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Lloyd Mexico Economic Report January 2003

Table of Contents

THE SHAPE OF 2003
PEMEX BOND OFFERING
NATIONAL EXPORT PRIZES
THE GEOGRAPHY OF CELL PHONE USE
WORLD FAIR DECISION
MORE PHARMACIES
REWARD FOR EFFICIENCY
NEW RAILROAD LINES
GAS PRICES REDUCED ALONG BORDER
POVERTY REDUCTION THROUGH BUGS?
PET RECYCLING IN MEXICO CITY

THE SHAPE OF 2003

The domestic economy successfully weathered last year's global economic slow-down. The economy's resilience is a direct result of tight fiscal and monetary discipline, allied to good policy coordination and a prudent, proactive approach to public debt.

In the past two years, inflation has been brought down, exchange rates have stabilized and interest rates have declined from around 17% to 7%. The nation's debt is accorded investment grade by all major international ratings firms. An extensive fiscal reform has been initiated, further strengthening the financial system. The rate of domestic savings remains a key element of financial policy and is finally showing signs of steady upward movement. So, what's the outlook for this year? World oil prices will continue to play a decisive role in determining how effectively the current administration of President Vicente Fox, now in its third year, can tackle several key issues. Oil accounts for about one-third of the government's revenue, and Petroleos Mexicanos (Pemex) hopes to boost crude output this year, significantly increasing government revenue.

The Finance Secretariat will be hoping that crude prices over the year average more than the 17 dollars a barrel its budget is based on, so that some additional government expenditures can be made in the second half of the year. The budget calls for the Gross Domestic Product (GDP) to grow by 3.0% this year and for inflation to be kept to 3.0%. The government is determined to keep interest rates (and inflation) down by restricting the budget deficit to 0.5% of GDP. In a recent speech, the President insisted that additional borrowing is not an option and that, "We can not spend more than we earn".

The peso has remained strong, reflecting investor confidence for continued economic growth. According to a recent survey of emerging economies, published in The Economist, Mexico is the third best country in which to do business, from the standpoint of political and economic stability, after Hungary and Poland. On July 6, the 61 million registered voters across the country will select 500 federal deputies (300 by majority, one for each district, together with an additional 200 allocated by proportional representation) and 32 federal senators. In addition, local elections are taking place in several states, including Campeche, Colima, Nuevo León, Querétaro, San Luis Potosí and Sonora.

These mid-term elections will play a crucial role in the eventual outcome of Fox's structural reform plans. If the National Action Party (Partido Acción Nacional, PAN) can gain enough seats to enjoy a majority in the new legislature, reforms can be made and campaign promises kept. However, if PAN fails to win an outright majority, reforms may be stifled and progress could be slow. Fox's own popularity remains high. A recent non-partisan poll found that 60% of those interviewed approved of his performance to date. One of the key reforms that Fox wants to institute is a major reform of the electricity sector. The sector requires investments totaling 60 billion dollars over the next decade to keep pace with increasing demand.

Another pending structural reform is that required to update labor laws and help boost the productivity of the workforce. Once such structural reforms are passed, foreign investment will be likely to increase substantially and economic growth rates of 5 or 6% should be possible for the remainder of Fox's six-year term.


PEMEX BOND OFFERING

Pemex has issued a one billion dollar bond on international markets. The 12-year bond has a return of 7.589%. Demand was strong, reflecting the fact that Pemex bonds are rated investment grade by major ratings firms such as Standard & Poor's and Moody's.

About 80% of the bond offer, managed by Goldman Sachs and Lehman Brothers, was sold in the U.S., the remaining 20% in Europe. Pemex will use the funds to increase its production of crude oil by 13% this year to about 3.65 million barrels a day.


NATIONAL EXPORT PRIZES

Exports were worth 13.4 billion dollars during the first ten months of last year, making Mexico the world's 7th largest exporter. The winners of last year's National Export Prizes show just how varied the nation's industrial output has become.

Two firms won awards in the category for large exporting firms: Dynasol Elastómeros and Exportadora de Sal. Dynasol is one of the world's largest manufacturers of solution-based styrene-butadiene specialty rubber, and hydrogenated thermoplastics. These products are used in the manufacture of numerous products including footwear, asphalt, tires, and adhesives. Dynasol's plant is located in Altamira (in the state of Tamaulipas) and the company has offices in Mexico City and Guadalajara.

Exportadora de Sal is based in Guerrero Negro (Baja California Sur) and is a major salt producer, exporting to U.S., Canada, Latin America and Asia. At its Guerrero Negro facilities, the world's largest outdoor eco-process salt works, salt is harvested from 20,000 hectares of salterns, using state-of-the-art technology.

Other Export Prizes were awarded to Equipos Inoxidables Del Norte, based in Gomez Palacio (Durango), a family-run manufacturer of components for electrical generation systems, and Del Campo y Asociados, who grow bell peppers and tomatoes near Culiacán (Sinaloa) in a facility that includes 21 hectares (52 acres) of 100% hydroponic greenhouses.

Other Export Prizes were won by Jabil Circuit de México, a global leader in the electronic manufacturing services industry, with manufacturing plants in Chihuahua and Guadalajara, and Q-Pumps, a pump supplier based in Querétaro, that designs and manufactures stainless steel pumps and other equipment used in the culinary industry.


THE GEOGRAPHY OF CELL PHONE USE

According to research by IDC, there are now more than 26 million cell phone users in Mexico, making a total of 15.904 billion minutes of calls each year. The leading provider is Telcel which has 18 million clients using pre-paid cards and an additional one million on contracts.

Pre-paid card users spend an average of 10.50 dollars a month, whereas contract users spend around 100 dollars a month, according to an analysis by Yankee Group.

But usage is not equal in all regions. A study by national research firm Select shows that market penetration, defined as the percentage of all telephone lines (fixed and mobile) that are mobile, reached 75% in states like Nuevo León, Baja California, Chihuahua and Tamaulipas by the middle of last year. The states with the lowest penetration of cell phones were Oaxaca (7.6%), Tabasco (7.6%) and Chiapas (4%).

This geographical disparity suggests that cell phone providers face two distinct challenges. In southern states, where usage is low, their focus is firmly fixed on acquiring new customers. However, in northern states, where usage is already high, their mission is not just to convince people to use a cell phone, but to persuade users of rival services that it is worth switching providers, by offering better rates or more value-added options.


WORLD FAIR DECISION

Querétaro has lost its bid to host the 2010 World Fair. The delegates of the International Exhibition Office have voted that the fair will be held in Shanghai (China). Organizers of Querétaro's bid are particularly disappointed, since the year 2010 will mark both the bi-centenary of Mexican Independence and the centenary of the Mexican Revolution.


MORE PHARMACIES

Corporativo Fragua, which operates Farmacias de Guadalajara, the nation's second largest pharmacy chain, is investing 20 million dollars this year in order to expand. Corporativo Fragua will add 36 stores to its 270-strong chain, and also upgrade inventory systems and technology. Based in the city of Guadalajara, the firm had an estimated 17% increase in sales last year compared with 2001.


REWARD FOR EFFICIENCY

A small team of experts in the Economy Secretariat plays a key role in the administration's drive to simplify administrative procedures. It has been awarded an International Standards Organization ISO-9001-2000 certificate in recognition of its quality, speed and honesty. The IS certificate shows the group is meeting or exceeding international standards.

The team has revised the documentation required to comply with a wide variety of federal regulations, ranging from Certificates of Origin (for food products like honey and avocados) to temporary import permits. Applications that took several days to process a few years ago can now be completed within hours.


NEW RAILROAD LINES

Mexico currently has 26,477 kilometers of railroad track, according to the federal Transportation Secretariat, SCT. However, the existing network has remained largely unchanged since the main period of railroad building mania ended in 1920.

The SCT recently announced that it is actively seeking private sector support to add various links to the existing network. New links include Ensenada-Tecate, Matamoros-Veracruz, Mexico City-Tuxpan, Durango-Mazatlán, Encarnación-El Castillo (in Jalisco) and Salinas-Laguna (San Luis Potosí).


GAS PRICES REDUCED ALONG BORDER

Merchants in northern border cities are breathing a collective sigh of relief following last month's significant reduction in the price of gas at service stations in a 20-kilometer-wide border zone. Cheaper gas prices in the U.S. had caused a serious decline in shopping in Mexican border towns as residents crossing the border to buy gas also bought many other items in the U.S. at the same time.

New prices are now in effect at 498 service stations in 41 municipalities along the 3,000-kilometer-long border from Tijuana (Baja California) to Matamoros (Tamaulipas). Between them, these stations account for 11% of all Magna Sin sales nationwide.

The border cities are divided into 6 zones for the purpose of establishing gas prices and prices will be reviewed weekly to keep them in line with stations across the border. At press time, Magna Sin prices (per liter) along the border ranged from a high of 4.49 pesos in the Mexicali region to a low of 3.21 pesos in Tamaulipas, compared with 5.84 pesos elsewhere in the country.


POVERTY REDUCTION THROUGH BUGS?

A unique low-cost program promoted by the U.N. Environment Program (UNEP) and funded by the World Bank Global Environment Fund and the Rockefeller Foundation may help reduce rural poverty. The seven countries in the 26-million-dollar project (Mexico, Brazil, Ivory Coast, Uganda, Kenya, Indonesia and India) have the world's richest soils in terms of microorganisms.

The project involves collecting and identifying tropical fungi, termites, bacteria and other forms of soil life. Soil microorganisms are known to play an important role in holding, filtering and purifying ground water, but the UNEP says that the soils should also prove to be a treasure-chest for a vast quantity of drugs, including antibiotics and industrial products.

In addition, by unraveling the relationships between the critters they find, scientists hope to identify bugs that can be used to regenerate or rehabilitate lands laid bare by erosion or contaminated with industrial wastes. Soil studies might also lead to the possibility of raising crop yields, without the costs and associated environmental risks of applying pesticides and fertilizers. This would bring considerable economic benefit to thousands of rural households.


PET RECYCLING IN MEXICO CITY

Mexico City residents have been given a big incentive to recycle PET (hard plastic) containers. The price paid for recycled PET containers in Mexico City has risen from 30 cents to 1.20 pesos a kilo under the terms of an agreement signed by the city's administration with private sector recycling companies.

Mexico City residents use about 55,000 metric tons of PET each year, of which fewer than 20,000 tons are currently recovered for re-use. It is estimated that the increased price will result in a further 23,000 tons of PET being recycled each year, saving 150,000 cubic meters of landfill space.

The city's first PET reprocessing plant opened in November 2002, making items such as carpet fiber, imitation wood, textiles and plastic sheeting. The city is funding 5 mobile recycling information units to visit schools and shopping malls as part of its on-going education program to encourage greater rates of reuse and recycling.





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.

© 2003 Operadora de Fondos Lloyd, S.A.
© 2003 Allen W. Lloyd, S.A. de C.V.

Published or Updated on: July 20, 2006
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