Lloyd Mexico Economic Report - November 2000
Table of Contents
ECONOMY GROWING RAPIDLYINTERNAL SAVINGS
MORE AUTO PLANTS
TAMSA'S ENERGY-LED BOOM
NEW PROCTER & GAMBLE PLANT
SUPERMARKET COMPETITION
SPANISH FIRM'S SUCCESS
RENEWABLE ENERGY
TELEFONICA BUYS OUT MOTOROLA
MILLION CITIES...
... AND REGIONAL DISPARITIES
KOSA EXPANDS QUERETARO PLANT
NEW AIRLINE ROUTES
ECONOMY GROWING RAPIDLY
Mexico's Gross Domestic Product (GDP) grew by 7.9% in the first quarter and by 7.6% in the second quarter. The growth rate for the second half of the year is expected to be somewhat lower. President-elect Vicente Fox's economic policy will continue the current administration's successful austerity program. The incoming government has set goals, for 2001, of economic growth between 4.0 and 4.5%, inflation of less than 7%, a current accounts deficit equivalent to 3.6% of GDP and a 0.7% reduction in public spending.
The 2001 budget is being calculated with the price of oil set at 18 dollars a barrel, well below current levels of 27 dollars a barrel. Oil revenues account for about one-third of government income, but Fox has vowed to present a sweeping tax reform package to Congress early next year aimed at reducing the nation's dependence on oil dollars.
INTERNAL SAVINGS
One significant economic improvement over the past six years has been the increased rate of domestic savings. At a ceremony marking the 50th Anniversary of the National Savings Trust (Patronato del Ahorro Nacional), which has 600 branches, mainly in rural areas, José Angel Gurría Treviño, the federal Finance Secretary, reported that the rate of internal savings has grown by 7 percentage points (from 15% to 22% of GDP) since 1994. This increase greatly reduces the vulnerability of the Mexican economy to outside forces.
MORE AUTO PLANTS
A press release from Grupo Industrial Saltillo's auto-parts subsidiary, Castech, says that the company plans to invest 148 million dollars to construct two new auto-part plants and to expand the capacity of an existing plant. The two new plants are both located in the northern border state of Coahuila. Both are joint ventures between Castech and VAW Aluminium AG. The first, in Ramos Arizpe, will produce engine blocks. The second, in Torre ón, will manufacture cylinder heads. Both plants are due to be completed by 2003. An existing V-8 engine block plant in Ramos Arizpe is also being expanded in order to meet increased demand from General Motors.
TAMSA'S ENERGY-LED BOOM
Tamsa (Tubos de Acero de México) is Mexico's only manufacturer of the seamless steel pipes used in the oil and natural gas industry. Recent high crude prices have boosted exploration and production rates, resulting in an increased demand for Tamsa products, and the company's first-half revenues were 16% higher this year than last. Tamsa's boom is not expected to last long, however, since analysts expect oil and gas prices to fall back in coming months.
In addition, Petroleos Mexicanos (Pemex), the state-owned oil monopoly, is increasingly focussing its attention on developing natural gas fields rather than crude oil fields. Since natural gas is generally found at shallower depths than crude oil, exploring and exploiting natural gas fields requires less steel pipe than crude oil production entails. Tamsa, managed by Techint, an Argentine holding company, has very few competitors worldwide, and derives 75% of its revenues from exports.
NEW PROCTER & GAMBLE PLANT
Proctor & Gamble has announced it is building a new 100-million- dollar plant about an hour's drive north of Mexico City, in Tepeji del Río, in the state of Hidalgo. The plant will replace an existing factory for diapers and sanitary napkins in Vallejo in Mexico City. A company spokesperson said that much of the new plant's output will be destined for export and that exports sales, mainly to Central and South America, are expected to bring in 100 million dollars a year. The new plant will occupy a 21- hectare site and employ about 350 workers, many of whom will transfer from the Vallejo plant. The Tepeji del Río plant is scheduled to be completed by the middle of next year.
SUPERMARKET COMPETITION
Consumer confidence in Mexico's strong economy has resulted in the number of supermarkets in the country increasing by leaps and bounds over the past six years. According to ANTAD (Asociación Nacional de Tiendas de Autoservicio), which groups 100 major retailers, there are now 4,886 supermarkets (35.5% more than in 1994) in 262 different cities. The major domestic supermarket chains (Comercial Mexicana, Gigante, Soriana, Casa Ley) have faced ever-stiffer competition from non-Mexican chains such as Wal-Mart, Carrefour and Auchan. Comercial Mexicana is the country's second largest supermarket chain, with 43 restaurants and 145 stores. Besides its own stores, it holds a 50% share in Costco México, a joint venture with U.S.-based Costco, which has 18 locations at present.
Mexico's largest supermarket chain (481 stores and restaurants) is Wal-Mart de M éxico (Walmex). Walmex executives are clearly confident of a sustained, long-term growth in consumer spending, since they say that their company plans to expand its floor space by between 10% and 15% a year for the next several years. August retail figures disappointed some analysts, with ANTAD reporting an overall 1.4% fall in same-stores sales, compared with the same month a year earlier. However, Walmex's same-store sales rose 3% in August. Walmex's strategy for success is relatively simple.
The company targets an estimated 85% of the total population by operating several very different chains of supermarkets, each geared towards a different income level. Walmex-owned stores range from giant Bodega low-price stores for lower-income shoppers to Wal-Mart Supercenters and Aurrera supermarkets in middle-income areas and Superama stores in many higher-income neighborhoods.
SPANISH FIRM'S SUCCESS
The Spanish electricity firm, Unión Femosa, is involved in several major new construction projects in Mexico. Femosa is already constructing two thermo-electric power plants in Naco, near Nogales, and Hermosillo, both in the northern state of Sonora. All the energy generated in these plants will be sold to the Federal Electricity Commission, CFE. Now, Femosa has been awarded the contract to build and operate a combined-cycle, natural gas-fired power plant in Tuxpán, in the Gulf coast state of Veracruz. The estimated cost of the 983-megawatt plant is 600 million dollars.
Last year, Femosa, together with its partner Grupo Aeroportuario del Pacífico, won the concession to operate several airports, including Guanajuato. Last month, the Guanajuato state government announced an agreement with the concession holders to undertake a comprehensive remodelling and upgrading of the airport over the next 15 years, at an estimated cost of 850 million dollars. Government officials believe that the remodelled airport, ideally located for the distribution of merchandise throughout central Mexico, could attract as much as 7% of the country's total air cargo traffic.
RENEWABLE ENERGY
Michael G. Carrol, a World Bank specialist, speaking at a recent conference in Merida, Yucatán, said that he expects more than 31 million dollars to be invested over the next four years in Mexico's Renewable Energy Project for the Countryside. The project aims to promote the use of renewable energy alternatives, especially solar and wind-driven generators. Attention will be focussed on remote areas that currently lie outside the federal electricity distribution system. Funds for the project will come from the World Environment Fund (9 million dollars), the Alliance (for the Countryside), the Shared Risk Trust and producers.
Among the 230 renewable energy projects planned for rural areas over the next four years are 152 solar-powered water pump systems for agriculture and cattle grazing in 28 different states, and 44 wind-powered water pump systems in other locations. Also included are 24 solar- or wind-powered refrigerator tanks for milk. These innovative energy projects should enable a substantial improvement in productivity, especially on the many farms located in arid and semi-arid regions of the country.
TELEFONICA BUYS OUT MOTOROLA
The cell phone division of the Spanish telecommunications giant Telefónica has announced its intention of buying all the shares that its U.S. rival Motorola holds in different cell phone operators in Mexico, including Bajacel, Cedetel, Norcel, and Movitel. The deal is worth an estimated 2.6 billion dollars. Mexico is the second largest cell phone market in Latin America, with an 11% market penetration.
MILLION CITIES...
Mexico has long been a land of important cities. In fact, the earliest city anywhere in the Americas was at Monte Alban, near Oaxaca. Centuries later, the pyramids of Teotihuacan, near Mexico City, were the central attraction in what was, at the time, the largest city in the western world. Cities may have come and gone but in recent Mexican history a clear pattern of urban growth is evident.
The preliminary results of the 2000 National Census show how Mexico's population is becoming increasingly concentrated in large cities, as a result of continuing rural-urban migration. Of the nation's 97.362 million inhabitants, 52% now live in cities of over 50,000. The largest cities are no longer growing as rapidly as the next tier of cities. For example, Mexico City's share of national population has declined somewhat in favor of mid-sized cities such as Querétaro, Aguascalientes, Puebla, and Toluca. In 1990, only four urban areas (Mexico City, Guadalajara, Monterrey, Puebla) had populations exceeding one million. This year, these four cities have been joined by Tijuana, Toluca, León, Ciudad Juárez and La Laguna (Torreón-Gomez Palacios-Lerdo). Between them, these nine large cities now house one-third of the country's total population. According to a recent article in Mexico City daily Excelsior, numerous other cities are forecast to join the "million-city" ranks over the next 30 years, including Acapulco, Mérida and San Luis Potosí by 2010, Cuernavaca, Quer étaro, Coatzacoalcos-Minatitlán, Mexicali and Cancún by 2020, and Aguascalientes, Chihuahua and Tampico-Madero-Altamira by 2030.
Perhaps the most noteworthy feature of the 20 cities expected to have more than a million inhabitants by 2030 is their distribution. Very few of them are in the southern half of the country; none are located in the populous states of Oaxaca and Chiapas.
... AND REGIONAL DISPARITIES
And that situation is precisely one of the challenges awaiting president-elect Fox - how to ensure that rapid economic growth, at a national level, is translated into more jobs and better living conditions for the nation's poorest states, the majority of which are resource-rich but opportunity-poor. A World Bank report recently highlighted the fact that, nationwide, almost half the workforce (42%) earns less than 2 dollars a day. Many of the poorest states are in the south where, even in oil-rich states like Chiapas, Tabasco, and Campeche, the revenues derived from petroleum production are not reflected in average salaries.
In Chiapas, for example, 62% of the working population earns less than the minimum daily salary of about 3 dollars a day. Low salaries and high unemployment have produced a tide of migrants moving north to seek better opportunities in Mexico City or in the U.S. The next administration will need to try and create more jobs in the southern states by a combination of improving industrial infrastructure and attracting private investment.
KOSA EXPANDS QUERETARO PLANT
Kosa, one of the world's leading manufacturers of synthetic fibers, has expanded its Querétaro plant making PET resin. The 25-million-dollar expansion relies on proprietary technology to expand PET resin production by 65,000 metric tons a year and is part of Kosa's strategy to increase its worldwide production of PET resin by 360,000 tons, in order to guarantee long-term supplies of the material to its clients. PET resin is used to manufacture a wide variety of plastic containers for products ranging from soft-drinks, purified water and cooking oil to food, pharmaceutical and personal hygiene products.
NEW AIRLINE ROUTES
Continental Airlines has announced its intention to invest 350 million dollars in expanding its flights to Mexico, beginning next year. The expansion will consist mainly of establishing new direct flights from Continental's main base, Houston, to some 30 cities in Mexico, including Morelia, Querétaro, Villahermosa, Durango and Culiac án.
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© 2000 Operadora de Fondos Lloyd, S.A.
© 2000 Allen W. Lloyd, S.A. de C.V.