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Lloyd Mexico Economic Report March 2004

Table of Contents

Investing remittances in Mexico
BBVA offer for Bancomer
Simplifying regulations
Produce more natural gas...?
...or import it?
Underground reservoir
Projects on the River Santiago
High tech water treatment
Soft drinks
Highway improvements
Taking out a patent
Profile of Mexican cybernauts
Digital economy age
New air routes

Investing remittances in Mexico

Preliminary figures released by the central bank show that 13.266 billion dollars were sent home as remittances by Mexicans resident in the U.S. last year, 35.1% more than during 2002.

A pilot project launched in three states - Jalisco, Zacatecas and Hidalgo - by Nacional Financiera, with the assistance of the Interamerican Development Bank, is seeking to ensure that more of these remittances are used to boost economic activity. The idea of the Invest in Mexico program is to encourage migrants living abroad to channel their funds into productive projects that will lead to the creation of businesses in their communities of origin, which coincide in many cases with some of the poorest areas of the country.

After active promotion by Mexican consulates and migrant organizations, more than 200 applications have been received and about 30 projects have been initiated. The program helps on an individualized basis with researching the viability of the project and the preparation of a suitable business plan.

Invest in Mexico hopes to attract not only large investors but also smaller investors who are interested in becoming business owners for the first time.


BBVA offer for Bancomer

Spain's second largest bank, Banco Bilbao Vizcaya Argentaria (BBVA), has offered to buy the remaining 40.6% of Bancomer, Mexico's leading bank, that it doesn't already own, for 4.1 billion dollars.

BBVA acquired a majority share of Bancomer in 2000 and has since seen the bank's profits increase by 66% from 152 million dollars to 695 million dollars last year. This figure represents 28% of the total worldwide profits of BBVA.

The offer is still subject to regulatory approval.


Simplifying regulations

The private sector continues to lament the time and cost of setting up a new business and meeting all the regulatory requirements. At the local (municipal) level, simplification has proceeded much faster than at the state or federal level. For instance, many municipalities, including Puebla, Los Cabos, Aguascalientes, León, Zapopan, Guadalajara, Tijuana and Mexicali, now have Rapid Business Opening Systems that can be completed in less than 48 hours.

The Federal Commission for Regulatory Improvement has reduced the number of obligatory federal requirements, but opening a business still takes, on average, 57 days.

This tardiness results in considerable economic costs in terms of expenses and lost opportunities. A recent World Bank report says that opening a business in Mexico costs an average of 1,100 dollars, much more than China (135 dollars) or the U.S. (210 dollars).

The total annual cost for companies and citizens to meet all regulations in Mexico is estimated at between 71 and 88 billion dollars, equivalent to 12-15% of GDP. The Private Sector Center for Economic Studies estimates that a 10% improvement in regulatory standards would increase GDP by 0.5%.


Produce more natural gas...?

One recent analysis suggests that national consumption of natural gas will rise by 7.4% a year over the next decade. The investments required to keep pace with this demand are considerable. According to the Energy Secretariat, at least 7.4 billion dollars a year will be needed for Petroleos Mexicanos (Pemex) to explore and develop new gas fields to reduce the amount of natural gas that has to be imported.

Part of this investment will have to be spent on upgrading the existing pipeline network. About 3,500 kilometers of the 8,700-kilometer long national pipeline system are operating at 100% of their capacity. The worst affected cities are Veracruz, Monterrey, Reynosa, Chihuahua, Tlaxcala and Salamanca.

In addition, the national network still does not reach all parts of the country, so some major new lines will have to be planned and laid.


...or import it?

The Federal Electricity Commission (CFE) is suggesting an alternative approach to meeting future natural gas demand. It proposes the construction of a series of regasification terminals in major ports that would enable liquid natural gas (LNG) to be imported by ocean-going tanker from anywhere in the world for re-conversion to natural gas on arrival.

CFE would then control the supply of gas for its own power stations and sell the excess to private sector corporations for industrial or domestic use. CFE argues that this system would also guarantee sufficient supplies of natural gas to replace the less efficient and more polluting LPG (liquified petroleum gas) widely used in many states.

Proposed locations for major regasification terminals include Rosarito (Baja California), Manzanillo (Colima), Lázaro Cárdenas (Michoacán) and Chetumal (Quintana Roo).


Underground reservoir

A joint Mexican-Japanese project promises to add a new dimension to solving the problems of water supply in some arid regions of northern Mexico. Officials of the National Water Commission (CNA), working with experts from Japan's Environmental Agency, have proposed the construction of Mexico's first ever underground reservoir near Valle La Misión, 20 kilometers north of Ensenada, in Baja California.

Ensenada is growing rapidly and in addition to meeting the needs of its 250,000 inhabitants, its water supply also has to meet the demands of some 350,000 tourists a year. The technology involved in the project is already in use in some locations in Japan.

The La Misión reservoir will involve a small surface perforation, followed by excavation and the construction of 500 meters of concrete barrier at depths of up to 50 meters. The barrier will retain rainwater (after hurricanes) from an area of several hundred square kilometers and also prevent the incursion of sea water. Since the reservoir is underground, evaporation losses will be zero.

Construction is expected to begin next year and to cost around 10 million dollars.


Projects on the River Santiago

Construction is now well under way of the 750-million-dollar El Cajón hydro-electric power project on the River Santiago in the state of Nayarit. The project is being built by a consortium headed by Ingenieros Civiles Asociados.

The project includes one of the highest dams of its type in the world. The 186-meter high dam will eventually allow the containment of 2.4 billion cubic meters of water.

The 750-megawatt capacity generating plant is due to begin supplying power to the national grid in 2007.

Upstream on the river, work is due to begin shortly on the Arcediano Dam, which will provide an additional source of much-needed potable water to the four million inhabitants of the Guadalajara metropolitan area.


High tech water treatment

The economics of water treatment has made it an increasingly attractive proposition for big business. General Electric Water Technologies, based in Monterrey, helps companies reduce their water treatment costs by up to 15%. Its clients already include Pemex, CFE, Industrias Monterrey and Hylsamex. GE Water Technologies is investing 20 million dollars this year and expects sales to grow by 60% to 12 million dollars.

Grupo Peñoles also sees a bright future. Peñoles is Latin America's largest mining group, but formed a joint venture called Texa in 1995 with Suez, a French firm of potable water specialists. Texa recently signed 70 million dollars worth of contracts in Quintana Roo and Mexico City, where it is responsible for 25% of the potable water supply. It is now eyeing potentially lucrative contracts for potable water in Tijuana and the state of Mexico as it seeks to double the value of its business in water distribution and treatment.


Soft drinks

Mexicans are acknowledged as the world's largest consumers of soft drinks, with a per capita consumption estimated at 487 8-ounce bottles a year. The massive soft drinks sector is led by Coca-Cola Femsa and Pepsi Bottling Group, who have market shares of 45% and 30% respectively.

Embotelladoras Arca, the second largest Coca-Cola bottler in Mexico, has received permission to add four cities in Chihuahua (Moequi, Delicias, Camargo and Saucillo) to its market area and will now control more than 70% of the market in 8 northern states. Arca is investing 60 million dollars this year to expand its network of 68 distribution centers and 14 bottling plants.

Meanwhile the much smaller Peruvian-owned soft drinks firm Ajemex, maker of Big Cola, hopes to build on its success in capturing 5% of the domestic soft drinks market in just two years. It believes that adding 10 new distribution centers to its existing chain of 30 will help it to double its share by 2005.


Highway improvements

Highway improvements costing some 4.8 billion dollars are scheduled to begin this year. More than half of the investment will go to the construction of 17 stretches of toll highways, including by-passes for Mexicali, the northern side of Mexico City and La Piedad, as well as Nuevo Necaxa-Tihuatlán, Morelia-Salamanca, Entronque San Blas-Esquinapa and Santa Ana-Atar.

Other projects will modernize more than 70 links in the national highway system, including Texcoco-Calpulalpan, the Cuautla by-pass, Morelia-Jiquilpan, Durango-Mazatlán, Escárcega-Chetumal and San Luis Potosí-Ojuelos.


Taking out a patent

Of the 13,000 requests submitted each year to the Instituto Mexicano de la Propiedad Intelectual, only around 530 come from Mexican researchers, according to the National Science and Technology Council. Since 1996, the leading Mexican research institutes in terms of number of patent requests submitted are the Petroleum Institute, the National University (UNAM) and the National Polytechnic Institute.

One of the more interesting recent patents was granted to researchers at the Querétaro campus of the National Polytechnic Institute for an "ecological" method of making tortillas. The new method, which took three years to develop, uses 100% of the grain, reduces the amount of energy and water required and achieves a reduction of up to 80% in production costs.

Despite the fact that 12 million metric tons of tortillas are consumed every year in Mexico, the two domestic tortilla giants, Maseca and Mimsa, declined to purchase the rights which were sold instead to U.S. firm Cargill.


Profile of Mexican cybernauts

The Mexican Internet Association (AMIPCI), founded in 1999, represents the most important companies involved in the provision of services via the Internet. According to AMIPCI about 12 million Mexicans now use the Internet, compared with 10 million at the start of last year. Based on a sample of 5770 respondents, AMIPCI's "2003 Internet Users Survey" provides some interesting statistics about Mexican cybernauts.

Male Internet users outnumber females by 2 to 1, though the proportion of females is increasing. About 23% of Internet users are aged 18-24, compared to 42% aged 25-34, 20% between 35 and 44, and 12% aged 45 and over. The average user began to surf 4.8 years ago, though 22% of all respondents first used the web within the last two years.

Internet usage is closely linked to education and 70% of users had at least begun a degree course. When asked what they did on-line, the usual choices were send and receive E-mail (87%), find information (82%), access bank accounts (64%), read the news (55%) and download music, games and software (39%).


Digital economy age

The Economy Secretariat and the private sector are setting up an Institute for the Development of the Digital Economy. Among other objectives, the Institute will help draft legislation governing electronic commerce (E-commerce).

Scheduled to open this year, the Institute will offer seminars and forums informing businesses about legal safeguards and ways to conduct e-commerce transactions, including the use and validation of electronic signatures. Regulations governing the legal use of electronic signatures were published in the Diario Oficial last August.


New air routes

Continental Express, a division of Continental Airlines currently offers 300 flights a week to 23 destinations in Mexico. Last month it announced the addition of four new routes from its base in Houston. Daily nonstop service to Monclova, using a 37-seat Embraer regional jet, will begin April 4, followed by similar service, using 50-seat regional jets, to Puebla (May 2), Oaxaca and Toluca (both June 10).

Monclova is an important business and industrial center in the northern border state of Coahuila. Puebla and Toluca are major industrial cities in central Mexico. Oaxaca is an important focus for tourism in the south of the country.





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.

2004 Operadora de Fondos Lloyd, S.A.
© 2004 Allen W. Lloyd, S.A. de C.V.

Published or Updated on: July 20, 2006
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