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Lloyd Mexico Economic Report June 2005

Table of Contents

Healthy economy
Regional disparities
Developing microcredits
Secondary mortgage market
New Baja California port?
Mid-census count coming up
Remittances still rising
Mexico-Texas power tie
Attractive rates for peso bonds
The decline of corner stores
Recycling profits
Road contracts
Loreto development

Healthy economy

Various statistics show that Mexico's economy continues its healthy growth. For example, the Finance Secretary, Francisco Gil Díaz, has said that the number of tax payers has increased by almost 2 million, or 10%, over the past 4 years. Some 18 million individuals and 5 million businesses are now formally registered for taxation purposes. In addition, the budget deficit has been reduced each of the last four years, with a balanced budget expected in 2006.

The Finance Secretariat reports, and private sector analysts agree, that economic growth is well on track to exceed 3.88% this year, and that inflation should drop below 4%.


Regional disparities

One economic challenge still to be faced is how to reduce the growing disparity between the prosperous north and relatively poor south of the nation. National Statistics Institute (INEGI) figures show clearly that the gap in economic development is widening. From 2000 to 2004, for instance, while the center and north of the country enjoyed GDP growth rates of about 5% a year, the economies of the west and south-east grew only a sluggish 2.4%.

Somehow, ways have to be found to unleash the south's underdeveloped potential, giving it a chance to catch up with the considerable economic progress that has occurred in the north.


Developing microcredits

Microcredits are loans made to small business owners who do not qualify for conventional bank loans. Increasing the availability of microcredits has been used as a successful development strategy in numerous countries, ranging from Spain to Bangladesh.

Since 2000, the Mexican government has provided 1.3 million microcredits. They are credited with helping to reduce the incidence of extreme poverty (defined as an income of less than a dollar a day) from 10.5% of the total population in 1990 to 4.1% in 2004. This means that Mexico has already met a key U.N. Millennium Goal for 2015.

As one U.N. spokesperson puts it, "making microcredits available is not charity, it is good business". This year, Mexico will distribute a further 65 million dollars worth of microcredits.


Secondary mortgage market

The federal government has taken steps to encourage the setting up of a secondary mortgage market, and of private sector insurance plans for mortgage credit. In turn, these developments should make it possible for banks and mortgage companies to offer housing loans for up to 95% of a property's value.

The insurance will allow mortgages packaged for resale to obtain a AAA credit rating, making them attractive to investors. The amount of credit available in the housing sector has risen rapidly since 2000 in the states of Nuevo León, Jalisco, Coahuila and Baja California, though it has remained relatively stagnant in the Federal District, Oaxaca, Chiapas, Yucatán, Sonora and Sinaloa.


New Baja California port?

The problem? A serious congestion of all ports in California because of the rapid 15% annual rise in container traffic from China to the west coast.

The solution? A coalition of several of the world's largest shipping and freight companies has suggested building a billion-dollar state-of-the-art port on farmland at Punta Colonet 250 kilometers (150 miles) south of Tijuana in Baja California. The port would be connected to the U.S. by a rail link, and could be handling a million containers a year by 2012.


Mid-census count coming up

INEGI is preparing its mid-census count which will be carried out in October to update population numbers, and provide some additional information about families and dwellings. Mexico's total population is estimated at 105 million; the rate of growth continues to decline, and is now between 1.4 and 1.5% a year.

The fastest growing state is Quintana Roo, thought to be growing by 5% a year, a rate that would see its population double by 2018. Preliminary results of the October count should be available in January 2006, with the definitive results ready by June.


Remittances still rising

The total value of remittances sent by the estimated 11 million Mexicans working abroad back to their families in Mexico reached 4.065 billion dollars during the first quarter of this year. This was 20.55% more than the same period a year earlier, according to the central bank, Banco de México. During the first three months, 12.31 million remittance transactions were made, giving an average value of 330.12 dollars per transaction.

The two states to benefit most were Michoacán (546.2 million dollars) and Guanajuato. Analysts are predicting that the remittances total for the year may exceed 20 billion dollars, more than crude oil exports, tourism income (likely to be around 12 billion dollars this year) or direct foreign investment. Remittances have risen from the equivalent of 1.21% of GDP for the period 1995-2000 to 2.2% of GDP in 2004.


Mexico-Texas power tie

Firms in north-eastern Mexico will benefit from a power transmission line (or "tie") connecting the power grids of Mexico and Texas. Texas regulatory authorities recently approved Sharyland Utilities' application to construct the high voltage, 150-megawatt D.C. Tie near the city of Mission, Texas.

Construction is scheduled to begin early next year and be completed by mid-2007. The tie will not only improve the reliability of power supplies on both sides of the border, but is expected to lead to some cross-border trading in power, given that the costs of generating electricity are lower in Mexico than in the U.S.


Attractive rates for peso bonds

Mexico recently sold 1.5 billion dollars worth of peso-denominated bonds maturing in 10 years. In a reflection of the confidence foreign investors have in Mexico, most were purchased by investors in the U.S., Canada and Europe. International investors hold more than 70% of Mexico's 10- and 20-year fixed rate peso bonds, but only 2% of the short-term government debt maturing within the next 12 months.

Yields on longer term bonds are over 10%, and peso-denominated bonds carry an A credit rating from Standard & Poor's (S&P) international ratings agency, making them very attractive to investors.


The decline of corner stores

The expansion of supermarket chains across the country may be welcomed by many consumers but is inevitably having an adverse effect on Mexico's traditional, small corner stores, or tienditas, which find it difficult to compete in terms of bulk purchases and pricing.

There are believed to be about 650,000 corner stores in Mexico; they account for 47% of all domestic purchases of household items and groceries nationwide. One small business leader, Enrique Guerrero, claims that the opening of a major supermarket leads to a 70% decline in sales at nearby small businesses, with many forced into closure within two years.

Another, Enrique Rivera, estimates that between 50 and 60 small stores close within five kilometers of every new major national chain supermarket. Some corner stores have survived competition from giants like Wal-Mart by diversifying, though this may not always be possible. Other small business owners have joined forces to organize joint purchasing of stock and supplies.


Recycling profits

The relatively youthful recycling industry for polyethylene terephthalate (PET), the clear, hard plastic used for drinks bottles, is doing well. The four companies authorized to process PET are Alvangard, Simplex, Innovative de México and Láminas y Reciclados. According to recent estimates, they will share profits of 40 million dollars this year.

The four firms operate 17 processing plants, recycling 76,000 tons of PET each year into raw material for new PET containers, as well as for the manufacture of fibres used in clothing, textiles and carpets. About 60% of the output is exported to the U.S., China and India.

There is lots of potential remaining in PET recycling since only about 20% of the national production (380,000 tons) is currently being recycled, compared with 25 to 30% in some other countries.


Road contracts

Pedro Cerisola, the Communications and Transportation Secretary has announced that public and private sector highway investments this year will total 7.7 billion dollars. The highways being built or improved include Las Yescas-Matamoros (Tamaulipas), Guadalajara-Colima, Playa Azul-Manzanillo, Puerto México-Carbonera (Coahuila) and the Merida ring-road.


Loreto development

The Loreto Bay Company and Fonatur have announced a joint 200-million-dollar project in Loreto, Baja California Sur. The plan will develop 8,000 acres into residential areas, a golf course, services and shops. Loreto is one of the nation's purpose-built resorts, famous for its beaches, seascapes, marine life and fishing.





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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