Lloyd Mexico Economic Report - November 1999
CONTENTS:
- SEVERE FLOODS ALONG GULF COAST
- COFFEE HARVEST
- LOWER TRADE DEFICIT
- BILLION-DOLLAR COPPER DEAL?
- INFLATION CONTINUES DOWNWARD
- BASF CONTINUES TO EXPAND
- MAKE-OVER FOR ACAPULCO
- DIRECT FOREIGN INVESTMENT
- CEMEX EXTENDS GLOBAL EMPIRE
- REVENUE FROM TV ADVERTS
- TAXING THE INFORMAL SECTOR
- ADDITIONAL POWER PROJECTS
- GAS PIPELINE COMPLETED
- NEW RESIDENTIAL PROJECT
- COMPUTER PROGRAM SALES
- POLYESTER PLANT IN QUERETARO
- INVESTMENT NEEDED IN DAIRY PRODUCTS
SEVERE FLOODS ALONG GULF COAST
Severe flooding affected many parts of central and eastern Mexico last month, with the official death toll standing at more than 400 as of press time. The floods, which resulted from weeks of torrential rain which caused dozens of rivers to burst their banks, are Mexico's worst for half a century. The National Water Commission reported that some towns had received an astounding 800 mm (2 feet) of rainfall in just two days - or more than Mexico City normally receives in an entire year. In the aftermath of the flooding, with land communications to numerous communities still cutoff completely as a result of mudslides and landslides, "disaster areas" were declared in several states, including Veracruz, Puebla, Hidalgo, Tabasco and Campeche.
More than 200,000 people have been left homeless and tens of thousands of hectares of cropland have been devastated. The flooding was focussed on an 800-kilometer stretch of coastal lowlands along the Gulf of Mexico between Veracruz and Campeche.
COFFEE HARVEST
Despite the floods, the 1999-2001 coffee harvest is expected to be a good one. Forecasts suggest that a record 6 million bags may be collected, though the quality of the early crop may be reduced on account of excessive humidity.
LOWER TRADE DEFICIT
Mexico had a foreign trade deficit of 405 million dollars during August, bringing the total deficit for the first eight months of the year to 2.669 billion dollars, 42.6% lower than for the same period last year. Exports for the first eight months brought in 86.3 billion dollars while imports totalled 88.969 billion. Exports were at an all-time high, helped by a marked increase in non-petroleum (principally manufactured) exports (30.6% higher than during August 1998) and higher oil prices.
BILLION-DOLLAR COPPER DEAL?
Grupo México has its sights set on acquiring U.S.-based Asarco (American Smelting and Refining) Inc. The Mexican mining and railroad company has offered 1.13 billion dollars for Asarco, surpassing an earlier offer for the corporation by Phelps Dodge Corp. The acquisition would turn Grupo México into the world's fourth-largest copper producer. There is a certain irony to the purchase since Grupo México was formerly Asarco Mexicana, Asarco's Mexican subsidiary.
INFLATION CONTINUES DOWNWARD
The nation's central bank, Banxico, has reported that inflation is continuing on its downward trend. The consumer price index rose by 0.97% during September, bringing the accumulated inflation for this year to 9.53%. Among the 46 cities sampled for the index, prices rose most in Oaxaca, Tapachula and Chihuahua and least in Mexicali, Culiacán, Tepic and Cordóba.
BASF CONTINUES TO EXPAND
Basf Mexicana (annual sales: 500 million dollars), which already operates five chemical plants in the country, plans to open a 20- million-dollar plant for chemical colorants in the Gulf port of Altamira in the second half of 2000. Most of the plant's production (annual capacity: 12,500 metric tons) will be destined for the North American market.
Basf, a subsidiary of German chemical manufacturer Basf Ag, has invested more than 300 million dollars in Altamira during the present decade in plants for polypropylene and estyrene co-polymers. Altamira has become an important growth pole for the chemical, petrochemical and textile industries, attracting investments worth more than 1 billion dollars in the last two years.
MAKE-OVER FOR ACAPULCO
A new wave of optimism has emerged in Acapulco, "the Pearl of the Pacific", in the two years that have passed since the tourist resort found itself in the path of Hurricane Pauline in October 1997. Prior to Pauline, Acapulco's tourism fortunes had already seemed to be declining.
As the city had grown to its present population of around 1 million, many of the international visitors who had been an important part of Acapulco's rise to fame during the 1950s and 1960s, now preferred to vacation in the newer, planned resorts like Ixtapa and Cancún. Between 1986 and 1997, the city suffered a 37% drop in foreign visitors, with a corresponding decline in overseas flights from 2,577 a year to just 1,430. Acapulco remained, however, an ever-popular destination for national tourists, principally because of its proximity to Mexico City.
Since Hurricane Pauline, which caused extensive damage to the sprawling residential districts which had accompanied Acapulco's rapid growth, the city is determined to capitalize once more on its beautiful tropical setting, lively night life and numerous local tourist attractions. A bevy of hotel renovations and infrastructure improvements ranging from new roads to sewage treatment plants for cleaning up the bay are under way. Over the next two years, investments totalling 1.2 billion dollars should restore some of the polish to one of Mexico's finest resorts.
DIRECT FOREIGN INVESTMENT
Direct foreign investment totalled 5.468 billion dollars in the first half of the year. Of this amount 2.867 billion dollars (68%) was from the U.S. and Canada and 1.057 billion from European countries, led by Holland and the U.K. Only 92.8 million dollars came from Japan, though this figure masks the fact that many Japanese investments are channeled via the U.S. in order to benefit from NAFTA rules of origin.
About one third (31.4%) of direct foreign investment was destined for companies based in Mexico City with a further 12.8% going to the state of Nuevo León. Other states attracting significant foreign investment were Baja California (9.9%), Chihuahua (5.5%), Jalisco, Morelos and Coahuila.
CEMEX EXTENDS GLOBAL EMPIRE
Cemex, the giant cement manufacturer, continues to expand by purchasing overseas cement companies. Already the third largest cement producer in the world, Cemex is making plans to buy firms in India and Tunisia. Cemex is Mexico's most global corporation, with a strong presence in markets as diverse as the U.S., Spain, Columbia, Venezuela, Panama, Chile, Philippines, Indonesia and Egypt. In Mexico City, a state-of-the-art interactive ordering system now enables the company to process 98% of all orders within 24 hours.
REVENUE FROM TV ADVERTS
Televisa, the TV giant of the Spanish-speaking world, is hiking its advertising rates some 40% next year and anticipates advertising revenues in excess of 1 billion dollars, some 16% more in real terms, having taken inflation into account, than the likely figure for 1999. Thinking of running a TV campaign? Each minute of prime-time (7:00 to 9:00 pm) advertising will cost about 42,000 dollars during the first quarter of the year 2000, a figure which will rise in quarterly increments to more than 50,000 dollars by year-end.
TAXING THE INFORMAL SECTOR
The Servicio de Administración Tributaria (SAT), Mexico's equivalent of the Internal Revenue Service, has announced an ambitious National Program to Regularize the Informal Economy. In the first stages, the program will focus on five major cities including Mexico City, Guadalajara and Monterrey. SAT believes that simplified tax rules and a nationwide educational campaign stressing the virtues of paying taxes will increase government tax revenues by more than two percentage points of GDP (Gross Domestic Product) in five years.
In 1998, government income from taxes (excluding taxes paid by state oil monopoly Pemex) was equivalent to 10.7% of GDP, well below the comparable figures of 17% in Chile, or almost 21% in the U.S. It is believed that about one-third of potential VAT tax currently goes uncollected as a result of businesses operating without formal invoices or sales receipts.
ADDITIONAL POWER PROJECTS
The Federal Electricity Commission, CFE, reports that power generation projects currently in progress will, when completed, add 10,500 megawatts to the nation's installed capacity. Demand for power is growing 6% a year and the projects form part of CFE's 6-year plan to increase total capacity by more than the anticipated increase in future demand. The resulting contingency reserve, equivalent to 27% of capacity, will ensure that future economic growth will not be hindered by any lack of power. The projects are scattered across the country, with 9 already under construction and a further 5 in the final stages of financing. One of the first to come on line will be the 484-megawatt Mérida III plant, already 90% complete. This combined-cycle thermal plant will supply power to the states of Campeche, Yucatán and Quintana Roo.
GAS PIPELINE COMPLETED
Work has finished on a 700-kilometer pipeline for natural gas from Ciudad Pemex, in the state of Tabasco, to new power stations in Campeche and Yucatán, including Mérida III. The 266-million- dollar pipeline was constructed by a consortium of three companies: TransCanada Pipelines (62.5% of the capital), Intergen (32.5%) and Gutsa Construcciones (5%).
The pipeline, the first in Mexico to be operated by the private sector and not by Petróleos Mexicanos (Pemex), should be transporting 370 million cubic feet of gas a day by 2004. In association with Gutsa, TransCanada is now working on a 200-kilometer pipeline in west central Mexico between Salamanca and Aguascalientes. This will supply diverse industries in the states of Guanajuato, Jalisco and Aguascalientes.
NEW RESIDENTIAL PROJECT
One of the most ambitious real estate developments in Latin America is now under way in Huixquilucan, just outside Mexico City. The first 900,000 square meters of the 575-hectare development, known as Bosque Real, were put on the market last month at about 200 dollars a meter. The owner is Consorcio Inmobiliario Lomas, a joint venture of three companies: Frisa, IUSA and Funtanet.
Developers expressing interest in the project include two U.S. firms: Hines and the Colony Group of California. The first phase includes 30 condominium lots (27,000 square meters each) and an 18-hole golf course. Eventually, about 13,000 homes will be constructed, housing an estimated 70,000 people, alongside a 250,000-square-meter commercial center with 250 retail outlets.
COMPUTER PROGRAM SALE
Sales of computer programs reached 519 million dollars in Mexico during 1998 and are expected to grow at 8% a year for the next three years. By 2002, the Business Alliance for Programs believes that sales will exceed 710 million dollars and that the industry will employ 23,000 workers. In related news, Yahoo!, the world's second largest Internet-based company (current market value about 45 billion dollars), is opening offices in Mexico.
The firm sees Mexico as its second most important market in Latin America (after Brazil) for on-line publicity. An ever-increasing number of ISPs (Internet Service Providers) throughout the country should enable the number of Mexicans with Internet access to reach 3 million before the end of 2001.
POLYESTER PLANT IN QUERETARO
KoSa (1998 worldwide sales: 2.8 billion dollars) has opened a new 35-million-dollar polyester thread plant in Querétaro. About 65% of the plant's initial production (16,000 metric tons a year) is destined for the domestic market, with the remainder to be exported throughout Latin America and the Caribbean.
INVESTMENT NEEDED IN DAIRY PRODUCTS
Imports of milk and dairy products from the U.S. are worrying Mexico's milk producers, of which the largest is Grupo Lala (annual sales: 600 million dollars). National firms supply about 50% of domestic demand; most of the remainder is imports of powdered milk. The strength of the peso has helped U.S. exporters gain ground in the lucrative market for fresh milk, cheese and yogurt, estimated to be worth 2.5 billion dollars. Under NAFTA, duties on such imports have fallen from 10% to 4% and disappear completely in 2003.
Decades of low investment in Mexico's dairy industry, partly a response to government-controlled milk prices (a practice abandoned in 1996), mean that most local producers need to modernize. The average milking herd is small, due to legal restrictions on the maximum area of farms and, even today, about 30% of dairy cattle are milked by hand.
Mirrored with permission from Lloyd S.A. de C.V.
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© 1999 Operadora de Fondos Lloyd, S.A.
© 1999 Allen W. Lloyd, S.A. de C.V.