GPRS mobile network. GSM is the world's most widely deployed wireless communications standard; the GPRS system also enables the use of third generation (3G) systems.

Ericsson's MMS technology will make Mobile Internet services far more powerful, enabling the high-speed exchange of color images and animations, including multi-media presentations, from one Telcel subscriber to another. MMS is expected to stimulate a dramatic increase in the use of mobile-to-mobile and mobile-to-e-mail messaging services.


PIPELINE INVESTMENT NEEDED

Gas Natural México is investing 184 million dollars over the next 5 years to expand its network of pipelines supplying domestic and commercial users in the northern industrial city of Monterrey. In addition, later this year, a new 87-million-dollar pipeline will begin bringing 11 million cubic meters (375 million cubic feet) of gas a day from Mier, in Texas, to thermal power stations near Monterrey.

These investments are only a fraction of the total pipeline investments required in Mexico over the next 7 years, according to a study recently published by the International Energy Agency (IEA) (Agencia Internacional de Energía). The IEA says up to 18 billion dollars in pipeline investments are needed to keep pace with future demand for natural gas, which is forecast to rise by 66 billion cubic meters over that period of time.


RECORD SALES FOR WAL-MART

Wal-Mart de México has reported record 2002 sales totaling 106 billion dollars, 13.1% more than 2001, after inflation has been taken into account. The chain served 13% more clients and same store sales were 3.7% higher in real terms than during 2001. The rapid expansion of Wal-Mart during 2002 resulted from investments of 500 million dollars that generated 8,101 new jobs. Eduardo Castro, Wal-Mart de México's CEO, announced that the firm will continue its expansion this year.


TOYOTA EXPANDS NETWORK

The Japanese automaker Toyota is investing 145 million dollars this year in Mexico to complete the second phase of the company's 140-million-dollar assembly plant in Tijuana, and to expand its chain of dealerships. New dealerships will open in Mexico City, Puebla, Chihuahua, Mérida (Yucatán), León (Guanajuato), Torreón (Coahuila), Toluca (state of Mexico) and Guadalajara (Jalisco), bringing the total number of authorized Toyota dealerships nationwide to 25 by the end of the year.


ENVIRONMENT PROJECTS

The World Bank is collaborating with several federal agencies to improve environmental issues. For example, it is helping the National Water Commission to modernize irrigation systems, and improve water quality and treatment. With the National Forestry Commission, it is promoting community involvement in sustainable forestry projects, focusing on ejidos located in forest areas.

It is also assisting the Mexico City Metropolitan Air Quality Commission in developing an Air Quality Plan, particularly with respect to transport efficiency. In addition, the World Bank is involved in helping strengthen the system of National Protected Areas and in offsetting the effects of greenhouse gas emissions by developing a "carbon sink" (carbon isolation) project in Oaxaca.


CONSOLIDATION IN SOFT DRINKS SECTOR

On a per capita basis, Mexicans are the world's greatest consumers of soft drinks. The domestic soft drinks market is worth more than 8.5 billion dollars a year. One noteworthy trend in recent years has been the increasing proportion of the market dominated by large firms such as Fomento Económico Mexicano (Femsa) and Pepsi Gamex.

Femsa, the largest Coca-Cola bottler in Mexico, bought soft drinks rival Sidral Mundet early in 2002, and then acquired another Coca-Cola bottler, Panamerican Beverages (Panamco), later in the year for 3.6 billion dollars. As a result, Femsa now controls the bottling and distribution of Coca-Cola in every major Latin American economy, with total annual sales estimated at 4.6 billion dollars, equivalent to about 20% of all Coca-Cola sales worldwide.

Soft drinks consumption in Mexico continues to grow, so it is likely that both Pepsi and Coca-Cola will fight aggressive marketing campaigns and launch a steady stream of new products in their efforts to capture more market share.





The text of this report was not submitted to any Federal Mexican Authorities or approved by them prior to publication. In preparing it, we have done our own research, using sources we believe to be reliable. However, we do not guarantee its accuracy. Neither the information contained herein nor the opinions expressed, constitute a solicitation by us of the purchase of any security.

Mirrored with permission from Lloyd S.A. de C.V.
See their Page on Mexico Connect.

© 2003 Operadora de Fondos Lloyd, S.A.
© 2003 Allen W. Lloyd, S.A. de C.V.

Published or Updated on: July 20, 2006
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