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Lloyd Mexico Economic Report June 2003

Table of Contents

RISK RATING AT HISTORIC LOW
SCOTIABANK BUYING INVERLAT
DEFLATION
ORGANIC VEGGIES
ACCOR INVESTS
FASTER FUND TRANSFERS
LIQUIFIED NATURAL GAS TERMINAL
MEXICAN FRANCHISES SUCCEED ABROAD
SORIANA OPENS NEW STORES
REFINERY UPGRADE
RAILROAD MERGER
3M CHOOSES MEXICO
ENRICHED MILK
HIGHER QUALITY WORKMANSHIP
WALDO'S MART INVESTS IN MEXICO
LISTEN TO A GURU

RISK RATING AT HISTORIC LOW

Mexico's "risk rating" is at an historic low. At the end of April, JP Morgan set the country risk rating for Mexico at 227 points, a clear signal of confidence for investors. This excellent risk rating, the lowest of any emerging economy, reflects the reduction in national debt, particularly short-term obligations, as well as the administration's sound management of public finances.

Private sector economic analysts are predicting a 2.35% growth in GDP this year. The latest monthly survey by the central bank, Banco de México, shows that the analysts' average estimate of inflation by year-end is 4.34%. They also believe that petroleum exports will rise 12.05% and non-petroleum exports 4.2%, and that foreign direct investment this year will reach 13.092 billion dollars, rising to 14.154 billion dollars in 2004.


SCOTIABANK BUYING INVERLAT

The Bank of Nova Scotia, based in Canada, is buying the 36% share in Grupo Financiero Inverlat presently held by the Mexican government for about 320 million dollars, or about 1.275 times book value. The acquisition will mean that Scotiabank will hold 91% of the group's shares. Scotiabank is reported to be negotiating with minority shareholders to try and acquire the remaining 9%.


DEFLATION

The consumer price index fell by 0.41% during the first half of May, reducing the accumulated inflation since January 1 this year to 1.04%. The central bank's target for the year is 3%.

The greatest increases occurred in the cities of Colima (0.52%) and San Andrés Tuxtla (0.45%); the smallest increases were in Mexicali (-6.25%), Hermosillo (-5.95%) and Huarampo, Sonora (-4.69%).


ORGANIC VEGGIES

Last month witnessed the first harvest of organic tomatoes from Bionatur Biological Glasshouses, a joint venture of Spanish firm Bionatur (35%) and Mexican conglomerate Grupo Iusa (65%). Bionatur, located in an industrial park in Pastejé, close to Mexico City, represents an investment of 125 million dollars in the first stage. The project uses hydroponic and pesticide-free methods.

Further investments will boost the area under cultivation from the current 40 hectares to 200 hectares by 2005. By that time, Bionatur will have the capacity to produce 150,000 metric tons of tomatoes a year, 90% of them destined for the U.S. market. Yields in the first phase averaged 70 kilos per square meter. The system may eventually be extended to other crops, such as cantaloup, cucumber and broccoli.


ACCOR INVESTS

The French hotel group Accor (3,700 hotels in 90 countries) has decided to invest 200 million dollars over the next 3 years to add 15 more hotels to its Mexican network. Most Accor hotels are aimed at the business market; the new hotels will be in the firm's competitively priced IBIS chain.

An Accor spokesperson stated that the company's commitment to Mexico is a direct result of the nation's excellent macroeconomic conditions, low inflation, and stable monetary and economic policies.


FASTER FUND TRANSFERS

Remittances sent back home by the estimated 20 million Mexican workers in the U.S. totaled more than 10 billion dollars last year, according to the Bank of Mexico. Now, Banamex and Citibank have announced a new real-time transfer service called Citibank Global Transfers, which will significantly reduce the costs of transferring funds between the U.S. and Mexico.

For a fixed fee of 5 dollars, funds can be sent from any Citibank account in the U.S. to any Banamex account or credit card in Mexico. In the reverse direction, funds can be transferred from Banamex to Citibank accounts in any one of 12 countries where Citibank has branches. The new service is the first to offer real-time cross-border transfers. At present, the average cost of sending a remittance is more than 20 dollars.


LIQUIFIED NATURAL GAS TERMINAL

The Energy Regulatory Commission has granted a permit for the first LNG (Liquified Natural Gas) storage terminal and regasification plant in Mexico. The permit, granted to Gas Natural Baja California, a subsidiary of the U.S. firm Marathon Oil Corporation, covers the construction, operation and maintenance of a plant close to Tijuana in Baja California, which involves an investment of about 550 million dollars.

Gas for the facility will be imported from countries such as Trinidad & Tobago, Venezuela and New Zealand. The marine terminal will accommodate vessels carrying up to 160,000 cubic meters of LNG and each of the plant's two storage tanks will have a capacity of 140,000 cubic meters. The plant is scheduled to be operational by 2006.


MEXICAN FRANCHISES SUCCEED ABROAD

U.S.-based fast food franchises like McDonalds may have expanded their chains in Mexico very rapidly in recent years, but several Mexican food chains are now fighting back on McDonald's home turf.

Among the Mexican franchises already with a foothold in the U.S. are Sushi Itto and Carlos n'Charlies. Three other food chains have recently announced their intention to open U.S. outlets. Gorditas Doña Tota plans to open 30 restaurants in Illinois, Texas and California, and is aiming to have 200 in operation within 5 years. El Tizoncito is beginning with New York and Chicago, with a target of 65 outlets by 2008, while Los Cebollines is focusing on opening 12 outlets in Miami.

Of course, not all Mexican franchises are food-based. Ópticas Devlyn (opticians) and Tintorerías Max (dry-cleaning) are just two examples of Mexican firms in other fields that have also made successful inroads into the U.S.


SORIANA OPENS NEW STORES

One of the nation's largest retailers, Soriana, is investing 200 million dollars this year in opening 15 new supermarkets. Soriana, which has a strong presence in northern Mexico, is gradually extending its chain into the rest of the country. Recent additions to its chain of 117 hypermarkets include stores in Saltillo (Coahuila) and San Juan del Río (Querétaro).

The 15 supermarkets currently under construction include stores in Minatitlán (Veracruz), Monterrey (Nuevo León) and Ciudad del Carmen (Campeche), as well as at locations in the states of Guanajuato, Sinaloa, Sonora, Quintana Roo, Baja California Sur and Puebla.


REFINERY UPGRADE

Because Mexico produces more crude oil than it can refine, it exports 130,000 barrels a day for refining abroad and then has to re-import some of the refined products. As a result, increasing the nation's refining capacity has become a top priority.

In October this year, work is expected to begin on the largest project of this administration: the modernization of Pemex's Lázaro Cárdenas refinery in Minatitlán, Veracruz. The work is expected to take four years to complete and to cost more than 1.6 billion dollars.

The expansion of Minatitlán involves the construction of nine new plants, which will raise the refinery's capacity to process crude from its current level of 200,000 barrels to 350,000 barrels a day. Gasoline production from Minatitlán will increase from 57,000 to 150,000 barrels a day.


RAILROAD MERGER

Trade between Mexico and the U.S. reached 232 billion dollars in 2002, most of it moving by overland routes. In an effort to streamline rail transport between the two countries, the merger of three railroad companies has been proposed to form a new entity to be known as Nafta Rail, which would control rail routes from Omaha (Nebraska) to the Pacific coast port of Lázaro Cárdenas (Michoacán).

Besides Transportación Ferroviaria Mexicana, a subsidiary of Transportación Marítima Mexicana, the other two firms, both based in the U.S., are Kansas City Southern Industries and Texas Mexican Railway. The merger is still subject to regulatory approval in both countries, but is not expected to meet any opposition. Analysts estimate that Nafta Rail would have annual sales of around 1.25 billion dollars.


3M CHOOSES MEXICO

3M has decided to focus on Mexico as its major manufacturing location to supply markets around the world. The firm has invested 30 million dollars in constructing 2 plants in San Luis Potosí, with the bulk of production destined for the U.S. market. 3M makes more than 3000 products ranging from chemicals and fiber optics to auto paint and medical tape. It is soon to begin building a major research laboratory in Mexico.


ENRICHED MILK

The North American division (including Mexico) of Parmalat, the Italian food giant, is responsible for about 35% of the firm's annual 8 billion dollars in sales worldwide. The latest product to emerge from its dairy plant in Lagos de Moreno, in the state of Jalisco, is Lactium MX, milk enriched with iron, zinc, vitamin C and folic acid.

This enriched milk is Parmalat's response to the findings of a national nutrition survey, carried out by the National Institute of Public Health, that the prevalence of anaemia in children aged 5 to 11 was close to 20%. Iron deficiency was also recognized in 85% of children aged less than 11 years old and in 70% of the female population.

The study showed that iron deficiency was common in all social classes and in both urban and rural environments. Lactium MX has amino acid chelated iron which is easily absorbed by the body. It is also low-fat, since the survey revealed that 50% of women and 30% of children were overweight.


HIGHER QUALITY WORKMANSHIP

According to the 2003 Initial Quality Study undertaken by market research firm JD Power and Associates, vehicles made in Mexico have fewer defects than those made in the U.S. The study has been conducted annually for the past 17 years and provides an important benchmark for the automotive sector.

The IQ (Initial Quality) of vehicles made in Mexico for export to the U.S. has improved by 35% during the past 5 years, considerably more than the 19% improvement recorded for U.S. automakers over the same period. According to the study, vehicles made in the U.S. last year registered an average IQ of 138 problems for every 100 vehicles manufactured, compared with 135 problems per 100 vehicles in Mexico.

Among the top plants in the study were the General Motors plant in Silao, where the Cadillac Escalade EXT, Chevrolet Avalanche, Suburban and GMC Yukon XL are made (IQ: 121), the Daimler Chrysler plant in Saltillo, in Coahuila, where Dodge Ram Heavy-Duty pick-up trucks are manufactured (IQ: 127), and the plant producing the Chrysler PT cruiser in Toluca, in the state of Mexico, (IQ: 131). The study is based on interviews with more than 52,000 people conducted 90 days after they took possession of their vehicles.


WALDO'S MART INVESTS IN MEXICO

Not to be confused with Mexico's largest retailer, Wal-Mart, Waldo's Mart, which began operating in Mexico in 2001, is investing 12 million dollars to open an additional 20 stores across the north and center of the country. Currently, it has stores in the many northern cities including Monterrey, Nuevo Laredo, Tijuana, Ensenada, Rosarito, Mexicali and Tecate.

Waldo's Mart is a "single price retailer" or "dollar store" operator. Its stores stock a wide variety of household merchandise, 90% of which is sold for a fixed price: 11 pesos.


LISTEN TO A GURU

Attendees at this year's Expo Management, an annual business congress in Mexico City, will have the chance to listen to some of this generation's most influential business gurus.

They include Alvin Toffler (author of "Future Shock"), who is credited with having given Ted Turner the inspiration for launching CNN. Gary Hamel (founder of the consulting firm Strategos), whose famous quotes include, "The Internet is the friend of companies making products that are truly unique and different", will also be present, together with Scott Bedbury (the man behind Michael Jordan and Nike's "Just do it!" campaign) and Kevin Clancy (founder of Copernicus Marketing) who believes that marketing is far more important to the success of a business than either finances or operations.

The event takes place June 4-6 at the Hipódromo de las Américas. Up to 5,000 top executives will pay 1,800 dollars each to attend.





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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