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Lloyd Mexico Economic Report - December 1999

YEAR 2000 BUDGET

The government's proposed budget for 2000 has been submitted to Congress. The government anticipates that the economy will grow by between 4 and 5% next year and that inflation will be around 10%. The budget allows for a fiscal deficit of 1% of Gross Domestic Product (GDP) and a current account deficit equivalent to 3.2% of GDP. The average exchange rate over the year is expected to be 10.40 pesos to the dollar. In calculating the budget, the government has assumed that oil prices will average 15.5 dollars a barrel.

PRESIDENTIAL HOPEFULS

The Institutional Revolutionary Party (Partido de la Revolución Institucional, PRI) has chosen its candidate for the presidential elections in July next year. Francisco Labastida Ochoa, 57-years old, a former governor of Sinaloa state who has held federal posts as Interior Secretary and Agriculture Secretary, won the primary, which marks new ground for PRI, by an overwhelming majority. It is the first time that the party's presidential candidate has been chosen by the electorate and not hand-picked by the incumbent president.

PRI has held the presidency for 70 years, and with the opposition parties unable to agree on a common candidate or platform, PRI's chances of extending that run appear to be strong. The two main opposition parties are the left-leaning Party of the Democratic Revolution (Partido de la Revolución Democrática, PRD) and the conservative National Action Party (Partido Acción Nacional, PAN). PAN's candidate is Vicente Fox, also 57, the former governor of Guanajuato state, whose campaign so far has been largely media-oriented. The PRD candidate is former Federal District Mayor Cuauhtemoc Cardenas.

A smooth political transition following the elections next July will enable Mexico to attract as much as 20 billion dollars in foreign direct investment during the year 2000, according to Carlos Gómez y Gómez, president of the Mexican Banking Association.

RETAILING EXPANSION

The retailing giant, Grupo Cifra (Walmart, Aurrera and Suburbia stores, Vips Restaurants) is investing 400 million dollars next year in opening several new establishments. The firm currently has 422 commercial outlets. The projected investment is 60% more than this year, even though same-store sales have risen only a modest 1.2% since October 1998. The new stores will add 9.7% in sales floor, consolidating Cifra's position as the nation's largest retailer. Retail sales across Mexico have risen quickly this year as a stable peso, declining interest rates and more jobs have boosted consumer confidence. Cifra's October sales reached 520 million dollars, up 5.7% in real terms from a year earlier.

THE BENEFITS OF NAFTA

A study carried out by the Research Center of Grupo Financiero Bancomer examines the changes brought about by the North American Free Trade Agreement, NAFTA, since its inception in 1994. Since then, more than 57 billion dollars have been invested in manufacturing, generating 31.7% of all new jobs. According to the study, companies partly or wholly dependant on foreign capital pay their employees, on average, 48% more than comparable firms dependent on national capital. Mexico's GDP has grown by more than 5% a year in the five years of NAFTA.

One of the agreement's major changes has been a dramatic growth in exports, particularly exports of manufactured goods, with a resulting reduction in the economy's dependance on petroleum exports, making the economy more efficient and competitive, and better able to weather global pressures. In 1985, manufactured goods were worth 6.4 billion dollars, 30% of Mexico's exports by value. They now bring in 106.5 billion dollars a year, or about 90% of all exports.

One of the more interesting effects of NAFTA has been a definite shift in the location of economic activity. Ten years ago, 30% of Mexico's GDP was generated in Mexico City; that figure has now fallen to 20%, while the northern border states (Baja California, Coahuila, Chihuahua, Nuevo León, Sonora and Tamaulipas) have seen their combined contribution increase from 20% to more than 28%. The northward shift in the location of industrial activity has occurred because most new firms choose to be closer to Mexico's major trading partners. The arrivals include not only U.S.-based firms but also many European and Asian companies anxious to take advantage of NAFTA's preferential trading regulations.

TAXING MAQUILADORAS

Mexico and the U.S. have reached a new agreement over how to tax U.S.-owned maquiladoras, or "in-bond" firms that assemble duty-free goods in Mexico for export. Mexican affiliates of U.S. firms will now pay higher taxes than previously but these additional taxes can be deducted from their parent company's U.S. tax bill. The arrangement ensures a more equitable distribution of tax between the two countries and will remain in place until 2002.

Under the agreement, maquiladoras have to pay tax on either 6.9% of their assets, up from 5% currently, or on 6.5% of total costs, whichever is higher. The terms of the new agreement make the only other existing option, of paying taxes on theoretical profits, much less attractive. Maquiladoras account for about 20% of all foreign direct investment in Mexico and are increasingly important to Mexico's economy.

The plants generated 40 billion dollars in exports during the first eight months of the year, or 46% of total exports. Figures published by the National Statistics Institute, INEGI, show that employment in maquiladoras totalled 1.165 million people at mid-year, up 14% from a year ago. INEGI figures also show that, during the first 8 months of this year, the most important maquiladora exports by sector (with their respective percentages in parentheses) were electrical and electronic items (27.3), transportation equipment (19.5), textiles and clothes (15.9), machinery (9.4), furniture (6.2), chemicals (2.5), processed foods (1.6), tools (1.2) and toys and sports items (1.0).

DEBIT CARDS FOR REMITTANCES

The country's largest provider of financial services, Grupo Financiero Banamex-Accival, has announced new regional debit cards, targeted at the recipients of remittances from the U.S.. Banamex hopes to attract between 300,000 and 500,000 card-users. Mexican workers in the U.S. remit about 6 billion dollars a year to families and friends back in Mexico and the new cards should provide a speedier and less expensive method of transfer than most alternatives. Money deposited in any MoneyGram Payment System office in the U.S. will be credited to the new "Invermático" cards.

The card is already available in the states of Jalisco and Hidalgo and will be marketed next in Guanajuato, Zacatecas and San Luis Potosí, all of which receive significant flows of money from the U.S.. The new card requires a minimum opening deposit of 500 pesos in any of Banamex's 1200 branches. Cash withdrawals can be made from any Banamex ATM or branch and the card can be used for purchases in any affiliated store.

CANADIAN BANK SEEKS CONTROL

At a recent press conference, the Bank of Nova Scotia announced its intention of acquiring a further 45% of the shares of Grupo Financiero Inverlat for a sum estimated to be close to 250 million dollars. The Canadian bank already owns 10% of Inverlat and has no doubt that its confidence in the Mexican economy is well-placed. In addition, the Bank is also looking to purchase the 36% of Inverlat currently held by the federal Bank Deposits Protection Institute. The combined purchases would give the Canadian bank 91% of all Inverlat stock.

MASTERS IN ELECTRONIC COMMERCE

The "Virtual University" of the Technological and Higher Studies Institute of Monterrey (Instituto Tecnológico y de Estudios Superiores de Monterrey, ITESM) is offering a masters program in electronic commerce, beginning in January next year. The program will cover both information technology and administration of e- commerce, preparing graduates for careers in this rapidly- expanding field.

The program, the first of its kind in Latin America, will be available through any of the Institute's campuses. ITESM has campuses throughout Mexico, as well as in Panama, Venezuela, Ecuador, Columbia, Peru and Chile. The institution has academic exchange agreements with numerous overseas universities including Carnegie Mellon University, the University of Texas at Austin and Thunderbird.

COMPETITION FOR INTERNET ACCESS

Microsoft and telephone giant Telmex have announced a 50-50 joint venture to create a new Spanish-language Internet portal. Portals are the first page called up by most Internet users, providing access to search engines and personalized news and stock quotes. A Microsoft spokesperson said that the new portal will automatically pick up traffic from Telmex's 315,000 "Prodigy" Internet users in Mexico, as well as the 65% of Latin American e-mail users who currently use Microsoft's "Hotmail".

Telmex is the majority holder in U.S.-based ISP Prodigy Communications and its existing Spanish-language portal, together with all its content (currently getting 15 million hits a month), will become part of the new joint site. Microsoft and Telmex estimate that there are 15 million Spanish-speaking Internet users in the Americas, 9 million of them located in the U.S., and predict that Latin American Internet usership will explode to between 20 and 30 million within the next five years.

The rapidly increasing number of competitors providing Internet access in Mexico should result in cheaper Internet Service Provider (ISP) subscription rates for all customers. Yahoo Inc launched its own Mexican web portal two months ago.

Telefonica, Spain's dominant telecommunications operator which recently purchased Infosel, one of Mexico's larger ISPs, operates its own Olé portal. Another telecommunications firm, Avantel (a joint venture of Banamex and MCI) has agreed an alliance with Todito.com in its effort to gain market share.

Meanwhile, Compaq Computer México intends to compete in the urban markets of Mexico City, Guadalajara and Monterrey with its own portal, Compaq.net. Industry analysts expect top media company Grupo Televisa to announce plans in the near future to provide Internet access by cable, possibly in conjunction with Telmex and Microsoft. Televisa and Telmex are joint owners of cable television provider Cablevision and given the high level of TV ownership in Mexico (90% of all households), providing Internet access via TV sets may prove to be an extremely profitable option.

EXPANSION OF DIGITAL TECHNOLOGY

Nextel de México, a subsidiary of Seattle-based Nextel Communications, is expanding its network of digital wireless services at a cost of 170 million dollars. Nextel, which began operations in Mexico in 1996, provides mobile wireless communications services for commercial vehicle fleets. Its digital network will cover the Valley of Mexico and the city of Toluca by the end of the year, and be extended to the cities of Querétaro, Puebla, Monterrey, Guadalajara, Pachuca and Cuernavaca in the year 2000. Using analog technology, Nextel already provides service in 45 cities including Guadalajara, Monterrey and Tijuana.

INTERAMERICAN BANK LOAN

The Interamerican Development Bank (Banco Interamericano de Desarrollo, BID) is assisting progress towards decentralization by extending an 800-million-dollar loan for the Program to Strengthen States and Municipalities. As part of its 3.5-billion- dollar loan package for next year, BID is preparing a 600- million-dollar line of credit for the Bank Deposits Protection Institute, IPAB. This would be used to increase the capitalization level of banks currently controlled by IPAB (such as Serfin and Bancrecer), prior to their subsequent sale.

GIFTS FROM MEXICO

Modern production methods are now being increasingly used to supplement traditional artisans' creativity, ensuring a constant stream of innovative and original gift items labelled "Hecho en México" (Made in Mexico) for special occasions. Exports of such items have more than doubled in the last 4 years, from 600 million dollars in 1995 to 1.25 billion dollars in 1998.

According to a market survey carried out by Grupo Salpro, gift items exported during the first half of this year were worth 500 million dollars. Of this total, 86% went to the U.S. and Canada, 3% to Europe and 11% to Latin American countries. The major gift categories were jewelry (21.4% by value), followed by articles made of leather (13.2%) and wood (10.5%).

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

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

Published or Updated on: July 20, 2006
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