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Lloyd Mexico Economic Report April 2002

Table of Contents

NATIONAL INFRASTRUCTURE COMMISSION
RECORD FOREIGN RESERVES
A NEW FIRST: DEFLATION
REDUCED GASOLINE IMPORTS
RELATED NEWS
CLEAN AIR IN MEXICO CITY
STARBUCKS ENTERING MEXICO
BILLIONAIRES
MORE TRADE FAIR OPTIONS
SERIOUS SHORTAGE OF AGAVE
POLITICAL PARTIES ELECT LEADERS
NEW BANK SETTLEMENT SYSTEM
AIRCRAFT TURBINES AND ENGINES
NATIONAL WATER PLAN
WALMEX PROFITS UP

NATIONAL INFRASTRUCTURE COMMISSION

A National Infrastructure Commission has begun work on coordinating, promoting and prioritizing long-term infrastructure development projects. The ten-member commission is headed by Eduardo Sojo, the federal government’s coordinator of public policy, and includes both government representatives and leaders of private sector groups such as the National Chamber of the Construction Industry.

The Chamber (which has more than 8000 members) estimates that 33 billion dollars is needed annually for investments in basic infrastructure (energy, water, environment, communications), together with a further 19 billion dollars a year for housing, health, education and tourist infrastructure. Highway improvement will be one of the Commission’s priorities.

The federal Communications and Transportation Secretariat, SCT, says that the nation’s road system needs more than 4.4 billion dollars spending on it over the next four years, to modernize the 19,000 kilometers of 14 major trunk routes, to construct an additional 7,400 kilometers of high-speed highway and to repair the 34,600 kilometers of inter-state highways presently in poor condition.


RECORD FOREIGN RESERVES

As of February 22, Mexico’s foreign reserves totaled 41.986 billion dollars, a new record, 15% more than a year previously. Interest rates on government treasury certificates (Certificados de la Tesorería de la Federación or Cetes) continue to decline. By the beginning of March, the rate on 28 day Cetes had fallen to 6.97%, while that of 91 day Cetes had dropped to 7.19%.

While the value of government bonds held by foreigners declined by 10.21% in January, compared with the previous month, foreign investment in the Mexican Stock Market (Bolsa Mexicana de Valores) reached 62.814 billion dollars, 14.33% more than during December 2001.


A NEW FIRST: DEFLATION

The consumer price index actually fell by 0.06% during February, mainly due to a 15% drop in the price of fruit and vegetables. This is the first time ever that negative inflation (deflation) has been officially registered in Mexico. The fall in fruit and vegetable prices was due to unexpectedly abundant harvests.

The consumer index rose slightly in some cities, including Fresnillo, Guadalajara and Tampico, but fell in most others including San Luis Potosí and Mexico City. The central bank hopes to keep inflation below 4.5% for 2002 and to 3.0% for 2003, bringing the rates closely in line with U.S. and Canadian rates.


REDUCED GASOLINE IMPORTS

Petroleos Mexicanos, Pemex, is investing more than 2.3 billion dollars in upgrading and expanding existing refineries. By reconfiguring refineries in Madero, Tula and Salamanca, Pemex plans to increase the quantity of crude oil being refined from 1.3 million barrels a day to 1.5 million barrels a day by the end of next year. While this increase in output will be barely sufficient to keep up with the ever-rising demand for gasoline, it should enable the nation to reduce its petroleum imports, which currently supply about 17% (by volume) of total domestic demand for refined petroleum products at an annual cost of 1.52 billion dollars.

RELATED NEWS

Members of the Mexican Association of Service Station Providers and holders of Pemex franchises are holding a three-day trade fair, Expogas 2002, later this month in Monterrey. Figures from the Energy Secretariat and Pemex show that there are currently about 5100 gas stations nationwide, employing about 250,000 people. A further 700 stations are currently under construction.


CLEAN AIR IN MEXICO CITY

Federal and state authorities and the Mexico City Environmental Commission have announced that 12 billion dollars will be allocated to the latest program to improve Mexico City’s air quality. The Program to Improve Air Quality (Proaire) 2002-2010 contains 89 separate points and places a new emphasis on citizen participation. It calls for emissions inspections of many smaller industrial establishments like laundromats and for the promotion of alternative energy sources and the introduction of zero-emission vehicles for public transportation.

For its part, Petroleos Mexicanos, Pemex, has pledged to reduce the sulfur content of domestic gasolines by 75% within 4 years. The scientists responsible for the plan include Mexico’s top chemist Mario Molina. Molina won the Nobel Prize in 1995 for his work on the problems caused by the build-up of chlorofluorocarbons (CFCs) in the lower atmosphere.


STARBUCKS ENTERING MEXICO

A joint venture between Seattle-based Starbucks Coffee International (20%) and Alsea (80%) will bring Starbucks coffee houses to Mexico. The group’s first Starbucks will be opening in Mexico City later this year. If all goes according to plan, the group will have more than 200 outlets around the country by 2010. Alsea is an operator of fast-food franchises, including Domino’s Pizza.


BILLIONAIRES

According to the annual Forbes magazine list of the world’s 500 richest people, the 12 wealthiest Mexicans at the end of last year had a combined fortune of 31.6 billion dollars. The Mexican contingent is headed by Carlos Slim Helú, the owner of Telmex. His 11.5 billion dollars makes him the richest person in Latin America and the 17th richest person in the world. Hard on Slim’s heels are Jerónimo Arango (Wal-Mart de México), Lorenzo Zambrano (Cemex) and Eugenio Garza Laguera (Coca-Cola Femsa).


MORE TRADE FAIR OPTIONS

Several cities have outstanding facilities for trade fairs and exhibitions and the popularity of Mexican venues for major business events has soared over the past decade. Last year, the country played host to more than 350 trade fairs and 300 exhibitions.

Facilities in the nation’s largest cities are continually being upgraded. Earlier this year, in Mexico City, Corporación Interamericana de Entretenimiento (CIE) opened a new 100-million-dollar exhibition center, the Centro de Exposiciones Las Américas. The center’s display area, all on a single floor, is 21,000 square meters, with the potential for expansion to more than 32,000 square meters. By way of comparison, the World Trade Center, also in Mexico City, has only 12,800 meters on a single floor, or a total of 25,000 meters on several different floors.

CIE expects the Las Américas center to capture more than 40% of all trade show revenues in Mexico City. The city of Guadalajara’s major exhibition center, Expo Guadalajara, currently has 26,000 square meters of exhibition space and a further 2,197 square meters of meeting room space. Already some shows, such as the annual international furniture show, Expo Mueble International, have too many exhibitors for the space available, leading the owners of Expo Guadalajara to consider plans for an expansion to 74,500 square meters.


SERIOUS SHORTAGE OF AGAVE

According to figures from the Tequila Regulatory Council (Consejo Regulador de Tequila), the production of tequila fell by 20% last year to about 156 million liters (41.2 million gallons). Tequila is made by distilling the juice of the blue agave and the fall in production is blamed on a drastic shortage of agave.

The cultivation of agave plants, which take up to 10 years to mature, has singularly failed to keep pace with the increased demand generated during the “tequila boom” of recent years, though the forecast agave production for this year, 650,000 tons, is 12% more than last year.

One effect of the agave shortage has been that the percentage of the total tequila production that is 100%-agave tequila has shrunk as many smaller tequila companies either close down or begin making “mixed tequilas” (51% agave and 49% other sugars). Only 8% of the 6.2 million liters exported last year corresponded to 100%-agave tequila. The four largest tequila makers - Cuervo, Sauza, Herradura and Cazadores - account for more than 50% of the total market.

As part of the industry’s effort to overcome the challenges posed by agave shortages, Sauza has announced that National University (UNAM) researchers will undertake a 7.1 million dollar research project aimed at improving the quality of the blue agave and reduce the incidence of disease.


POLITICAL PARTIES ELECT LEADERS

Both leading political parties recently held internal elections for party president. The new president of the Institutional Revolutionary Party (PRI) is Roberto Madrazo, a former governor of the state of Tabasco, who is widely considered to be a likely PRI candidate in the next (2006) election for federal President.

Meanwhile, President Vicente Fox's National Action Party (PAN) has re-elected Luis Felipe Bravo Mena for a further four-year term. Both parties are focusing on next year’s mid-term congressional elections. While the PRI currently controls both the Chamber of Deputies and the Senate, the PAN would love to gain enough seats to guarantee support for President Fox’s proposed policy reforms.


NEW BANK SETTLEMENT SYSTEM

Bankers are confident that the recent modernization of inter-bank payment systems will bring an end to the long lines characteristic of many banks. A single new electronic Compensation System for all banks replaces the numerous former versions operated manually. The system will facilitate the automatic payment of regular bills such as those for power, telephone, cable TV, club fees, etc.

As electronic fund transfers gain ground, many depositors will find they are able to do much of their banking on-line or via telephone. In addition, employees will no longer need to hold bank accounts at the same institution as their employer, but will be able to enjoy a free choice of bank. Eventually, the avalanche of 2 billion printed slips a year circulating between banks, and estimated to cost an average of 8 pesos per transaction, should be reduced to a trickle.


AIRCRAFT TURBINES AND ENGINES

The Economy Secretary, Luis Ernesto Derbez, believes that the aeronautical industry can play a key role in Mexico’s future industrial development. According to Derbez, Mexico is ideally placed to foster alliances between the few major international companies that manufacture aircraft engines and the myriad of small and medium-sized Mexican manufacturers that can supply suitable components.

Two developments in different parts of the country appear to support Derbez’s viewpoint. In Querétaro, a Spanish company, ITR, is building a factory to make airplane engines and turbines, while, in Merida, Precision Castparts Corporation is investing 125 million dollars over the next 5 years to build a 60,000-square-meter plant, its 53rd worldwide, to make turbine parts for commercial jet engine manufacturers Rolls Royce, Pratt & Whitney and General Electric.


NATIONAL WATER PLAN

The Programa Nacional Hidráulico 2001-2006 considers water a strategic resource and views it as a national security issue. Recognizing that only 7% of national territory has a humid climate and that 56% lies in arid or semi-arid zones, it emphasizes that the principal user of water resources is farming, with 21% of the economically active population dedicated to agricultural activities and with almost 80% of all the water extracted from wells and rivers being used for irrigation.

The Plan lists six major objectives to achieve sustainable water usage by 2025. They include the more efficient use of water in agriculture, principally through better irrigation techniques, the improvement of potable water supplies, drainage and water treatment, the reduction of consumption and contamination in certain specific drainage basins already under stress, and better technology, administration and financing of water related projects.


WALMEX PROFITS UP

Wal-Mart de México (Walmex) continues to go from strength to strength. The company had a record operating profit in 2001, 25% higher than the previous year. Its sales per square meter of floor space improved by 4.7% and its operating costs were equivalent to only 14.6% of sales.

Walmex opened 61 new locations in 2001, bringing its total number of units to 228 supermarkets, 54 department stores and 219 restaurants in 53 cities.

The firm plans to invest 700 million dollars over the next 18 months to open a further 62 units: 7 Sams Clubs, 15 Bodegas Aurrerá, 8 Wal-Mart Supercenters, 6 Superamas, 4 Suburbias and 22 restaurants.

This year already looks like being another excellent year. During the first two months, same-store sales were up 6.1% from the same months a year ago.

 




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.

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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