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Lloyd Mexico Economic Report - Janaury 2002

Table of Contents

THE SHAPE OF 2002
MORE FOREIGN INVESTMENT
AIRLINE PARTNERSHIPS
QUERÉTARO AIRPORT
TRADE WITH EUROPE
FIRST STATE BOND
FREEDOM OF INFORMATION LAW
SCANIA OPENS MONTERREY OFFICE
THE MARKET FOR INSTANT SOUP
TORREON - A GROWING CITY
NATIONAL HOUSING PLAN
QUINTANA ROO TOURISM
BIOPIRACY IN THE FORESTS?
E-BOOKINGS FOR TRAVELERS
FEWER VEHICLES PRODUCED
RELATED NEWS

THE SHAPE OF 2002

World oil prices are likely to play a decisive role in determining how effectively the current administration of President Vicente Fox, now in its second year, can tackle several key issues. Oil accounts for about one-third of the government's revenue. Last year, despite the fact that unexpectedly low oil prices forced it to reduce public spending three times, the government refrained from exceeding its original borrowing targets.

Its first proposal for this year’s budget was based on an expected average price for crude oil exports of 17 dollars a barrel, but oil prices have fallen significantly in recent weeks and Finance Minister Francisco Gil Díaz has been looking at ways to trim this year’s spending by as much as 3 billion dollars (27.6 billion pesos).

Increasing government revenue by boosting crude oil exports is not seen as a likely scenario since Mexico has joined other non-OPEC oil producers in pledging to cut its oil production in an effort to boost world prices.

The budget, one of the most austere in years, assumes that GDP will grow by 1.7% and that inflation will fall to 4.5% this year and 3.0% in 2003. The government is determined to keep interest rates (and inflation) down by restricting the budget deficit to 0.65% of Gross Domestic Product (GDP).

The peso has remained strong, reflecting investor confidence for economic growth in Mexico. This confidence was further demonstrated when demand for a recent bond issue by Pemex (Petroleos Mexicanos), the state-run oil company, was more than double the 750 million dollars available.

One unresolved issue carried over from last year is tax reform. The government’s initial proposals have been stalled in Congress due to objections to a proposal to extend value-added tax (IVA) to previously exempt items such as food, medicine and school tuition fees. The measure would generate an additional 13 billion dollars in government revenue, which would allow increased funding for public works and social welfare programs.

Stemming the rise in unemployment is another key goal. According to the National Statistics Institute (INEGI), the nation’s official jobless rate, which is based on the percentage of the economically active population that did not work even one hour per week during the period in question, averaged about 2.5% last year.


MORE FOREIGN INVESTMENT

The flow of foreign capital into the Mexican Stock Market (Bolsa) rose 6.19% in October 2000, compared to the previous month, according to officials. More than 99% of the 51.3 billion dollars poured into Mexico by foreigners in October was channeled into equity investments. Of that total, 26.7 billion dollars was invested in the American depository receipts (ADRs)of blue-chip companies. Investment in bonds fell 9.44% to 456 million dollars. A spokesperson for the OECD has said that even with the current weakened world economy Mexico remains one of the principal recipients of direct foreign investment. The country has attracted more than 85 billion dollars in direct foreign investment since becoming a member of the OECD in 1994.


AIRLINE PARTNERSHIPS

Two domestic airlines have announced agreements with U.S. carriers. Aeroliteral, a regional airline based in Monterrey, now has a code-sharing agreement with Delta Airlines which will greatly increase the flight options available to its passengers. Aeroliteral has 230 flights daily, serving 33 domestic destinations and 6 in the U.S.

One of Aeroliteral’s rivals, Azteca Airlines, which has flights to 11 domestic destinations and one in the U.S., is consolidating its presence by linking its frequent flyer program with Continental Airlines. This is seen as the first step towards a wider alliance between the two airlines.


QUERÉTARO AIRPORT

Work is beginning on an international airport for the city of Querétaro. At an estimated cost of 50 million dollars, it will meet expected demand for the next 20 years. It will be located in the municipalities of Colón and El Marqués, north-east of the city, and is expected to be brought into service by mid-2004 .


TRADE WITH EUROPE

According to Manuel Lopez, the head of the EU delegation to Mexico, Mexican exports to the European Union (EU) have increased 40% since July 2000, when a trade agreement between the two took effect. Mexico's imports from the EU have increased 30% during the same period.


FIRST STATE BOND

The state of Morelos (capital city: Cuernavaca) has become the first local authority in Mexico to sell bonds. The state issued a 7-year bond to raise 23.6 million dollars, which will be used to repay higher interest loans from commercial banks, releasing additional funds for health and education.

To guarantee the bonds, Morelos will deposit 16.4% of its share of federal tax revenues into a trust fund that will make monthly interest payments and start to repay capital in 2004. The Mexican unit of Fitch, the Chicago-based rating company, has given Morelos' peso-denominated debt an "AA+" rating.


FREEDOM OF INFORMATION LAW

President Vicente Fox has proposed a bill to Congress which would guarantee public access to government information. The initiative is a key component of his administration's pledge to stamp out corruption and ensure transparency. The bill covers all branches of government including autonomous government entities, such as the Federal Electoral Institute, the National Human Rights Commission and the Banco de México.

A time frame is set for government departments to meet any request from the public, provided that the information requested will not threaten national security or prejudice judicial proceedings.


SCANIA OPENS MONTERREY OFFICE

Sweden's Scania (annual revenues: 5 billion dollars), the world’s fourth largest manufacturer of trucks, commercial vehicles and passenger buses, has opened a new office in the northern Mexican city of Monterrey. Scania invested 21 million dollars in the country last year to add 12 new distribution and service centers to its extensive network covering Mexico's largest cities, from Mexico City to Tijuana, and from Veracruz to Querétaro.


THE MARKET FOR INSTANT SOUP

The domestic market for instant pastas is growing 15% a year and reached 22,000 metric tons last year with a value of 175 million dollars, according to a market survey by Grupo La Moderna. The group aims to become Mexico’s number one producer of instant “soup in a cup” products, supplying at least 16% of the market within 18 months. La Moderna is investing 4.5 million dollars in developing new flavors using vitamin-enriched wheat-based pastas, under the brand- name “Milunch Instantáneo”.

Together with its minority partner, Grupo Bimbo, La Moderna believes it can take advantage of lower distribution costs to displace competing imported brands from the marketplace.


TORREON - A GROWING CITY

A spate of recent retailing investments in Torreón has begun to transform the city’s shopping options. The developments include the city’s second Wal Mart, and the construction by Compañía Comercial Cimaco of the 41-million-dollar Plaza Cuatro Caminos, a mall housing 75 stores and restaurants. In addition, the French automobile company Renault recently opened a dealership in the city and Gala, a local manufacturer of built-in kitchens and household furnishings, chose Torreón as the location for its 40th retail outlet nationwide.


NATIONAL HOUSING PLAN

President Vicente Fox has announced a National Housing Plan. Government-run, home-loan institutions hope to oversee the creation of 475,000 dwellings this year. The homes will have a total cost of 9.8 billion dollars, which will be financed through subsidized private credits. About 100,000 of the new dwellings will be for government workers and a further 275,000 homes will be financed by Infonavit for non- government workers.

A newly formed national mortgage bank will finance most of the remaining 100,000. In an effort to stimulate the construction industry, the bureaucratic procedures required for construction and financing are being simplified. The aim is for the construction of new houses to reach 750,000 a year by the end of the present federal administration in 2006.


QUINTANA ROO TOURISM

According to the Quintana Roo state governor, his state is now responsible for 34% of all tourist revenues nationwide and the total number of hotels in the state now exceeds the number in many entire countries, including the Dominican Republic. Several more hotels are planned for Quintana Roo.

The Spanish hotel giant Melia is to build on an alternative site, probably in Cancún, following the cancellation of its Xcacel-Xcacelito project on environmental grounds. A boutique hotel is planned for the very pretty coastline at Xel-Há, mid-way between Cancún and Tulum. Other tourist- related developments include the enlargement of Parque Garrafón marine reserve.


BIOPIRACY IN THE FORESTS?

Quoting a recent study, Environment Secretary Victor Lichtinger says that Mexico is losing its tropical forests in the states of Tabasco, Veracruz, Yucatan and Chiapas faster than was previously thought. An average of 1.1 million hectares (2.72 million acres) of forests and jungles was lost each year between 1993 and 2000.

Much of the loss stems from an expansion in the area used for grazing and farmland, but illegal logging has also played a part. Lichtinger wants a bigger budget for fighting deforestation. He may also need to get some modifications made to the government’s Plan Puebla Panama which seeks to encourage development in southern Mexico and central America by building roads into the rainforest to spark industrial and tourist investments.

The plan not only threatens the astonishing biodiversity of the tropical forests, it may also open vast areas up to bio-prospecting and bio-piracy, as companies race to find significant genetic resources and seek worldwide patents for them. Charges of bio-piracy have already caused the abandonment of a major research project (International Cooperative Biodiversity Group Maya) examining age-old herbal remedies used by indigenous peoples in Chiapas.

It had been hoped that the project, funded by the U.S. National Health Institute, would stimulate the region's economy and assist in preserving the region's biodiversity, but many indigenous groups including Compitch, a coalition of Maya healers, argued that indigenous people would never see any benefits from the research. Obviously, government agencies, indigenous groups and NGOs working in the region urgently need to come up with alternative, more acceptable, proposals for the sustainable development of tropical forests.


E-BOOKINGS FOR TRAVELERS

Foreign tourism brought close to 9 billion dollars in foreign exchange to Mexico last year, not far behind oil as a source of national income. Increasingly, travelers want the convenience of being able to make on-line reservations for flights, hotels and car hire.

Three major corporations are competing for most of this market: Sabre Holdings, Amadeus Global Travel Distribution and Worldspan. Sabre is the largest; its worldwide revenues in 2000 exceeded 2.6 billion dollars. But several smaller companies are hoping to gain a share of the action by targeting niche markets. For instance, Mexico Boutique Hotels, based in Puerto Vallarta, offers on-line reservations for a select group of up-market guesthouses and hotels in 20 different destinations.

E- commerce is growing very rapidly in Mexico. A Morgan-Stanley report found that e-commerce sales generated 270 million dollars in 2000, while the comparable figure for last year is expected to be 650 million dollars, with a potential annual rate of over 2 billion dollars by 2004.


FEWER VEHICLES PRODUCED

The latest figures from the Mexican Automotive Industry Association (AMIA), show that the output of motor vehicles fell 9.1% (to 172,233 vehicles) in October compared to the same month in 2000. Exports of vehicles during October fell 10.7% to 128,274 units. The fall is mostly due to the effects of the slow-down in the U.S. economy.

RELATED NEWS

Volkswagen has announced that it is ending production of its popular Combi van, widely used for public transportation in many Mexican cities. Since 1971, when it was first introduced, nearly 270,000 Combis have been sold in Mexico. It will be replaced in Volkswagen’s line-up by the Eurovan.

 

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

Published or Updated on: July 20, 2002
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