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Lloyd Mexico Economic Report November 2002

Table of Contents

BUDGET SURPLUS
FLOAT GLASS TO BE MADE IN MEXICO
ECOLOGICAL GDP
PAPER BILLS REPLACED BY PLASTIC
SERVICE STATION FRANCHISES
INVESTORS DRAWN TO TOURIST SECTOR
PEMEX SEEKS ADDITIONAL RESERVES
NEW CEMENT PLANT
MINING CONCESSIONS
REWARD FOR ENERGY EFFICIENCY
DO REMITTANCES BOOST SAVINGS?
URBAN REDEVELOPMENT IN MEXICO CITY
MORE HYDRO-POWER PLANTS

BUDGET SURPLUS

The national economy registered a budget surplus of 390 million dollars (3.9 billion pesos) for the first eight months of this year. The modest surplus is partly due to higher than anticipated oil prices and comes despite a significant boost in government spending over the same period as it reactivates the construction sector. Given the surplus, this year's official target for a budget deficit equivalent to 0.65% of Gross Domestic Product (GDP) should prove easy to meet.

It also means that the government is optimistic about raising spending on infrastructure improvements during its remaining time in office. For 2003, it has earmarked 45 billion dollars (450 billion pesos) for a variety of projects designed to strengthen the domestic economy, reducing its exposure to the slow-down in U.S. economic growth. About 25% of the total will be used to promote housing construction, with the remainder going on water, energy, highway, port and airport projects.


FLOAT GLASS TO BE MADE IN MEXICO

The glass-maker Vitro, based in the northern city of Monterrey, has joined forces with AFG Industries, a subsidiary of Japan's Asahi Glass Company, to begin manufacturing float glass in Mexico. The float glass process revolutionized glass-making in the 1960's. After the raw materials (including silica, soda ash, dolomitic limestone) are mixed and melted at 1500oC, the molten glass is allowed to flow as a continuous ribbon into a bath of molten tin. Since the glass and tin do not mix and the contact surface between them is perfectly flat, the resulting glass is virtually distortion-free.

Float glass is widely used for premium glazing applications in buildings, homes and vehicles. Production is scheduled to begin early next year, after the completion of modifications costing 90 million dollars to Vitro's plant in Mexicali, close to the U.S. border.


ECOLOGICAL GDP

Gilberto Calvillo, the president of INEGI, the National Statistics Institute, has announced that the agency is to start reporting the nation's "Ecological GDP". Developing a Green GDP index was a key campaign promise of President Vicente Fox. The index will take into account not only the conventional, production-based, GDP but also the environmental costs of achieving that level of production. It will therefore provide a measurable means of assessing the sustainability of Mexico's economic development.

While the precise details of how the Ecological GDP index will be calculated have not yet been made public, INEGI has been collecting the basic statistics needed for its calculation for some time, ever since it introduced its pioneering System of Economic and Ecological Accounting a few years ago.


PAPER BILLS REPLACED BY PLASTIC

The central bank, Banco de México, has begun replacing the current 20-peso paper bills by new plastic bills, designed to have a longer life. The new bills look similar to the old bills and are the same color, though their design incorporates various safety features, such as a transparent window. It will be at least a year before most of the 130 million 20-peso paper bills in circulation have been replaced by their plastic counterparts. If the change is successful, then other denominations will follow.

Plastic bills cost about 50% more to manufacture than paper bills, but last up to 4 times longer. Following Australia's lead in 1988, some 20 countries now have plastic bills in circulation, including New Zealand, Brazil and Thailand. Unlike their paper predecessors, plastic bills easily survive the rough and tumble of domestic washing machines and, when their life is up, can even be recycled into plastic containers or plumbing fittings.


SERVICE STATION FRANCHISES

Petroleos Mexicanos (Pemex) has set aside 350 million dollars for the introduction next year of a new franchising system for service stations. The oil giant has announced that new franchises will fall into one of four categories.

"Personalized service" stations will focus on client services, with snack bars or restaurants and convenience stores. "Express service" stations will be streamlined with special high-speed pumps and payment options. "Professional driver" service stations, designed for trucks and buses and their drivers, will be located on major highways, while "hyper-market service stations" will be convenient for people shopping at large malls and hyper-markets on the periphery of major cities.

Pemex anticipates that at least 500 new service stations will be added to the current network.


INVESTORS DRAWN TO TOURIST SECTOR

During the first seven months of this year, the number of international tourists visiting Mexico was about 5% down compared with last year, to 11.9 million. Their estimated spending was down 1.7% to 5.35 billion dollars. The slight decline in international visitors (the result of the tragic events of September 2001), was partially offset by a 1.1% increase in domestic tourists to 27.9 million. Fortunately, the numbers are certainly not deterring investors. According to Tourism Secretary Leticia Navarro, investments in the sector were up 28% in the first seven months of the year, to 1.44 billion dollars.

Among hotel chains planning to add to the nation's current hotel capacity of 452,116 rooms is the French hotel operator Accor (3,700 hotels in 90 countries). Accor opened four hotels in Monterrey earlier this year and recently unveiled plans to spend 100 million dollars to open others in Cancún, Mexico City and Guadalajara. Accor's focus is on economy-class hotels for business travelers, such as its Motel 6, Ibis, Novotel and Red Roof Inn chains.


PEMEX SEEKS ADDITIONAL RESERVES

The state oil monopoly, Pemex, is preparing to explore and develop new offshore oil fields to make up for the eventual decline of its supergiant Cantarell oil field, the country's main source of crude in the past decade. Cantarell's huge output of 1.8 million barrels per day (b/d) has given Pemex little incentive to find new reserves in recent years.

Now, however, with the present administration saying that it wants to boost Mexican crude oil output by 30% to 4 million b/d by 2006, Pemex is looking to find and develop new fields. It has allocated about 10 billion dollars (105.745 billion pesos) this year to exploration and production projects, more than at any time in the last 20 years. One priority is to boost production from the offshore Ku-Zaap-Maloob complex, close to Campeche, from its current level of 282,000 b/d to 800,000 b/d by 2011. This involves drilling 82 wells and the construction of 17 drilling platforms and 32 pipelines. The complex has proven reserves of over 2.1 billion barrels and probable reserves of 5 billion, though its crude is "superheavy", with a correspondingly low market price.


NEW CEMENT PLANT

The recovery in domestic demand as the economy surges forward has led Cementos Mexicanos (Cemex) to announce plans to build a new cement manufacturing plant to keep pace with future requirements. The precise location of the new plant has not yet been confirmed. Demand for cement is expected to increase by 4% this year. Cemex has an installed capacity (in its 18 existing plants in Mexico) of 27.2 million tons of cement a year. The company, whose head office is in Monterrey, is the world's third largest cement producer, with plants in 32 countries.


MINING CONCESSIONS

The federal government recently awarded two mining concessions. The first is for the mining of gold, silver, lead and zinc in Taviche, Oaxaca. The second is for gold, copper and platinum in San Pablo, Sinaloa. Next up are the mineral rights concessions for 21 projects located in the Western Sierra Madre (Sierra Madre Occidental) mountains. The 50-year concessions include properties in the states of Sonora, Chihuahua, Durango and Sinaloa known to hold reserves of gold, silver, lead, zinc and copper.

Developing the mineral reserves should lead to greatly improved infrastructure and better employment prospects for those living in some of northern Mexico's poorer regions. The recently announced National Development Plan for Mining 2002-2006 (Programa Nacional de Desarrollo Minero 2002-2006) offers firms a range of incentives aimed at persuading them to locate their administrative operations in towns close to their concessions.


REWARD FOR ENERGY EFFICIENCY

At Japanese automaker Nissan's largest plant in Mexico, in Cuernavaca, just outside Mexico City, more than 130,000 cars (Tsuru, Tsubame and Sentra models) and 86,000 light trucks roll off the assembly lines each year. The plant is at the forefront of Nissan's efforts to increase the efficiency of its operations by reducing its water and energy consumption and limiting the waste generated during manufacturing. At the moment, the plant generates 2.4 kilos of solid waste per vehicle assembled, a figure Nissan hopes to reduce to 600 grams by 2004.

The plant is also very efficient in terms of energy and water usage. According to the Mexican Automobile Industry Association, the average vehicle assembly plant in Mexico consumes 3.5 cubic meters (925 gallons) of water per vehicle. The Cuernavaca plant's average is just 1.4 cubic meters (370 gallons) per vehicle, much lower than any similar facility in Mexico or than any other Nissan plant anywhere in the world. The plant's innovative programs have been recognized by the American National Standards Institute (ANSI) which has awarded it the ultimate accolade of ISO-4001 certification.


DO REMITTANCES BOOST SAVINGS?

A report from the National Population Council (CONAPO) suggests that virtually all of the estimated 11 billion dollars in annual remittances sent home to Mexico by workers abroad is spent on basic necessities, purchasing durable consumer goods, or for buying or improving housing. The corollary is that only a small percentage goes towards savings, suggesting that remittances have little impact on the rate of domestic savings, the raising of which is considered crucial to Mexico's long-term economic success.

The value of remittances is now equivalent to double that of farm exports and is 35% higher than tourism earnings. According to the CONAPO study, more than 1.2 million households (5% of the national total) receive remittances from relatives in the U.S. As many as 40% of these households are considered "highly vulnerable" economically, since remittances are their only source of income.


URBAN REDEVELOPMENT IN MEXICO CITY

Mexico City's downtown regeneration is proceeding at breakneck speed. City authorities are offering tax incentives to developers who take on the "gentrification" of older properties or the construction of new buildings near the city center. One project well under way is a 200-room Quinta Real hotel, due to open in 2004, alongside a shopping center, office block and corporate apartments, complete with a mini convention center. Not far away, construction of a new building to house the Senate is scheduled to start early next year.

Restoration of the centuries-old Habeas Christi church on Avenida Juarez has also begun, together with the construction of a new civic plaza alongside the Alameda Park. This project is expected to pay for itself when the commercial properties surrounding the new plaza are resold. Further west along Avenida Reforma, the skyline now includes the 300-million-dollar, 55-story Torre Mayor, due to be completed by June 2003, when it will become Latin America's tallest skyscraper, rising 225 meters above street level.


MORE HYDRO-POWER PLANTS

The Federal Electricity Commission (CFE) is planning the construction of three giant new hydro-electric power (HEP) plants. The El Cajon project, on the River Santiago in the state of Nayarit, is reported to have attracted the interest of at least seven major international construction companies.

The second major scheme is the Boca del Cerro project, on Mexico's biggest river, the Usumacinta, in Chiapas, on the border with Guatemala. One drawback to this scheme is the possible flooding of areas of archaeological significance, though the major Mayan sites already identified in the region are believed to lie well above any future water level.

The third proposed HEP plant is at La Parota, near Acapulco, in Guerrero. This project would also provide much needed potable and irrigation water as well as reduce the flooding risk associated with several rivers. About 23% of the nation's installed generating capacity currently comes from hydro-electric power.





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.

2002 Operadora de Fondos Lloyd, S.A.
© 2002 Allen W. Lloyd, S.A. de C.V.

Published or Updated on: July 20, 2006
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