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Lloyd Mexico Economic Report - January 1999



Two very different factors will have a major influence on the economy this year. The first is the price of oil on international markets and the second is the run-up to next year's presidential elections, when the ruling Institutional Revolutionary Party (PRI) will face an unprecedented level of opposition.

Falling crude prices buffeted government spending last year and the continued drop in oil export prices to below 8 dollars a barrel, their lowest level in decades, has already caused President Zedillo's administration to revise its original budget proposal for this year. Oil futures tumbled because of an oil glut and the failure of the Organization of Petroleum Exporting Countries (OPEC) to enact any new measures to cut production beyond the reductions of about 3.1 million barrels per day already approved by both OPEC and non-OPEC producers. The U.S. Energy Information Administration's Annual Energy Outlook for 1999 includes the long-term forecast that oil prices will remain depressed for seven or eight years

At press time, the details of the budget were still being debated in the Congress. The debate is more heated than usual since PRI no longer has a majority in the Congress. The government's stated priorities are to keep the country's accounts nearly balanced, despite oil prices, and to retain the confidence of foreign investors. Its budget proposal includes tax hikes to compensate for falling oil revenues. However, the government's opponents, including many in the business sector, favor a more fundamental overhaul of the taxation system, in an effort to reduce its dependence on oil. Whatever the final details of this year's budget, it promises to be the most austere for the past 20 years. Government goals for this year are a 3.0% rate of economic growth, inflation of 13%, and a fiscal deficit limited to 1.25% of GDP.

Government forecasts suggest that while oil-related income will still account for a third of all fiscal revenue, most of that income will come from domestic sales of gasoline, rather than from oil exports. Crude oil exports are now likely to bring in only about 6 billion dollars a year, or roughly one-third of all oil-related income. But the national oil policy is still poorly oriented in the view of many analysts, with too much emphasis being placed on increasing the productive capacity of the giant Cantarell field in the Gulf of México.

Politically, all eyes are focussed on the presidential elections to be held next year. They are certain to be the most keenly contested elections in modern Mexican history. Each of the two major opposition parties (Partido Acción Nacional, PAN, and Partido de la Revolución Democrática, PRD) is convinced it can win, while PRI (Partido Revolucionario Institucional) has bounced back from mid-term defeats and reorganized its internal structure. For the first time ever, PRI will hold primary elections to choose its presidential candidate. Previously, each PRI presidential contender has been hand-picked by the incumbent president. Political debate in the run-up to next year's elections promises to be livelier and more heated than ever.


A consortium led by Grupo Tribasa, one of Mexico's largest construction companies, has been awarded the concession to operate the Southeast Airport Group, which includes several major tourist destinations. Tribasa has three European partners in the consortium - Copenhagen Airports A/S (Denmark), Groupe GTM (France) and Cintra Concessions (Spain). The consortium bid 117 million dollars for a 15% stake in the Airport Group with an option to buy another 5% within five years. The remaining 80% will be sold on the Mexican Stock Exchange. The group intends to invest 160 million dollars in upgrading the nine airports in the Southeast Group which include: Cancún, Cozumel, Mérida, Huatulco, Veracruz, Oaxaca, Villahermosa, Tapachula, and Minatitlán between now and 2004. More airports are scheduled to be privatized during 1999 as Mexico modernizes its air transportation system. Next on the auction block are the 12 airports in the Pacific Airport Group, including Guadalajara and Puerto Vallarta.


The National Association of Self-Serve and Department Stores, ANTAD, reported that "same-store" sales in most major chains, including Cifra, Soriana, Comercial Mexicana and Gigante, were up 3.8% last October, compared with the previous year. This year, the Guadalajara-based Gigante chain plans to invest 85 million dollars to add 20 new outlets (5 Gigante supermarkets, 5 warehouse stores, 6 Office Depot and 4 Toks restaurants) to its existing chain. Gigante also intends to expand into the Hispanic market of the southern U.S. with three supermarkets in Los Angeles. Meanwhile, the Houston-based H.E.B. chain has opened its third Economax store in northern Mexico, in the industrial city of Monterrey, with plans for stores in at least four other locations later this year. Casa Ley, currently most active in north-western Mexico, is also seeking new markets and has announced plans, in association with the U.S. Safeway chain, to open 5 supermarkets in the cities of Saltillo and Torreá¢án.


Effective last December 3, the National Minimum Wage Commission (CNSM) raised the nation's minimum wage by 14%. Mexico is divided into three zones for the purpose of minimum wages. The increase brings daily wages in Zone "A" (Mexico City, Baja California, Baja California Sur, Acapulco, parts of Veracruz and major border cities) to 34.45 pesos. The new minimum wage in Zone "B" (Monterrey, Guadalajara, Tampico, Altamira and some other medium-sized cities) is 31.90 pesos and in Zone "C" (the remainder of the country) 29.70 pesos per day.


The benefits of increased wages were offset by increases in the price of vehicle fuels and electricity. Gasoline and diesel prices were hiked 15% with further increases to come during the year. This means that despite Mexico having huge petroleum reserves, the domestic price of gasoline will be higher than in the U.S.. In addition, electricity will be subject to inflation-linked price increases this year, likely to be in the order of 13%. Higher transportation charges are one of the reasons that the cost of the basic food basket has spiraled in recent years. According to the Workers University of Mexico (UOM), its cost has jumped 205% since December 1994, compared with minimum wage increases equivalent to 73% over the same period.

Spending patterns have been transformed. The UOM study concludes that while, in 1994, food would require only 44.7% of the salary of a minimum wage worker, it now eats up 76.4%. As Mexico City daily La Jornada reported recently, official Inegi statistics show that real wages have dropped to a 30 year low and are likely to sink even further as the 1999 budget takes effect. The Mexican Economic Analysis and Projection Center's (CAPEM) statistics show that minimum wage purchasing power, in real terms, has fallen by 67% since 1980, or 20% since 1994 (when the minimum wage was 13.97 pesos).


Unilever de México has acquired 100% of the shares of Mexican ice cream company Helados Bing (annual sales: 20 million dollars) for an undisclosed amount. Bing, originally founded in Guadalajara by American entrepreneur Adolf Horn, boasts annual sales of 20 million dollars and is renowned for its high quality products. Unilever already owned a minority stake in Bing under the terms of a joint investment agreement signed with Bing's parent company Grupo Quan in January, 1997. The purchase will enable Unilever, which also owns Helados Holanda, to consolidate its leadership of the ice cream market in Mexico


The federal Telecommunications Commission (Comisión Federal de Telecomunicaciones, Cofetel) has announced the revised tariffs for interconnection that will operate in the telephone sector for the next two years until December, 2000. The new interconnection rate, for both local and long distance services, is 2.6 cents per point minute, a reduction of approximately 53%.


Avantel, the MCI-backed long distance telephone carrier, has unveiled a videoconferencing system that is expected to have a significant impact in the Mexican market. The high-tech system is a collaborative venture between Avantel, Anixter and VTEL. Conference rooms in Mexico City, Guadalajara and Monterrey are wired for use and conferencing capabilities will be provided to major cities in 35 other countries in the near future. The system uses ISDN (Integrated Service Digital Network) lines and up to 30 channels to send high-resolution video, voice and data. Per-minute pricing is available which should allow many businesses to cut travel time and expenses. VTEL has already captured 15% of the Mexican videoconferencing market and expects this figure to double by the end of the year.


Many Mexicans regularly enjoy two eggs for breakfast and the average annual per capita consumption of eggs in Mexico (about 17 kilos, almost one egg a day) is 16% higher than the comparable U.S. figure. Some health experts have expressed serious concern about high egg consumption, linking it, for example, to high levels of cholesterol. Now, in association with the U.S. company Omegatech, a Mexican firm, Desarrollos Agra, has launched a new food product - enriched eggs - on the domestic market. Omegatech processes DHA-rich micro-algae into poultry feed, which is consumed by some of Agra's 2 million egg-laying hens on 16 farms near the northern city of Monterrey. DHA (docosahexaenoic acid) is a long-chain polyunsaturated fatty acid, one of the so-called "good" fats. Eggs enriched with DHA also have less cholesterol and more vitamins B-12 and E, than regular eggs. The Agra-Omegatech product, marketed as Agra D'Oro ("Golden Agra"), is already on sale in Mexico City and some northern cities for 19.50 pesos per dozen, 80% higher than the price for regular eggs. Agra hopes its golden eggs will soon satisfy up to 25% of the national demand for eggs.


Mexico's state-owned oil monopoly, Petroleos Mexicanos, Pemex, sold 1.5 billion dollars in securities last month backed by oil revenue. The sale was the biggest Latin American issue in the second half of 1998 and Pemex's first sale of securities backed directly by oil revenues since 1996. The proceeds will help finance Pemex's 1999 investment budget of 9.3 billion dollars. The company's investment plans include the reconfiguration and upgrading of several of its refineries and the expansion of production capacity in the Cantarell crude oil field in the Gulf of México.


Preliminary figures for last year show that the government housing scheme for low income workers, Infonavit (Instituto del Fondo Nacional de la Vivienda de los Trabajadores), awarded 102,174 housing credits, providing housing for 1.7 million people. Infonavit aims to complete 160,000 houses in 1999, 60% more than last year, as part of an 18-month plan, "Compromiso por la Vivienda", which involves the construction of 200,000 homes and a total expenditure of more than 2.6 billion dollars.


Early last month, Satmex 5, the first Mexican satellite to be managed by a private company, Satélites Mexicanos (Satmex), a joint venture of Telefónica Autrey and Loral Space & Telecommunications, was successfully launched into orbit from French Guiana aboard an Arianespace rocket. Satmex 5 was constructed by Hughes Space and Communications Company, the world's leading manufacturer of geostationary commercial communications satellites. Mexico's four previous satellites (Morelos I and II, Solidaridad 1 and 2) were all built by Hughes. Satmex 5 will replace Morelos II. With ten times its power and 48 transponders (24 C-band and 24 Ku-band), it will provide business communications, television and educational programming services to a region stretching from Canada to Argentina. Experts predict that Satmex 5 should have a 15-year life span, double that of the satellite it replaces. The new satellite puts Satmex in an excellent position to challenge PanAmSat in the market to supply DTH (Direct-to-Home) television transmission services.

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

© 1996 Operadora de Fondos Lloyd, S.A.
© 1996 Allen W. Lloyd, S.A. de C.V.

Published or Updated on: July 20, 2006
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