MexConnect
Business  |  See all articles tagged finance-economics finance-personal or in region Sonora

Lloyd Mexico Economic Report December 2002

Table of Contents

GREENSPAN ON MEXICO
PRESIDENCY OF APEC
NEW U.S. AMBASSADOR
EUROBOND ISSUE
NEW BANK COMMENCES OPERATIONS
REVERSE MORTGAGES FOR RETIREES?
MORE MEMBERSHIP STORES
LANGUAGE'S ECONOMIC IMPORTANCE
MEXICAN BULLET TRAIN?
FORD INVESTS IN SONORA
HOW BIG IS THE INFORMAL SECTOR?
MORE WATER FROM MOUNTAINS
HSBC TO BUY BITAL

GREENSPAN ON MEXICO

In a speech last month entitled "The Wealth of Nations Revised", U.S. Federal Reserve Chairman Alan Greenspan said that modern economists would agree with Adam Smith on three broad points that promote economic growth: free trade, the quality of a country's institutional infrastructure, and macroeconomic stability.

Comparing the economic outlook now with the situation a decade ago, Greenspan had nothing but praise for Mexico, saying it has been doing very well since it implemented the North American Free Trade Agreement, instituted a floating exchange rate, developed stable fiscal policies and controlled inflation. Greenspan concluded that Mexico is now "viewed by international investors as a relative safe haven within the region."


PRESIDENCY OF APEC

Mexico has assumed the presidency of the Asia-Pacific Economic Cooperation (APEC) forum, becoming the first Latin American nation to lead the organization. APEC's 21 member states account for 50% of the world's GDP (Gross Domestic Product), and a major proportion of foreign direct investment around the globe.

The honor was announced at the end of the very successful APEC summit held in the resort city of Los Cabos at the end of October. Mexico sees its prominent role in APEC as a landmark, opening up more possibilities for increased trade and technology links with APEC's Asian member countries, particularly for smaller companies.

Mexico's 2.9 million small and medium-size businesses represent 92% of total businesses and generate 70% of all jobs, even though they contribute only 11% of the country's GDP. Authorities are also actively promoting west coast ports, such as Manzanillo, as ideal trans-Pacific links between North America and Asia.

Despite having trade agreements with 32 countries, Mexico's foreign trade is still over-reliant on the U.S., the recipient of 85% (by value) of all exports. At present, Mexico's foreign trade is worth about 350 billion dollars a year, of which only 10% is for trade with Asia.


NEW U.S. AMBASSADOR

The U.S. Senate has confirmed the appointment of Antonio Garza as the new U.S. ambassador to Mexico. Garza, a native of Brownsville, is a second-generation American whose four grandparents were all born in Mexico. In his confirmation hearing, Garza supported the idea that foreigners who work in the United States should be able to earn legal status.


EUROBOND ISSUE

The state-owned Banco Nacional de Comercio Exterior (Bancomext), which promotes foreign trade, is selling a 100 million dollar eurobond issue denominated in pesos on the international market. The bonds mature in 3 years and are designed to attract European and U.S. investors.

The aim is to "internationalize" the Mexican peso as an investment instrument, according to a Bancomext press release. The bond issue is being handled by Morgan Stanley.


NEW BANK COMMENCES OPERATIONS

A new bank, Banco Azteca, began operating last month. It intends to compete mainly in the largely untapped market to provide conventional banking services to the estimated 16 million low income earners, defined as those earning between one and two times the minimum salary. Its first "branches" are all inside existing stores of the nationwide Elektra chain. Launching the bank has required an initial investment of about 80 million dollars.

Banco Azteca will start by offering a range of savings products, with low minimum balance requirements, as well as fixed rate small loans for vehicles and homes. In subsequent phases (2004 onwards), it will introduce term deposits, service payments (phone, gas etc) and investment funds.


REVERSE MORTGAGES FOR RETIREES?

The Fondo Nacional de Fomento al Turismo (Fonatur) and Banamex-Citibank have set up a joint working group to develop a mortgage product designed for pensioners in the U.S. and Canada interested in acquiring a home (or second home) in Mexico. The product will be tested in two or three pilot projects, not necessarily located on the coast or in Fonatur's Centrally Planned Resorts (Centros Integralmente Planeados) such as Ixtapa or Huatulco.

The idea is not a new one. Several studies of the retirement market have concluded that the greatest single obstacle to attracting more retirees to Mexico's warm and sunny climes is the lack of suitable property mortgages.

Also under consideration is the possibility of offering reverse mortgages, an arrangement by which owners raise funds by remortgaging a portion of their property. When the property is eventually sold (on the death or relocation of the owner), the outstanding mortgage is then repaid out of the proceeds.


MORE MEMBERSHIP STORES

The supermarket sector is keenly contested. The leading firm, in terms of volume of sales, is Wal-Mart, but Mexican chains such as Gigante, Soriana and Comercial Mexicana all hold slices of the pie, as does French giant Carrefour.

Gigante is stepping up its expansion plans in an effort to enlarge its market share and opened its first two "Price Mart" membership stores last month. The company will open two more Price Marts in the first quarter of next year and is also adding another 100 units to its 50-strong chain of small, neighborhood "Súper Precios" stores. Gigante is also looking to boost its sales to the Hispanic market in the U.S. by opening 9 additional stores in key regions of that country before the end of next year.

Soriana is also developing membership stores in addition to its regular supermarkets. It plans to invest 1 billion dollars over the next five years as it expands its network. Soriana's strength is in northern Mexico, in cities such as Monterrey, Chihuahua and Hermosillo.


LANGUAGE'S ECONOMIC IMPORTANCE

The reduction of poverty is a top priority of the current administration and several economic programs have been put in place to help those below the poverty line. But is direct economic assistance the only way forward?

Rural areas have higher poverty indices than urban areas and the poorest rural areas are inhabited mainly by the 5 million Mexicans of indigenous Indian descent. Even today, 62 distinct indigenous languages (and about 100 dialects) are spoken in Mexico and 30% of the indigenous people do not speak Spanish.

A recent study by researchers from the Universidad Iberoamericana (UIA) and the Centro de Investigación y Docencia Económica (CIDE) found that language, education levels, and future earning power are all closely inter-related. For instance, the researchers found that both those who only speak Spanish and those who are bilingual (speaking Spanish and a native Indian language) do very much better in school than those who speak only an Indian language.

With regard to incomes for workers aged 16 to 49 with no education, they found that indigenous people have an average monthly income of only 570 pesos, compared with 1,010 pesos for their non-indigenous counterparts. For those with 7 to 9 years schooling, the figures are 1,339 and 1,520 pesos respectively, suggesting that education has narrowed the gap.

In terms of public policy, this implies that more funds should perhaps be allocated to educational programs in the poorest rural areas in order to help ensure that children gain a sufficient command of Spanish to take further schooling, thereby raising their earning power and helping them climb out of poverty.


MEXICAN BULLET TRAIN?

Several state governments are considering how to finance a proposal by the Spanish high-speed railroad construction firm CAF to build a high-speed railway connecting Mexico City with cities in the north and west of the country. The first stage of the plan involves the construction of a 220-kilometer (137-mile) line from Mexico City to Querétaro. That city is being considered as a possible site for a new international airport and is also competing to host the 2010 World Fair. The investment needed to complete this stage is about 3.5 million dollars (35 million pesos).

In subsequent stages, two branch lines would be added. The first would be via the industrial cities of Celaya and León to the nation's second city, Guadalajara. The second branch would be through San Luis Potosí to the industrial powerhouse of Monterrey in the north.

According to CAF, trains would reach an average speed of 250 kilometers an hour (similar to the AVE trains in Spain), enabling the railroad to compete advantageously with airlines in terms of journey times and travel costs. With government approval and suitable financial backing, the first stage of the "bullet train" proposal could become a reality by 2006, according to Maximiliano Zurita Llaca, CAF's general director in Mexico.


FORD INVESTS IN SONORA

Armando López Nogales, the governor of the state of Sonora, has announced that the U.S. automotive giant Ford is to invest 1.8 billion dollars in the expansion and modernization of its manufacturing and assembly plant in Hermosillo. The expansion will create up to 34,000 new jobs and is expected to act as a catalyst to attract numerous smaller autoparts manufacturers to the city, providing an enormous boost to the state's industrial development.

The state government will be promoting the possibilities through a series of overseas trade missions. Ford's existing plant employs 2,000 workers and turns out 600 vehicles a day.


HOW BIG IS THE INFORMAL SECTOR?

A recent survey by the National Statistics Institute INEGI (Instituto Nacional de Estadística, Geografía e Informática) suggests that people working informally (without paying tax) generate about 12.2% of GDP.

By avoiding tax, firms operating in the informal sector gain a competitive advantage over legally established enterprises, but it is not all a one-way street. For instance, it provides employment for 12.5 million people, or 28% of the non-agricultural workforce. In addition, 28.3% of the revenue received by informal activities is spent on power, water, telephone, fuel and other raw materials. Informal businesses account for a significant proportion (21.5%) of total activity in the restaurant and commerce sectors, but also play an important part in other service industries (16.4%), transportation (11.5%), and construction (11%).

Why have so many people chosen the informal sector? According to a study carried out by the Center of Private Sector Economic Studies (Centro de Estudios Económicos del Sector Privado), the two main reasons are overregulation and the excessive costs of complying with all the necessary requirements to establish a legitimate business.

The study also emphasizes that most informal sector businesses require only minimum start-up capital and that their productivity relies more on underpaid labor (and avoiding tax) than on productivity. As part of their concerted effort to bring the informal sector into the tax-paying fold, federal authorities have already simplified many administrative procedures.


MORE WATER FROM MOUNTAINS

The National Forestry Commission (Comisión Nacional Forestal) is proposing that major reforestation projects be implemented on dozens of mountains nationwide in order to help boost the volumes of water available for domestic, agricultural and industrial use. The reforestation projects would be accompanied by minor engineering work designed to trap and hold more water on the mountains, reducing overland flow and flood risk at lower elevations and boosting ground-water reserves.

Lamenting the decline of forested areas in past decades, Alberto Cárdenas Jiménez, the director of the Commission, said that healthy forests would boost the "production of water". The Commission has identified 55 mountains that it believes are ideal candidates, including La Malinche (Tlaxcala), Volcán de Colima (Colima/Jalisco), Zempoala and Tepozteco (Morelos).

A pilot project is already underway on the slopes of the twin volcanoes of Iztaccíhuatl and Popocatépetl, just outside Mexico City, where more than 1,000 hectares have been reforested.


HSBC TO BUY BITAL

The board of directors of Grupo Financiero Bital, Mexico's fifth-largest bank, has voted to accept an offer for the bank from HSBC. The deal is worth about 1.14 billion dollars (1.21 dollars a share). Headquartered in the U.K., HSBC is one of the largest banks in the world, with offices in 81 countries and close to 746 billion dollars in assets. Bital has 1,400 branches and nearly six million customers. The offer is still subject to the approval of Mexican authorities.





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.

2002 Operadora de Fondos Lloyd, S.A.
© 2002 Allen W. Lloyd, S.A. de C.V.

Published or Updated on: July 20, 2006
All Tags