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Lloyd Mexico Economic Report - February 1999

Back Issues:
1999 - January

1998 - January - March - April - May - June - July - August - September - October - November - December

CONTENTS:

 

PIPELINE TO GUATEMALA

Last month, Mexico and Guatemala agreed on the details of a 125-mile, 320-million-dollar gas pipeline linking the two countries. The pipeline will begin in southeastern Mexico and carry gas through the states of Oaxaca and Chiapas before it crosses the border into Guatemala. To be built and operated by private companies, the pipeline could be in full operation within three years and become the first step in a Central American pipeline to Honduras and El Salvador. Companies reported to be interested in building the new pipeline include Shell, ICA, Williams Companies and Argentina's Compañía General de Combustibles.

FEWER STRIKES

There were only 33 official strikes in Mexico last year, down from 38 in 1997. The Labor Secretariat attributes the 13.2% fall to improved communication between managers and workers but, in its annual report, also points out that real wages cannot increase substantially until the country achieves sustained economic growth rates of more than 5% a year. According to the Secretariat, 845,000 jobs were created last year; 80% of these jobs paid less than 5 dollars a day (equivalent to 1.5 times the minimum wage) with the strongest demand coming in the services, construction and food and beverage industries. National Statistics Institute (INEGI) figures for December 1998 show that Mexico had 33.8 million registered employees with 83.2% of them earning less than 10 dollars a day.

TOURISM SURPASSES OIL

The volatility of international oil prices looks certain to diminish the revenue from crude exports this year. As a result, two other sources of dollars - remittances (the dollars sent home by Mexicans living and working in the U.S.) and tourism - will assume even more significance than previously. The total value of all remittances each year is estimated to exceed 5 billion dollars and tourism is even more important. According to the Tourism Secretariat, Sectur, Mexico's 20 million international visitors last year brought in more than 8 billion dollars, or substantially more the value of oil exports. Total tourism sales, both national and international, were worth 30 billion dollars, equivalent to 8.2% of GDP. At the end of 1998, Mexico's foreign reserves hit an all-time high of 30.14 billion dollars.

MORE SAVING REQUIRED

One of the central tenets of this administration's economic policy has been to try and encourage an increased rate of domestic savings, which would help make the Mexican economy more self-reliant. Some success has been achieved, but perhaps not enough. Back in 1994, domestic savings (the sum of corporate, individual and government savings) were valued at only just over 14% of GDP.

By the end of 1997, savings were worth 24.6% of GDP but unfortunately, this trend has now reversed and savings through the first nine months of 1998 were worth only 18.1% of GDP, according to figures released by INEGI. Boosting internal savings probably requires both an extensive tax reform and the creation of savings products offering a higher rate of return. Few of the products currently on offer enable small investors to keep pace with the rate of inflation, hence there is little incentive for people to save their money rather than spend it. The Bank of Mexico (Banxico) reported that 1998 inflation totalled 18.6% and has set a target of 12.8% for this year. This target is widely seen in the private sector as being overly optimistic with most analysts predicting a rate close to 17%. In a recent speech, President Ernesto Zedillo emphasized that inflation control is the government's first economic priority this year.

SALINA CRUZ STEEL PLANT

A press release issued by Grupo Acerero del Norte (GAN) provides details of GAN's massive new iron and steel project in the isthmus of Tehuantepec in the southern state of Oaxaca. The project is viewed as an economic catalyst for an area which for decades has been one of the country's poorest. GAN's project could generate 4,500 jobs directly and up to 20,000 indirectly. Initial tests prove that the main ore body in the Sola de Vega mining district, located in the municipality of Santa María Zaniza, contains more than 200 million metric tons of ore with an average iron content of 55%. GAN plans to mine 10 million tons of ore a year from an open-cast pit and then transport the ore almost 400 kilometers by pipeline to a state-of-the-art iron and steel works at Salina Cruz on the Pacific coast. The plant, scheduled to commence operations in April 2001, will produce 4.2 million tons of sponge-iron a year, most of which will be converted into sheet steel.

PAINT MERGERS

The paint market has three distinct segments: decorative or domestic (65% of total sales), industrial (28%) and auto painting and detailing (7%). The main suppliers of decorative paint are such large firms as Comex (45% of the market for decorative paint, 2100 outlets), Sherwin Williams and ICI. Even so, most of the 200 or so paint manufacturers in Mexico are small or medium-sized companies, though this pattern is now changing, in line with what appears to be an unstoppable worldwide trend towards fewer, larger paint manufacturers. In the industrial paint sector, Comex has already merged with Azko Nobel and in the auto-detailing sector, Herberts (the paint division of Hoechst AG) is being acquired by Du Pont. Herberts and Du Pont operate two factories each near Mexico City and two in Monterrey.

Du Pont-Herberts will become the world's fourth largest paint manufacturer (after Sherwin Williams, Azko and ICI) and will dominate the auto paint sector with total annual sales in excess of 3.5 billion dollars. Given that the annual per capita consumption of paint in Mexico is only 3.9 liters, compared with 18.6 liters in the U.S., the long-term prospects for paint companies that succeed in staying in the market look good.

TELEPHONE CODES CHANGE

New long distance access codes came into effect last month, bringing Mexico in line with many other countries by requiring callers to dial 01, instead of 91 for access to the national long distance system, 001 instead of 95 for access to USA and Canada and 00 instead of 98 for international network. New 3-digit numbers are in use for special services like directory inquiries, operator assistance and emergency services. Between now and the end of the year, all local phone numbers will have 7 digits, except for those in Mexico City, Monterrey and Guadalajara which will have 8. In most cases, this change will be effected by beginning the new number with the former long distance code for the city. For example, all existing Mexico City numbers will begin with 5 and all Guadalajara numbers with 3. At the same time, the number of local billing areas will be reduced from 1,500 to 419, making many calls which are currently billed as long distance less costly.

AVANTEL PHONE NETWORK

Once Avantel, the telephone joint venture owned by Grupo Financiero Banamex-Accival and MCI WorldCom, has been granted the relevant concession by federal authorities, it plans to invest more than 300 million dollars over an 18-month period to develop a local network to complement its existing long distance system. Owning its own local network would enable Avantel to forego the high interconnection fees, which last year amounted to 200 million dollars, that it now pays Teléfonos de Mexico, Telmex.

NEW VACATION PLAN

Three major resort companies, Grupo Posadas, Resort Condominiums International (RCI) and Hilton Grand Vacations Company have agreed to combine their strengths and make vacation property ownership plans more flexible. RCI, which has 3,277 affiliated time-share developments in 90 countries, is the world's largest resort property exchange program, responsible for more than 1.8 million vacation exchanges in 1997, four times as many as any of its competitors. Grupo Posadas, one of the fastest growing hotel groups in Latin America, operates 55 hotels in Mexico, the U.S. (Caesar Park) and Central and South America. The new venture, to be known as Fiesta Americana Vacation Club will allow its members to redeem their vacation exchange points not only at any RCI location but also at any Grupo Posadas hotel or Hilton Grand Vacations Club.

CANCUN TO GET MORE POWER

A joint venture called Energía de Quintana Roo has been given the official go-ahead to build and operate a 42.7-megawatt diesel-fueled power station in the Puerto Morelos industrial corridor near the resort city of Cancún. The venture's partners are Wartsila Diesel (Finland) which will be responsible for finance and construction, Greco Maya, Desarrollos Hidráulicos de Cancún and the local municipal government of Benito Juárez. Once the 34-million-dollar project is complete, more than 100 Cancún hotels will also become partners in the power plant, whose output will be exclusively used to supply their power needs.

FROM CANDY TO CAULIFLOWER

Against the general flow of imports of candy to satisfy Mexican sweet tooths, Grupo Montes, a candy manufacturer based in Jalisco, has been increasing its exports. One-third of its annual production of 12,000 metric tons is now sold outside the country, mainly in the U.S.. This year the company plans to diversify into greenhouse-based production of artichokes, cauliflower, broccoli and strawberries. Montes is no newcomer to farming; its goat and cattle herds already supply the 40,000 liters of milk a day needed for its candy.

MEDIA CONCESSIONS

Some media analysts are predicting that major changes to the Federal Radio and Television Law (Ley Federal de Radio y Televisión) will be debated in Congress later this year. The opposition-controlled Congress would like to reduce the strength of the connections between the ruling party, PRI (Partido Revolucionario Institucional), and the media. The need for debate is made more urgent by the fact that about 700 concessions for radio and television wavelengths (out of a total approaching 2000) come up for renewal in the next two years. However, other commentators are arguing that rather than opening a potentially heated debate on the subject right now, it would be preferable to grant all concessions an automatic 4-year renewal and postpone discussion of modifications to the Radio and Television Law until after next year's federal elections.

PLEXCO INVESTS IN QUERETARO

Plexco, a subsidiary of Chevron, the U.S. oil giant, is building a 25-million-dollar plant in the city of Querétaro to manufacture pipes and tubes used for the distribution of natural gas, for water systems and for protecting fiber optic telephone cables. The company anticipates that 70% of the plant's initial annual production of 10,000 tons will be used in the domestic market and that the remaining 30% will be exported to Central and South America.

HOUSING IN XOCHIMILCO

An ambitious new urban development project has been proposed for part of the Xochimilco district on the southern edge of Mexico City. The plan, entitled "Santa Cecilia Ecological Project" entails a total of 2,400 low-density homes on an area of 700 hectares, along with four 250-room hotels, a 1,500-person convention center, golf course, horsemanship club and museum.

MOLDING ACQUISITION

Universal Forest Products (U.S. providers of structural lumber, DIY products and specialty wood packaging) has announced that its Mexican subsidiary, based near the city of Toluca, has acquired 45% of a Durango-based company, Pino Exporta. Pino Exporta (1997 sales: 25 million dollars) manufactures door and window moldings, exporting 90% of its production. The acquisition will enable both companies to reduce raw material lumber costs through joint purchasing.

HIGHWAY UPKEEP

The responsibility for the operation and maintenance of more than 20,000 kilometers of federal highways has been transferred from the federal Communications and Transportation Secretariat, SCT, to state governments. The SCT remains responsible for the 15,656 kilometers of highway which comprise the ten principal trunk routes across the country.

Mirrored with permission from Lloyd S.A. de C.V.
See their Page on Mexico Connect.

© 1996 Operadora de Fondos Lloyd, S.A.
© 1996 Allen W. Lloyd, S.A. de C.V.

Published or Updated on: July 20, 1999
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