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Lloyd Mexico Economic Report May 2003

Table of Contents

TRADE SURPLUS
AMERICAS-WIDE FREE TRADE
NEW POWER STATION
INVESTING IN YOUTH
PREPAYMENT OF BRADY BONDS
MICROELECTRONIC SYSTEMS
INVESTMENT FUNDS
LAUNCH OF ANOTHER SATELLITE
COFFEE EXPORTS PLUMMET
SHARP FOCUSES ON MEXICO
CELLPHONE CHALLENGE
FREE TRADE FOR AUTOS
QUERETARO FIRMS EXPAND
FROM DENMARK TO MEXICO
EXPO GUADALAJARA EXPANDS

TRADE SURPLUS

Mexico's trade surplus with the U.S. reached an historic high in February of 3.9 billion dollars, according to the U.S. Trade Department. The figure was 29% higher than during January, mainly because of lower imports of U.S. manufactured goods into Mexico.

In February, U.S. exports to Mexico fell 9.7% to 7.066 billion dollars, while Mexico's exports to the U.S. rose 1.1% to 10.966 billion dollars. The accumulated trade surplus for the first two months of this year is 6.917 billion dollars, 38% higher than for the equivalent period last year.


AMERICAS-WIDE FREE TRADE

While there are still many details to be ironed out, the Americas region is still aiming for continent-wide free trade as of May 2005. Discussions continue towards an Americas Free Trade Accord (Acuerdo de Libre Comercio de las Américas, ALCA). Regional free trade is seen as an important stimulus to future GDP growth and the reduction of poverty.

The provisional headquarters of ALCA is in the city of Puebla in central Mexico. Mexican officials hope that the permanent headquarters of the new organization will also be located somewhere in the country, ensuring that the nation has an important leadership role as the ALCA moves forward.


NEW POWER STATION

The Federal Electricity Commission has begun construction of a new 350-million-dollar thermoelectric plant in Gómez Palacio, Durango. The new plant, known as Central La Laguna, will have a capacity of 500 megawatts and is due to come on stream in April 2005.

Connected to the national grid, the power station will supply users in the states of Coahuila and Durango. The construction phase will generate 3,000 jobs in the region.


INVESTING IN YOUTH

President Fox has announced a new program aimed at encouraging young people to complete their high school studies. The Youth with Opportunities Program consists of monthly deposits into a student's savings account during the last four years of high school.

If the student graduates from school, these savings (about 3,000 pesos), plus accumulated interest, can be withdrawn for any purpose the student wants: to continue studying, start a small business, or offset living expenses.

By the end of this year, 822,000 students will be enrolled in the program, which is another sign of the high priority that the government is giving to education and to providing individuals and families with the means to overcome economic difficulties.


PREPAYMENT OF BRADY BONDS

The government is continuing to pre-pay its debt commitments in order to save interest. This month, it will repurchase 3.839 billion dollars of series A and B U.S. dollar-denominated Brady bonds, saving an estimated 327 million dollars in interest payments.

When the transaction is completed, only 3.6% of the original 34.254 billion dollars in Brady bonds (denominated in various currencies) will still be in circulation. None of the remaining bonds are denominated in U.S. dollars.


MICROELECTRONIC SYSTEMS

About one billion cellphones have been sold worldwide. The inventor of the first cellphone, Martin Cooper, believes that future cellphones will be so small they can be placed unobtrusively behind your ear; ringing tones will be replaced by a tickling sensation.

Science fiction? Perhaps not. This degree of miniaturization depends on the rapidly growing field of MEMS (micro electro-mechanical systems). MEMS are already incorporated into hundreds of "intelligent" industrial and consumer items, from ink-jet printing heads to airbag sensors. The market for MEMS in 2006 is predicted to be worth 80 billion dollars.

The Mexico-U.S. Foundation for Science is joining Kanikt Consultores, a Guadalajara-based company, and a network of Mexican universities to develop MEMS in Mexico for applications in the petroleum and health industries. One device, incorporated into a band-aid patch applied to a person's skin, measures vital signs and transmits the data (wirelessly) to a receiver. This disposable patch will reduce the clutter of wires and cables in intensive care facilities.

Other MEMS may monitor post-sales vehicle servicing, energy generation and petrochemical processes. The joint venture aims to ensure that Mexican firms earn a share of the likely future bonanza in MEMS business.


INVESTMENT FUNDS

A recent article in Mexico City daily El Financiero highlighted the valuable contribution being played by investment funds in national development. In particular, they provide an alternative to the traditional investments available through main-stream banks. The growth of investment funds has encouraged a significant increase in the rate of domestic savings.

Despite competition from an ever-growing range of funds, Lloyd funds continue to lead the way, with consistently high Standard & Poor's ratings. The newest Lloyd fund, Loyd-US, is an aggessive long-term fund that holds dollar-based securities, making it particularly attractive to investors seeking currency stability.

Lloyd now successfully manages some 10.5 billion pesos (approx 990 million dollars) on behalf of its clients. In terms of total assets under management, Lloyd is the ninth largest of the 34 authorized fund operators (including banks) in Mexico. However, it serves many more clients than any other fund operator, has the lowest initial deposit amount for opening an account, and manages more than twice as many of the assets of non-Mexican investors as any of its competitors.


LAUNCH OF ANOTHER SATELLITE

Satélites Mexicanos (Satmex) is a joint venture between Loral Space & Communications and Principia, a group of Mexican shareholders, including the government. Satmex has 3 satellites in orbit at present: Morelos 2 (launched in 1985 and now nearing the end of its useful life), Solidaridad 2 (1994) and Satmex 5 (1998).

In August, Satmex 6 will be placed in orbit by French company Arianespace. From a geostationary orbit 36,000 kilometers above the earth's surface at 109.2 degrees west, its "footprint" will extend from northern U.S. to southern Argentina, making Mexico the first country in Latin America to have a satellite offering continental coverage.

Satmex 6 will have 60 36-megahertz transponders providing 36 C-band channels and 24 Ku-band channels, which will be used for the provision of high-speed data transmission, Internet, TV, radio and telephone links and distance education, in addition to video conferencing and a host of other commercial applications.


COFFEE EXPORTS PLUMMET

Since the record coffee harvest of 6.3 million 60-kilogram sacks recorded in the 1999/2000 season (the coffee season runs from October to September), coffee harvests have declined dramatically. The 2001/2002 forecast is for only 3.5 million sacks.

Exports have declined in a similar fashion due to a combination of poor harvests and low prices. According to the Mexican Coffee Council, exports during the first six months of the current season fell by 34%, compared with a year ago, to only 1.273 million sacks, worth 91.867 million dollars.

The only long-term solution to coffee growers' woes would be a rise in international coffee prices. This may happen fairly soon given that the International Coffee Organization is forecasting that this season's production will fall about 10 million sacks short of total demand, meaning that global stockpiles of coffee should be reduced.


SHARP FOCUSES ON MEXICO

Sharp Electronics Corporation is enlarging its existing plant in Rosarito, Baja California. After the 18-million-dollar expansion, the Rosarito plant will become a multi-product factory for both conventional and digital TVs, as well as audio equipment. The plant will be the only Sharp plant in North America to produce digital Aquos LCD flat screen TVs; output from the plant will replace imports from Japan.

A company executive said that Sharp chose Mexico because it is not only the most stable location politically and economically, but also the most important market in Latin America. The expansion will add 1,200 additional workers to the existing 3,000-strong workforce at the plant. Among innovative Sharp products being readied for the marketplace is a mini generator relying on solar-energy that the company says will enable households to cut their annual energy costs by up to 60%.


CELLPHONE CHALLENGE

Telefónica Móviles México, a subsidiary of Spain's largest cell phone operator, has grown rapidly after buying a controlling 65% stake in Pegaso last year and acquiring several small regional cellphone operators. By January 2004, the company will have invested more than 600 million dollars to offer GSM (Global System for Mobile Communications) services in more than 40 cites, beginning with service in Mexico City, Monterrey, Guadalajara and Tijuana.

Telefónica Móviles plans to raise its client base from its current level of 2.4 million subscribers to 7 million by 2007, and could soon be a serious challenger to América Móvil, the dominant operator in the domestic market at present.


FREE TRADE FOR AUTOS

In recent years, vehicle exports have steadily increased from 276,000 in 1990 to 1,039,000 in 2002. Almost all exports are either to the U.S. or Canada. It is perhaps not surprising, then, that Mexican auto makers appear to be preparing to make the most of their opportunity when free trade for vehicles begins, under the terms of NAFTA, in January next year.

The pre-tax price of some models is cheaper in Mexico. In addition, Renault, Peugeot and Alfa Romeo cars are available in Mexico, but not north of the border. Mexican manufacturers may benefit therefore from future cross-border sales of new vehicles. Mexican consumers should benefit from more imports of used vehicles, which at present sell for a lower price in the U.S.

The government recently eased restrictions on used vehicle imports. Last month, the Economy Secretariat published revised regulations in the Diario Oficial for border firms that wish to import cars. Such firms can now import up to 20 vehicles a month, instead of the previous limit of 10.


QUERETARO FIRMS EXPAND

Three major corporations with industrial plants in the city of Querétaro have announced expansion plans.

Vidriera de Querétaro is investing 21 million dollars to increase the capacity of its bottle-manufacturing plant from 150 million containers a month to 165 million a month. The plant is already the largest of its kind in Latin America. Vidriera's principal clients are Coca-Cola (25% of total production) and Grupo Modelo (22.1%).

Samsung Electronics México will invest 300 million dollars over the next 5 years to expand its plant for refrigerators, air conditioning units, microwave ovens and washing machines. When the expansion is complete, the plant will produce 1000 refrigerators and 1,200 air conditioning units a month. About half will be sold on the domestic market, with the remainder exported to South America.

A third corporation, Dixon Company (stationery and office supplies), has decided to make Mexico its world center of operations. Production from the firm's five U.S. facilities will be relocated into Dixon's Querétaro plant. The company is reported to be considering a public stock offering on the Mexican Stock Market (Bolsa Mexicana de Valores) sometime next year.


FROM DENMARK TO MEXICO

The Danish company Danisco, the world´s second largest producer of pectin (made from citrus peel), is expanding its plant in Tecomán, in the state of Colima. The expansion will enable the plant to make a speciality pectin, known as low ester pectin, used in jams with low sugar content, fruit blends for sweets, bread and dairy products and as a stabilizer in yoghurt. Production is scheduled to start in April next year.

The market for low ester pectin is the fastest growing of all pectin markets. Danisco currently makes all its low ester pectin in Denmark. Relocating production to Mexico will allow the firm to double its present capacity, while reducing production costs.


EXPO GUADALAJARA EXPANDS

During 2002, Expo Guadalajara, the major exhibition center in Mexico's second largest city, hosted 434 events and exhibitions, attracting 919,000 visitors and generating profits of about 7.5 million dollars, 16% more than the previous year.

A proposed 94-million-dollar expansion would see the 90,000-square-meter center increased by another 12,000 square meters, ensuring sufficient space for even the largest international exhibitions.





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.

2003 Operadora de Fondos Lloyd, S.A.
© 2003 Allen W. Lloyd, S.A. de C.V.

Published or Updated on: July 20, 2006
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