Lloyd Mexico Economic Report July 2003
Table of Contents
INTEREST RATES AT HISTORIC LOWFUND MANAGERS HAPPY
FOX TAKES STRONG STANCE
TREASURY SECRETARY PRAISES MEXICO
AIRPORTS IN CENTRAL MEXICO
SUBURBAN TRAIN SYSTEM
METROPOLITAN RING ROAD
CREDIT BOOM
END OF AN ERA
OFFICIAL STATISTICS ARE VERY GOOD
INSURANCE FOR INVESTMENT IN MEXICO
BALANCED SCORECARD APPROACH
FREEDOM OF INFORMATION LAW
TIME TO DEVELOP CHICONTEPEC OIL
INTEREST RATES AT HISTORIC LOW
The interest rate of the benchmark 28-day Treasury Certificates (Certificados de la Tesorería, Cetes) has fallen to 4.72%, the lowest figure since they were introduced in 1978. The decline in rates reflects expectation that a small negative inflation rate will be reported for last month when figures are released, coupled with the strength of the peso against the U.S. dollar.
At the same time, the main index of the Mexican Stock Market rose to 6,738.97 at the end of May, higher than at any previous time this year. The total amount of foreign investment on the Mexican Stock Market grew by 1.73% during May to stand at 50.337 billion dollars at the end of the month, including 29.504 billion in American Depository Receipts and 17.773 billion in Free Subscription Stock.
FUND MANAGERS HAPPY
The Mexican stock exchange has begun trading, in pesos, in 29 of the 30 companies that make up the Dow Jones Industrial average, including such companies as Eastman Kodak, IBM, Coca-Cola Co, and General Motors. Initially, trading is restricted to institutional investors, such as fund companies.
Buying U.S. stocks in Mexico will give Mexican investors certain tax advantages. For example, stocks purchased on the Mexican stock exchange (whether by Mexicans or foreigners) are exempt from capital gains and the tax on dividends in Mexico is lower. The new funds will allow Mexican investors to diversify their portfolios.
FOX TAKES STRONG STANCE
In recent speeches, President Fox has set out an ambitious agenda for Mexico's role in world affairs. Among other aims, he has expressed his government's intention to seek a permanent seat on the U.N. Security Council, and to join the G8 group, which is comprised of the 8 most industrialized economies. Mexico has the world's ninth largest economy.
He has also suggested that Mexico and Brazil should bring joint pressure to bear on developed nations with a view to ending all agricultural subsidies. Mexico is hosting the next ministerial level meeting of the World Trade Organization in Cancún this September.
TREASURY SECRETARY PRAISES MEXICO
On June 12, Mexico completed its early retirement of all outstanding Brady Bonds, issued in the 1990s to help several emerging market countries restructure and reduce their debt burdens. At a ceremony to mark the occasion, U.S. Treasury Secretary John Snow praised Mexico's economy, saying that, "The early retirement of the last of Mexico's dollar-denominated Brady bonds is an occasion for celebration... We are here today to formally recognize the resilience of the Mexican economy, in particular, as it has finished repaying these debts ahead of schedule, and is clearly on a path to a bright future. Since 1990, Mexico has taken many important measures to strengthen its economy: floating its exchange rate, opening markets, privatizing enterprises, resolving its banking crisis and strengthening its financial sector, as well as providing a sound fiscal and monetary framework".
AIRPORTS IN CENTRAL MEXICO
Mexico has the most extensive network of air traffic in Latin America, including 57 international airports. Passenger and freight movements are heavily concentrated in Central Mexico, which houses 30% of the national population and accounts for 40% of Gross Domestic Product. In order to ensure sufficient capacity for the next 20 or 25 years, the government has decided to expand several airports in the region.
Its proposals envisage an investment of 270 million dollars in total, 50% of which will come from the private sector. The capacity of the 93-year-old Mexico City International "Benito Juárez" Airport will be raised from 20 to 30 million passenger movements a year, with the addition of a second story on the existing terminal building.
Another 28 million passengers will be channeled through other airports: Toluca to the west, Querétaro to the north and Puebla to the east. The Puebla "Hermanos Serdán" airport hopes to attract international flights, as well as capture 30% of the freight traffic that currently uses Mexico City airport. One of the less desirable results of these developments is that some passengers will need to change airports in future in order to make flight connections.
SUBURBAN TRAIN SYSTEM
An estimated 15 million inhabitants of Mexico City regularly use public transport. At present, fleets of crowded micro-buses ferry passengers twice a day between their homes and the nearest subway station. For those living in the north of the city, the daily commute will be much faster after the introduction of a 640-million-dollar commuter train, the Ferrocarril Suburbano de la Zona Metropolitana del Valle de México. When the project is completed, trains will run on three main routes: Buena Vista-Cuautitlán-Huehuetoca, Ecatapec-Naucalpan and San Juan de Aragon-Los Reyes, with a network of connecting branch lines.
The first phase will extend 25 kilometers from Buenavista station to Cuautitlán, using existing rail lines and includes the construction of 7 stations (Buenavista, Fortuna, Tlalnepantla, San Rafael, Lechería, Tultitlán and Cuautitlán). Interconnections to the Metro will be available at Fortuna (to Ferrería on Metro line 6) and Buenavista (to the Metro station of the same name on Line B).
The light trains will run from 5 a.m. to midnight and will cut commuting time for users by up to 2.75 hours a day. The Suburban train network is being planned in conjunction with the route of the Metropolitan Ring Road and of the planned "bullet" train link between Mexico City and Guadalajara.
METROPOLITAN RING ROAD
Work will begin shortly on the Metropolitan Perimeter Ring Road which will connect three of the major highways radiating out from Mexico City. The highways are those to Querétaro, Pachuca and Puebla, respectively. Linking these highways together should speed transit times and dramatically reduce the number of vehicles needing to enter Mexico City proper. The Ring Road is part of a total highway investment (both government and private sector) of 25.6 billion pesos this year.
CREDIT BOOM
The commercial banking sector is to offer 16.7 billion dollars in personal and business credit over the next twelve months, by far the largest increase for more than 30 years. Presenting the initiative, Manuel Medina Mora, the president of the Mexican Bankers Association, said that the decision reflects the economic stability now enjoyed by the country, and the strengthening of the financial sector over the past several years.
Different banks will, of course, continue to offer different loan programs with a variety of terms and conditions. The number of credit cards is projected to increase by more than 2 million this year to reach about 11 million. More than 180,000 vehicle loans are expected to be signed over the same period. Property mortgages will also become easier to find, since the commercial banks are projecting that they will provide more than 100,000 loans in that area over the next two years, with down payments as low as 20%.
END OF AN ERA
The last Volkswagen sedan (popularly known as the Bug or Beetle, or "vocho" in Spanish) will roll off the assembly line in Puebla later this summer, marking the end of an era. More than 21.5 million Bugs have been sold worldwide; 1.65 million still circulate in Mexico City, many as taxis.
The first Bug, designed by Ferdinand Porsche, was produced in Germany in 1936. Volkswagen de México began making the car at its Puebla plant in 1952. After 1996, it was the only plant worldwide that still manufactured the vehicle. The car originally intended as a "vehicle for the masses" quickly became a symbol of German industrial efficiency and, later, a style icon.
In recent years, demand for the vehicle has steadily declined in the face of ever-increasing competition from other compact cars. Going on sale later this month is the final production run of a special edition Bug in original colors and with some older styling features.
The Puebla plant will continue to turn out 560 New Beetles (exported to 80 countries) and 800 Jettas each day. By 2005, after investments totaling 180 million dollars, it will also add an estimated 400 units of the Bora, a mid-sized sedan.
OFFICIAL STATISTICS ARE VERY GOOD
The International Monetary Fund has published a report on the transparency of official Mexican statistics. They stress in their report, entitled Mexico: Report on Observance of Standards and Codes, that the general quality of information available is very good and that the relevant government agencies maintain a disciplined timetable for releasing economic and financial information.
The report also suggests some minor modifications to methodology that would help bring certain Mexican economic statistics fully in line with international norms. There are three principal sources of economic data in Mexico: the central bank (Banxico), the Finance Secretariat (SHCP), and the National Statistics Institute (INEGI).
INSURANCE FOR INVESTMENT IN MEXICO
In 1971, a U.S. government agency, Overseas Private Investment Corporation, was created to help reduce the risk for small and mid-sized firms willing to invest overseas. Last month, Mexico and the U.S. signed a bilateral agreement which will provide insurance for those companies that invest in the "poorest regions of Mexico". While the accord still has to be ratified by the Senate in each country, it should result in additional direct foreign investment of up to 1.5 billion dollars. The first enterprises to benefit are likely to include educational, infrastructure and environmental projects.
BALANCED SCORECARD APPROACH
Symnetics México is a consulting company specializing in the Balanced Scorecard (BSC) approach to policy implementation. The BSC system was developed about a decade ago by U.S. cost-reduction experts Robert Kaplan and David Norton, and has been utilized successfully by companies like Mobil and Daimler-Chrysler.
What is the Balanced Score Card approach? Essentially, it consists of ensuring that non-financial measures complement financial indicators and are raised from the operational level of the firm to the strategic level. The BSC concept is already being used in several Pemex subsidiaries, including Pemex Gas.
Symnetics México has now been contracted to apply the method to other areas of government including the Economy, Labor and Social Development Secretariats, in line with the goals of the National Development Plan and its drive to improve efficiency.
FREEDOM OF INFORMATION LAW
The nation's first Freedom of Information Law took effect last month, guaranteeing public access to government information. The law has been welcomed by President Fox and is widely expected to lead to greater administrative transparency. All branches of government are covered by the new law, including autonomous government entities, such as the Federal Electoral Institute and the National Human Rights Commission.
The law requires information such as the federal budget, payroll, internal audits, public debt and contracts for public works to be posted on the Internet. Citizens' requests for information will be overseen by the Federal Institute for Access to Public Information; the inaugural president of the Institute is María Marván Laborde. Provided that the information requested does not prejudice national security, judicial proceedings or criminal investigations, documents requested must be provided within 30 working days.
TIME TO DEVELOP CHICONTEPEC OIL
By 2006, the state oil giant Petroleos Mexicanos (Pemex) is aiming to produce more than 4 million barrels of crude per day. The company recently released a revised budget for exploration and production, and two massive projects stand out.
The first involves the construction of 47 drilling platforms and 56 submarine pipelines, at an estimated cost of 6.4 billion dollars.
The second is to develop the Chicontepec oil field, known since 1926, which straddles the states of Puebla and Veracruz and is estimated to contain reserves of 130 billion barrels of crude. Pemex is investing 575 million dollars this year, and has earmarked a staggering 31 billion dollars over the next 15 years to drill more than 10,000 wells in order to fully exploit this field.
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.
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2003 Operadora de Fondos Lloyd, S.A.
© 2003 Allen W. Lloyd, S.A. de C.V.