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Lloyd Mexico Economic Report January 2005

Table of Contents

The shape of 2005
Comprehensive health care
Paseo de la Reforma
Which city for executives?
Better air in Mexico City
High tech catches on
Tequila prices
Oil discovery
Drilling for gas
Rainforest purchase
Avocado exports
Beer competition

The shape of 2005

President Vicente Fox is now in the penultimate year of his six-year term. While some observers have been disappointed that Fox has failed to push his proposed fiscal and labor reforms through the opposition-controlled Congress, the President's personal approval rating remains high, with almost 60% of survey respondents saying that he is doing a good job.

Boosted by higher prices for crude oil and increased exports, the nation's economy continues to exhibit strong growth. The Mexican Stock Market performed very well in 2004. Inflation and interest rates both remain low and foreign reserves are at a record high. Total consumer credit in Mexico amounts to about 7% of GDP, which compares very favorably with the equivalent figure of close to 60% for the U.S. The OECD (Organization for Economic Cooperation and Development) is forecasting that Mexico's economy will grow 3.9% this year, and 4.2% in 2006.

Considerable attention will be focused this year on the run-up to the 2006 Presidential elections. Judging by recent opinion polls, the front runners for the PAN (Partido Acción Nacional) nomination are Santiago Creel and Felipe Calderón Hinojosa. The race for the PRI (Partido Revolucionario Institucional) nomination involves many more players, including party leader Roberto Madrazo and Enrique Jackson (PRI coordinator in the Senate), as well as several state governors. The fight to win the PRD (Partido de la Revolución Democrático) ticket looks to be between Andrés Manuel López Obrador, the current mayor of Mexico City, and Cuauhtémoc Cárdenas Solórzano.


Comprehensive health care

All states have now signed onto a new health insurance program designed to provide coverage to the estimated 52 million Mexicans not currently covered by employer-employee systems (such as IMSS) or private health insurance. The new program, Popular Insurance began last year, and provides basic health care and catastrophic coverage to all the uninsured by 2010. About 70% of current beneficiaries are single-mother households. The total costs are estimated at 1% of GDP.


Paseo de la Reforma

The refurbishment of Paseo de la Reforma in Mexico City has attracted private sector investments over the past three years worth almost one billion dollars. Projects already completed include several hotels, the Torre Mayor, the Lucerna office building and several apartment blocks.

Still under construction are a further 17 other projects. The 330-million-dollar Torre Mayor, owned by Reichmann International, is the tallest building in Latin America. Its 52nd floor observation lounge, 225 meters above street level, now affords an incredible view over one of the world's most vibrant cities.


Which city for executives?

Monterrey, in Nuevo León, is the most expensive city for executive life in Mexico, according to a survey by Mercer Human Resource Consulting. The annual survey considers the levels of compensation that companies must offer potential executives, based on the cost of housing, education, health, food and domestic services. The survey uses Mexico City as index 100 and compares 40 prominent industrial and commercial cities nationwide.

The ten most expensive cities in the study (with their index score in parentheses) are Monterrey (111), Los Cabos (107), Cancún (102), Mexico City (100), Tijuana (98), Ciudad Juárez (91), Culiacán (91), Chihuahua (90), Mexicali (90) and Guadalajara (89). The least expensive cities are Pachuca, Guanajuato and Tlaxcala.


Better air in Mexico City

Mexico City air has become cleaner in recent years. For instance, the number of days where ozone exceeded the established norms fell from 306 in 2000 to 252 in 2003. An experiment financed by the World Bank aims to make the air even cleaner, by identifying the best buses for the city's streets.

A series of vehicles, using a variety of fuels, are all operating on the same route along the major north-south traffic artery of Avenida Insurgentes. Units using compressed natural gas are competing with low-sulfur diesel vehicles and hybrids using a combination of electric power and diesel. Conventional diesel vehicles are acting as a control group.


High tech catches on

Figures from a recent INEGI survey show that 91.7% of homes in Mexico currently have television sets, a rate essentially unchanged for several years. However, the rates of cell phone ownership (35.3% of all homes) and subscriptions to pay T.V. (19% of households) are rising rapidly.

Computer ownership has also increased rapidly, by 70% over the past 3 years, to 11.7% of all homes. About 9% of homes have Internet connections. The costs of owning computers, Internet access and cell phone charges are already built in to various INEGI cost of living indices.


Tequila prices

A few years ago, tequila industry representatives were bemoaning the fact that there was a serious shortage of agave, the plant from which all tequila is distilled. The shortage drove the prices of agave and tequila to record levels. This year, it looks like agave harvests will actually exceed demand. By 2006, this excess may reach 400,000 metric tons.

Agave producers are understandably worried about the risk of falling prices for their product, but the millions of tequila drinkers worldwide are already raising their glasses in anticipation.


Oil discovery

Petróleos Mexicanos (Pemex) has invested 1.5 billion dollars over the past four years in searching for deep-water deposits of oil in the Campeche Sound. The effort now seems to be paying off. An exploratory well, Nab 1, drilled where the ocean is 680 meters (2,230 feet) deep, is yielding 1,200 barrels a day (b/d) of heavy crude.

While this may seem an insignificant amount given the nation's total oil output of 3.4 million b/d, Pemex is confident that it represents the start of a new oil bonanza in the Gulf of Mexico. Unofficial reports suggest that the total amount of crude in deep water deposits on the Mexican side of the maritime border with the U.S. could be as much as 54 billion barrels.


Drilling for gas

Pemex is also working hard to develop the giant Burgos Basin natural gas field in the north-east of the country. The company estimates that developing the field (with 166 wells over the next 15 years) will increase natural gas production by 110 million cubic feet per day. More than 4.3 billion dollars have already been invested in exploration and development.

The natural gas produced will offset Mexico's imports of natural gas, which cost around 2 billion dollars in 2003, and result in considerable savings of foreign exchange. According to Pemex, 1000 cubic feet of gas from the Burgos Basin costs only around 2.5 dollars, compared to 5.5 dollars for imported gas.


Rainforest purchase

The Mexican government and an international NGO (non-government organization), the Nature Conservancy, have agreed to pay 3 million dollars to local Mayan ejidatarios (communal farmers) for thousands of acres of tropical forest in the southern part of the Yucatán Peninsula. The purchase will add 370,000 acres to the protected "core" zone of the Calakmul Biosphere Reserve.

Calakmul is a designated UNESCO World Heritage site with major Mayan ruins and is the largest intact tropical forest in Mexico, home to hundreds of plant and animal species. The communal farmers will use the funds to develop property they own outside the reserve's core area.


Avocado exports

Avocado growers in the state of Michoacán are confident of a bright future now that U.S. Department of Agriculture restrictions have been relaxed to permit exports to every state except California, Hawaii and Florida. Exports to those three states will begin in 2007. The avocado season runs from October 15 to April 15. The 2004-2005 harvest is expected to reach one million tons, most of which is for the domestic market.

Exports to the U.S. are expected to total 120,000 tons this season, with a prediction of a further rise (to 150,000 tons) in 2004-2005. State-of-the-art technology, modern cultivation methods and ideal natural conditions combined to give Michoacán's 10,000 avocado growers a record yield last season of 2.24 tons per hectare (0.9 tons per acre).


Beer competition

Mexico's breweries contribute about 1.62% of GDP and provide 80,000 jobs directly and 800,000 indirectly. The nation's average per capita consumption of beer is estimated at 48 liters a year, compared with 123 liters in Germany, so there is considerable potential for growth.

The two main beer makers, Grupo Modelo and Cuauhtémoc Moctezuma, who control 80% of the domestic market between them, face increased competition from imported beer. Led by Budweiser, Miller and Heineken, imported brands rose 30% between 2000 and 2003.

Fortunately, Mexico's beer exports continue to be healthy; the country is the world's second largest exporter, surpassed only by the Netherlands. Grupo Modelo makes and sells no fewer than five of the 25 most popular brands in the U.S.: Corona, Modelo Especial, Corona Light, Pacífico and Negra Modelo.

 




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.

© 2005 Operadora de Fondos Lloyd, S.A.
© 2005 Allen W. Lloyd, S.A. de C.V.

Published or Updated on: July 20, 2006
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