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Lloyd Mexico Economic Report - January 2000

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The upcoming federal elections to be held on July 2 will be one of the major factors influencing the economy this year. Most of the current administration's 1999 economic targets were met or exceeded, largely as a result of unexpectedly favorable oil prices during the second half of last year. This was the first time for several years that an administration's stated goals had not proved to be overly optimistic. The year-2001 budget contains no surprises. It sets goals of 5% growth in GDP, 10% inflation, an exchange rate of around 10 pesos to the dollar and a current account deficit of less than 2.6 billion dollars.

The Zedillo administration's conservative approach to economic policy has helped increase Zedillo's popularity as president from 31% five years ago to 67% as he nears the end of his term. His party, the Partido Revolucionario Institucional (PRI), remains very confident of winning this year's elections despite losing its majority in the Chamber of Deputies in 1997. PRI has won every presidential election since its creation in 1929, managing to reinvent itself every time it has faced serious opposition. The holding of the party's first-ever nationwide primary in 1999 to chose its candidate appears to have worked in its favor and the latest opinion polls all show that the PRI candidate, Francisco Labastida Ochoa, is well ahead of his main rivals.

Whatever the eventual outcome of the July elections, most analysts are confident that this year's transition of power will not be accompanied by the economic problems that have plagued several previous changes of administration. The current government announced "economic armor-plating" several months ago, including credit guarantees of some 23 billion dollars from the U.S. and international financial institutions. The plan was praised by World Bank president James Wolfensohn, who stated that Mexico is in very good financial shape and that no end-of-term economic or financial crisis is foreseen.

Several economic issues will remain in the headlines this year. For example, considerable concern has been expressed about the high cost (in excess of 100 billion dollars) of the government's bank bailout program, Fobaproa. Fortunately, however, new capitalization rules now ensure that the banks are in much better shape. Another concern is the weakened purchasing power of wages. According to the Center of Analysis and Projections for Mexico (CAPEM), median salaries, adjusted for inflation, have lost 36% of their buying power since 1980 and the minimum wage has lost nearly 70% of its value over the same period. And perhaps the most significant single trend at the start of the new millennium must be the anticipated boom in Electronic (E-)business. By 2003, E-business in the U.S. is expected to reach 1.3 trillion dollars, with more than 70% of major companies using the web as a sales channel. In Mexico, too, the advent of large-scale E-business will change the way in which many businesses are managed. Optimism in telecommunications and technology stocks helped push the IPC, the main index of the Mexican Stock Exchange, to record levels in early December, by which time the IPC was 69.67% higher than at the start of last year.


Two years after the introduction of Afores, or Retirement Funds, it is worth taking stock of their progress. Combined, the Afores now administer about 16.8 billion dollars. This year, they are expected to receive an additional 6.3 billion dollars. Over the first two years, the Afores averaged a 9.9% return after taking inflation into account, well above the rates for bank deposits. RELATED NEWS Citibank is buying an additional 51% of Afore Garante for 179.01 million dollars to bring its total holding to 91%. The remaining 9% is held by the Chilean pension fund Habitat Desarrollo.


The European Union (EU) and Mexico have agreed an ambitious free trade agreement. The final details were ironed out in talks held in Brussels between European Trade Commissioner Pascal Lamy and Mexican Trade Secretary Herminio Blanco. The agreement, covering industrial and agricultural goods, services, public procurement, investment and rules on competition and intellectual property, is expected to come into effect during the second half of the year. Under the agreement, all Mexican industrial exports will enter the EU duty-free by 2003. Mexican tariffs on EU industrial goods, currently as high as 20%, will fall to a maximum of 5% in 2003 and be eliminated by 2007.


The two largest pig farming operations in Mexico, both based in the northern state of Sonora, are now controlled by U.S. firms. In early 1999, Farmland Industries Inc, a farmers' co-operative based in Kansas City, Missouri, bought a 50% share in Grupo Kowi. Later in the year, Smithfield Foods Inc. acquired Grupo Alpro for 22 million dollars. Pork consumption rose 30% in Mexico during the nineties, and is expected to continue rising for many years, as both population and family incomes increase. According to Adriana Martínez, a researcher with Pig Improvement Co., only 40% of Mexican pig farmers use modern techniques.

However, this is perhaps not surprising given that an estimated 30% of pork production comes from domestic smallholdings which raise only one or two pigs a year. But it does make Mexican pork relatively expensive to produce - around 52 U.S. cents per pound, compared with 32 cents a pound in the U.S.. Since the implementation of NAFTA in 1994, U.S. firms have almost doubled their exports of pork to Mexico, to more than 130,000 tons a year. In the longer term, both Smithfield and Farmland are likely to be more focussed on taking advantage of the favorable land and labor costs in Mexico to increase their exports to the U.S., than they are on supplying just the domestic market.


New York Life Inc. is buying Seguros Monterrey Aetna and Fianzas Monterrey Aetna for 570 million dollars. Both companies were formerly owned by Aetna International (49%) and Grupo Financiero Bancomer, Mexico's second-largest financial services group (51%). Seguros Monterrey Aetna, based in Mexico City, is the third largest insurer in Mexico with combined premiums totalling 400 million dollars, 8.1% of the total market. It accounts for 23% of the current market for life insurance, a market worth less than 1% of GDP in total. Fianzas Monterrey Aetna is the Republic's second largest bonding and surety company.

The deal is expected to close in the first quarter of 2000. Bancomer will use the proceeds from the sale as part of a plan to significantly increase its capitalization. New York Life sees tremendous potential in the growing market for life insurance among the 20 to 55-year-old age bracket. Another large insurance company, Aseguradora Hidalgo, at present owned by the federal government, is also likely to be sold in the next few months.


Even before final figures are released, it seems as if 1999 is likely to have been supermarket chain Grupo Gigante's best ever year for total sales. Last October, its same-store sales increased 6.1%, and total sales increased 11.2%, compared with a year earlier. Gigante operates 188 stores including supermarkets, Toks restaurants and Office Depot stores. It invested 120 million dollars in 1999 in renovating existing stores and plans to invest a further 130 million dollars this year to the same end. It also has one store operating in Los Angeles, with 5 more planned for this year. The U.S. potential is considered enormous given that between 4 and 5 million Mexicans reside in the Greater Los Angeles area. Expansion in Mexico will include 50 Office Depots, bringing the total to 94 by year-end.


Tourism is vitally important to the national economy, responsible for 8.2% of the GDP. More than 1.7 million workers are directly employed in the "smokeless" industry, and a further 4.5 million depend indirectly on the activity. This year, some 20 million visitors, 80% of them from the U.S., are expected to spend 8 billion dollars here. Many will stay in new hotels. Grupo Posadas, Mexico's giant hotel chain (60 hotels; 12,000 rooms), invested 200 million dollars last year in opening 12 new hotels, including a 150-room Fiesta Americana in Cholula, a few kilometers west of the city of Puebla. Among hotels operated by Posadas are Fiesta Americanas as well as Fiesta Inns and Caesar Parks.

Some tourists will also be able to enjoy a new domestic cruise-ship route. The Tourism Secretary has announced that a weekly 600-passenger cruise has begun sailing from the island of Cozumel via the port of Calika, near Cancún, to the port of Progreso in the state of Yucatan. The 7-day cruise, operated by a subsidiary of Transportadora Marítima Mexicana, is designed to attract both national and international visitors.


According to recent figures from the Mexican Auto Industry Association, Volkswagen holds first place for automotive sales, with 26% of the market, ahead of General Motors and Chrysler. Volkswagen is also the premier exporter, having shipped 312,557 units, mainly to the U.S., during the first eleven months of last year. Rather than open a second plant in Mexico to meet the strong demand for its models, Volkswagen has decided to build a 1-billion-dollar expansion to its plant in Puebla which will increase production capacity there by 200,000 vehicles a year. RELATED NEWS French auto-maker Renault is re-entering Mexico after a 13 year absence. Together with its Japanese partner, Nissan, Renault is to use two underused Nissan factories (in Cuernavaca and Aguascalientes) to produce its Megane Scenic minivan, Clio compact and Scenic sports utility vehicle. The investment involved is worth about 400 million dollars over 7 years and Renault expects the plants to be running at full capacity by 2003.


Hyundai Motor Company, the South Korean vehicle manufacturer, is building a passenger bus assembly plant in Ciudad Serdán, in the state of Puebla. The 700-million-dollar plant will employ 1500 workers. Hyundai already has vehicle assembly and development plants in 10 countries including South Korea. Germany, Japan and the U.S..


McDonalds plans to double its number of restaurants in Mexico by the end of 2002, investing 262 million dollars in 175 new establishments, half of them located in Mexico City. The firm, which has 170 restaurants at present and claims to supply 35% of the market for fast-food hamburgers, plans to open a further 35 restaurants this year, 60 next year and an additional 80 in 2002. On average, each additional McDonalds will employ 65 workers.


Pegaso, which currently provides mobile wireless phone service to 30,000 subscribers in Tijuana, Monterrey and Guadalajara, plans to invest 1.3 billion dollars over the next 5 years to provide local wireless telephone service in Mexico City. It is estimated that sometime in the middle of this year the number of mobile phones in Mexico will reach 11 million, overtaking the number of fixed conventional phones for the first time.


The Plastics Industry Association (Anipac) has called for the government to make natural gas prices more competitive in order to promote greater investment in domestic secondary-level petrochemical production and curb the annual 10% growth in foreign imports. Anipac President, Juan Manuel Alvarez Icaza, said that investment in processing plants would enable oil and gas to be transformed into primary inputs for the plastics industry such as butane, ethylene and propane. Last year, Mexico exported 212,000 metric tons of plastics and 647,000 metric tons of resins, but had to import 535,000 metric tons of plastics and 1,125,000 metric tons of resin, at a net cost of 1.2 billion dollars.

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

© 1999 Operadora de Fondos Lloyd, S.A.
© 1999 Allen W. Lloyd, S.A. de C.V.

Published or Updated on: July 20, 2006
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