Lloyd Mexico Economic Report - August 1999
CONTENTS:
- POLITICAL DEVELOPMENTS
- POLARIZED HOUSING MARKET
- PEPSICO BOTTLERS MERGE
- INTERNET BANKING
- EXPORTS OF FURNITURE
- CEMENT SALES UP
- FIRST BOND IN EUROS
- UNEMPLOYMENT DOWN
- SMALLER HOUSEHOLDS
- CHALLENGE TO TELMEX
- COMMUTER TRAINS IN MEXICO CITY?
- STEEL MERGER?
- THE FUTURE OF CHOCOLATE
- CANNED DRINK
POLITICAL DEVELOPMENTS
Elections were held in two states last month. In the country's most populous state, Mexico, which virtually surrounds Mexico City, the long-dominant Institutional Revolutionary Party (PRI) won the gubernatorial race. However, in the small western state of Nayarit, the two major opposition parties fielded a joint coalition candidate who was elected the new governor. It was the first time that PRI had ever lost the governorship in Nayarit.
Even though the right of center, business-oriented, National Action Party (PAN) and the left-wing Democratic Revolution Party (PRD) agreed to combine forces in Nayarit, it is highly unlikely that the two parties will be able to agree on a common platform or candidate for the federal elections in July next year. If the opposition remains divided, the results of these latest state elections suggest that PRI may yet prove able to extend its 70 year hold on the presidency.
RELATED NEWS
The government recently completed negotiations to ensure that a 23.7 billion dollar multilateral contingency package of credits (including 4.2 billion dollars from the International Monetary Fund) is in place well ahead of next year's elections. The package, described by analysts as "economic armor-plating", is unlikely to be required in its entirety, but provides a buffer against unexpected volatility or currency speculation.
POLARIZED HOUSING MARKET
A boom is likely in the higher priced end of the housing construction market, according to some real estate experts. More than 5000 homes costing between 150,000 and 1.6 million dollars are expected to be built this year. The lack of housing credits has polarized the house construction sector into the two extremes of affordable, "social" housing, for which credits are available, and luxury homes, built by people who have sufficient resources that they do not need credit. The construction of social housing has increased by 10% over the past year, with 230,000 expected to be completed during 1999.
PEPSICO BOTTLERS MERGE
The Federal Monopolies Commission has approved the possible acquisition of one PepsiCo bottling franchise, Grupo Embotellador Bret (Gebsa), by another, Grupo Embotelladoras Unidas (Geusa). The acquisition is still subject to the approval of PepsiCo. Geusa bottles and markets Pepsi products in the western states of Jalisco, Michoacán, Colima and Nayarit, as well as in the central state of Guanajuato, and also owns part of Grupo Azucarero México (GAM), one of Mexico's largest sugar companies. Gebsa holds the Pepsi franchise for the southern states of Oaxaca, Tabasco and Veracruz, in addition to the central states of Puebla and Tlaxcala.
INTERNET BANKING
Banamex has become the first Mexican bank to provide a web page which account holders can use to make transfers between accounts, pay taxes or make payments to other Banamex clients. Coming next are payroll and other business-related banking services which, by reducing the time needed for routine banking transactions, should be a great boon to smaller businesses. Several other banks are introducing similar electronic banking services in the near future.
EXPORTS OF FURNITURE
Mexico ranks as the fifth largest furniture exporter to the U.S. and the value of furniture exports to the U.S. is expected to exceed 2.7 billion dollars this year, according to figures released by the National Foreign Trade Bank. The rapidly expanding market for furniture in mid-western states remains the main focus for exports, stimulated considerably since 1994 by the North American Free Trade Agreement. The U.S. market absorbs 70% of all Mexican furniture exports.
CEMENT SALES UP
Demand for cement is expected to increase about 5% in the next year, as more funds are allocated to public works and more housing credits become available. According to a study by Grupo Financiero Banamex-Accival, cement manufacturers are enjoying good times as a result of the judicious combination of lower costs, higher prices and rising demand. The increased funds for public works are the windfall from higher than anticipated oil prices.
The major cement manufacturers are Cemex (59% of the market), Apasco (23%) and Grupo Cementero de Chihuahua (3%). Cemex is the world's third largest cement maker with factories in several countries including the U.S. and Indonesia. Analysts expect the increasing number of smaller specialist cement manufacturers to keep prices relatively stable over the next year or so.
FIRST BOND IN EUROS
Mexico's first Euro-denominated global bond was well received on markets in Europe and the U.S.. The new issue, for about 410 million dollars, is a 7.125% bond maturing in 2006. The bond, originally targeted for about 300 million dollars, was increased in size due to the strong interest among investors on both sides of the Atlantic.
UNEMPLOYMENT DOWN
At the end of May, the index of "open unemployment" in urban areas had fallen to 2.44% of the economically-active population, its lowest level since December 1992. Unemployment peaked at 7.6% in August 1995 and has declined steadily ever since. The accuracy of Mexico's unemployment statistics is frequently questioned in the media but the National Geography, Statistics and Information Institute, INEGI, uses internationally accepted methods to compute various different unemployment indices.
"Open unemployment", the most commonly quoted, is defined by the International Labor Organization, as anyone over 12 years old, actively looking for a job, who has not worked a single hour (whether in the formal or informal sector) during the week when interviewed. As in most countries, INEGI surveys are based on samples in urban areas, involving 80,000 home interviews in 32 towns and cities.
Recognizing the obvious limitations of the "open unemployment" index, INEGI publishes several additional indices including one combining the "unemployed and those earning less than the minimum salary". This index was at 12.9% in May.
SMALLER HOUSEHOLDS
The National Population Council has published a report giving details of the 21.8 million households in the country. Mexico's total population is currently estimated at about 98 million (double that of 1970), giving an average number of inhabitants per household of 4.5, down from over 5 a decade ago. Single parent households total 3.4 million, 50% of which include children under 15 years old and 80% of which are headed by a female.
In sharp contrast to the U.S. and Canada, 53% of all households are nuclear families where unmarried children live with both parents. Almost 70% of women of reproductive age use some form of birth control and infant mortality is expected to decline to 24 per thousand by next year.
Decreases in both birth and mortality rates have led to a drop in the number of households with children under 5 years of age and a sharp increase in the number which include individuals over the age of 65. Average life expectancy at birth is now 77 years for women and 71 years for men.
CHALLENGE TO TELMEX
Only 5 million households in Mexico have a fixed-line telephone since many people are unwilling to pay the high installation costs charged by Telmex. But this situation is about to change. The infrastructure investment required for wireless service is only a small fraction of that needed for a network of fixed lines. Last year, Unefon, owned by TV magnate Ricardo Salinas Pliego, paid 360 million dollars for the rights to several wireless phone frequencies. Its wireless phone system will have connection charges beginning at 50 dollars, well below Telmex rates.
Notimex, Mexico's news agency, reports that Unefon expects to begin service by summer next year and looks set to become Mexico's second-largest telephone company, with 2.5 million subscribers and annual earnings in excess of 100 million dollars within five years.
COMMUTER TRAINS IN MEXICO CITY?
The federal Communications and Transportation Secretariat, SCT, has indicated that it hopes to award contracts before the end of this year for the construction of a metropolitan commuter network of rail lines in Mexico City, to help ease the pressure on the city's transportation systems. About 240 kilometers (150 miles) of existing railroads will eventually be incorporated into the system. The first line would run from Huehuetoca, 40 kilometers north of the city, to Buenavista station, the central railroad terminus. The SCT anticipates that almost 150 million journeys a year will be made on that route alone.
Corporations which have expressed their interest in the project include three German companies (Ad Trans, Alsthom and Siemens), as well as Sumitomo (Japan), Bombardier-Concarril (Canada) and CAF (Spain). The estimated cost of building the network is 7 million dollars a kilometer where existing rail lines can be used, and 11 million dollars a kilometer where new track is required. Either way, the proposed metropolitan railroad should prove much more economical to construct than extending the underground metro which would cost around 60 million dollars a kilometer.
STEEL MERGER?
Grupo Imsa has announced it is holding talks about purchasing a controlling interest in Mexico's largest steel producer, Altos Hornos de Mexico S.A. (Ahmsa), which is heavily indebted and actively seeking a partner. Imsa believes it could improve Ahmsa's productivity by between 20 and 25%. The two companies complement each other well in terms of their production. Ahmsa, based in Monclova, produces steel slabs, while Imsa, based in Monterrey, specializes in finished steel products.
A combined Imsa-Ahmsa would supply about 32% of national steel production. This year, the Mexican Iron & Steel Chamber expects that total production will be 14.5 million metric tons, only slightly higher than the 14.21 million metric tons reported for 1998. In the first five months of this year, steel exports brought in 1.4 billion dollars, twice the amount required for imports of certain specialist steels.
THE FUTURE OF CHOCOLATE
The Mexican chocolate industry is in disarray. Even though Mexico first gave chocolate (xocolatl in the Nahuatl language) to the world, growers of cacao and manufacturers of chocolate bars and candy no longer seem to be in tandem. Growers in Tabasco, the main producing state, have complained that the price of cocoa beans on the New York market has fallen below their production costs. The National Cacao Producers Union, which has 22,000 members, has warehoused 8,000 tons of cocoa while it waits for prices to improve. Meanwhile, however, the government has authorised the import of 7,000 tons of beans in order to ensure adequate supplies for chocolate manufacturers, who have their own complaints.
In a recent CNN interview, Raul Picard, president of Mexico's National Association of Chocolate Producers, said that tariffs of up to 20% on imported beans may protect cocoa farmers, but that domestic production (31,000 metric tons last year) is insufficient to keep pace with manufacturers' needs.
This means that Mexico's 160 independent chocolatiers (including Corona, Turin, Chocolatera de Jalisco, and Suiza) have to rely on imports and are forced to pay higher prices for their raw material than their international competitors. Unlike cocoa beans, imported chocolate and candy is assessed a tariff of only 8%, favoring sales of chocolate products manufactured by firms like Hershey, Mars and Nestlé. The domestic chocolate market is worth 430 million dollars a year; only about 20% of sales is in the hands of national producers.
CANNED DRINK
A recent Associated Press report focusses on a family-owned business that has perfected the technique of canning pulque, the mildly alcoholic drink made by brewing the juice of certain species of agave or maguey. Unlike tequila, another agave-derived drink, pulque is not distilled. According to archeologists, pulque has been brewed for more than 2000 years. Previous attempts at canning or bottling it failed because its fermentation process was so rapid that the containers literally exploded before they could be marketed. Now, Bebidas Naturales San Ysidro has perfected a way to give canned pulque a shelf-life of 12 months. It already has U.S. Food and Drug Administration approval and is on sale from California and Texas to Germany.
Mirrored with permission from Lloyd S.A. de C.V.
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© 1999 Operadora de Fondos Lloyd, S.A.
© 1999 Allen W. Lloyd, S.A. de C.V.