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Lloyd Mexico Economic Report - April 2000

INVESTMENT GRADE GRANTED

Mexico has been awarded investment grade by U.S.-based Moody's Investors Services. Moody's raised the long-term foreign currency rating on Mexican sovereign debt from Ba2 to Baa3. The announcement last month had immediate repercussions on the Mexican Stock Exchange, with the IPC, the market's main index, hitting a new high. Despite the favorable rating, the first time Mexico has ever received investment grade, many economists are preaching caution, emphasizing that Moody's main rival, Standard & Poor's, still holds the country one notch below investment grade and is unlikely to revise its grading upwards until after the July elections.

BANKING CONVENTION

At the 63rd national annual banking convention, entitled "Transition Without Crisis - Political and Financial Stability", held last month in the resort city of Acapulco, most delegates were confident that this year's presidential election will not be accompanied by any economic uncertainty. Both the current President, Ernesto Zedillo, and his federal Finance Secretary, José Angel Gurría, emphasized that recent record-high oil prices, which mean increased revenue for the country, inevitably carry a risk of pushing up global inflation. With higher inflation rates, international interest rates would also rise, a change which might have adverse effects on the national economy.

BANKING MERGERS?

BBV-Probursa, the Mexican subsidiary of Spanish bank Banco Bilbao Vizcaya Argentaria (BBVA), is merging with Grupo Financiero Bancomer, Mexico's second largest bank. BBVA will inject 1.2 billion dollars into the new group and hold 30% percent of its stock. The new bank, to be called BBVA-Bancomer, will have assets of 36.6 billion dollars, a credit portfolio of 25.9 billion dollars and will manage deposits of 26.9 billion dollars, making it by far the largest bank in the country, with about 2000 branches. The merger still has to be approved by the shareholders of both institutions and by regulatory authorities. The Bank of Montreal, which currently holds a 16% stake in Bancomer, will remain a partner in the new group.

Financial analysts believe that the merger may begin a wave of similar mergers in the banking sector over the next year. Four banks are reported to be interested in bidding for Banca Serfin, now being auctioned off by the Bank Deposits Protection Institute (IPAB). IPAB has controlled Serfin, believed to hold around 9% of the total of all bank deposits in Mexico, since last July when the bank was unable to meet new capitalization requirements. The four banks are Grupo Financiero Banamex-Accival, Banco Santander (Spain), HSBC Corp. (U.K.), and Citibank (U.S.). The winning bid is expected to be announced next month.

BUSINESSMEN INVEST

The Mexican Businessmen's Council (Consejo Mexicano de Hombres de Negocios, CMHN), which groups 35 of the largest corporations in the country, has announced that its members plan to make investments worth 8.5 billion dollars this year, 22% more than during 1999.

COMPUTER SALES SOAR

According to Dataquest, a division of Gartner Group Inc., based in Stamford, Connecticut, personal computer shipments in Mexico exceeded 1.4 million units in 1999, 65% more than during 1998. This means that Mexico displaced Brazil as Latin America's leading PC shipper. In the region as a whole, the leading suppliers (with market share in parentheses) were Compaq (22.1%), IBM (8.6%), Acer (6.8%), Hewlett-Packard (5.9%), Alaska (3.8%) and Dell (3.6%). One recent trend evident over the past twelve months is "bundling", in which the purchase of a new computer is linked with the provision of Internet access. The practice has boosted sales; for example, in the quarter following a bundling offer mid-way through last year, shipments of Acer computers rose 110% compared with the previous quarter. Acer recently opened a new 70-million-dollar assembly plant in Ciudad Juárez, which will employ 3,900 workers by the end of this year.

BILLION-EURO BOND

Last month, Mexico placed a 1-billion-Euro (970-million-dollar), 10-year bond on the European market. The issue was the largest placed in Euros by any emerging market country to date, a clear sign of the confidence European investors have in the future of Mexico, according to a Finance Secretariat spokesperson. The new bond, whose placement was handled by Salomon Smith Barney and Credit Suisse First Boston, has an annual interest rate of 7.5%.

CONTROLLING GAS USAGE

The markedly higher international prices for crude oil over the last six months have not had any significant effect on domestic gas prices. When gas prices rose slightly on March 1, the increase was one in a series of small increases which will limit price rises to 10% over the year as a whole. The current prices per liter for unleaded Magna, high octane Premium and Pemex Diesel are about 52 cents, 58 cents and 41 cents (U.S.) respectively. One gas station in the industrial area of Vallejo in Mexico City has established electronic links to the offices of about 100 of its clients, providing them with real-time information about the volumes and types of gasoline products being supplied to clients' fleets of vehicles.

The system, known as Control Card, and developed in 1997 by Luis Díaz Torre, is an attempt to prevent gas-use fraud by drivers working for vehicle fleets. Companies already using Control Card include Estafeta, Gamesa, Sabritas, Sidral Mundet, Coca-Cola and Cervecería Cuauhtémoc. Each company puts its own individual limits on the type and quantity of fuel supplied, paying a 3% surcharge for the system. Preliminary surveys reveal that the companies involved have reduced their gas consumption by an average of 9.5%.

IMSA EXPANDS BY ITSELF

Steel-maker Imsa has withdrawn its offer for rival Ahmsa, first made nine months ago, and will pursue a strategy of independent expansion. Announcing the news, Imsa's president, Eugenio Clariond Reyes, stated that his corporation will invest 148 million dollars over the next two years to double its production capacity. And what will become of Ahmsa? Reports suggest that Spain's largest steel producer, Aceralia, is about to make its own bid for the debt-troubled company.

FREE TRADE WITH ISRAEL

Mexico and Israel have signed an agreement that will eliminate trading tariffs on 99% of all products and services traded between the two countries over a five year period beginning July 1 this year. Mexican exports of vehicles, steel, sugar, orange juice concentrates, coffee, beer and tequila will be among those products afforded immediate tariff-free status. Bilateral trade between the two countries reached 130 million dollars in 1999. The agreement is evidence of continuing efforts to reduce Mexico's dependence on trade with the U.S.

ELECTRONICS INDUSTRY CHANGING

The electronics industry is one manufacturing sector where speed is vital. New products often have an average life-span measured in months rather than years. A recent AP-Dow Jones article describes how these characteristics have led to boom times for electronics manufacturers in Mexico's second city, Guadalajara, aptly described as Mexico's Silicon Valley. Firms in Guadalajara take advantage of their relative proximity to the U.S. to supply the lucrative U.S. market for electronic innovations with greater speed and efficiency than can their main competitors, based in Asia. Many major manufacturers, including Hewlett-Packard and IBM, now contract out much of their production to smaller companies, focussing their own activities on the development of new products and marketing. Many of the newer manufacturers are growing at spectacular rates.

Take, for example, Flextronics, which began operations in Guadalajara in 1997. Its total sales, worth just 12 million dollars during its first eight months of operations, now top 140 million dollars each quarter. Flextronics has purchased 30 hectares of surrounding cornfield in order to triple the size of its plant. Similarly, other electronics companies, like Solectron Corp., Jabil Circuit Inc. and SCI Systems Inc. are hardly household names, yet they manufacture an ever-increasing percentage of many products sold under brand- names like Compaq, Ericsson and Cisco Systems.

In fact, seven of the ten largest contract manufacturers in the world are now established in the city, together with a host of supply plants and ancillary services including rapid air-cargo services handling overnight shipments. Demand for employees has increased to the point where many companies bus workers in from outlying villages, up to an hour's drive away, in order to keep up with their needs. Firms located in Guadalajara benefit from the steady stream of graduates from the city's seven universities and numerous technical schools.

INTERNATIONAL POWER LINK

The National Energy Program anticipates the need for 32 additional power plants requiring a total investment of about 20 billion dollars, expected to come mainly from the private sector. One alternative to new power plants, at least in the north of the country, is to purchase power from the U.S.. Among the options being considered by the Federal Electricity Commission is the construction of a transmission line linking Palo Verde in Arizona with Santa Ana in the rapidly-developing state of Sonora. Public Service New Mexico has already expressed its interest in constructing this interconnection, likely to cost at least 180 million dollars.

ONE FOR THE WHALES

A proposed 100-million-dollar salt works expansion project in Baja California has been cancelled, following five years of opposition from environmentalists who argued that it would have adverse impacts on one of the country's biggest wildlife sanctuaries. The project, proposed by the salt-exporting company Exportadora de Sal, owned jointly by Japan's Mitsubishi Corp. (49%) and the Mexican government (51%), would have been based at Laguna San Ignacio, near the Vizcaino Biosphere Reserve, one of only four gray whale breeding areas in the world. Each year, the whales migrate 9,900 kilometers from the Bering Straits to mate and calve in the warm water lagoon.

OIL RESERVES UP

After a decade of falling oil reserves, Mexico officially registered an increase in reserves during 1999. The increase is due to the incorporation of Cantarell well 418, one of the biggest discoveries in the last ten years. The Cantarell field currently has proven reserves in excess of a billion barrels of crude. According to the latest figures from state-owned Petroleos Mexicanos (Pemex), crude reserves currently total 57.7 billion barrels, well below the equivalent figure of 67.6 billion barrels for 1990. Later this year, additional exploratory wells in the gigantic Cantarell field, located offshore, in the Gulf of Mexico, are likely to increase known reserves by a further 1.4 billion barrels.

LOW-INCOME HOUSING

Consorcio Ara, one of Mexico's principal developers of low and middle-income housing, is growing rapidly. Its annual report for 1999 reveals that Ara built 12,761 units, 41% more than during 1998. Ara's 1999 net sales were worth 274 million dollars, 41.4% up from 1998, with net profits of 51,86 million dollars, 66.7% higher than a year before. Ara, which currently has orders for 17,350 units on its books, expects its volume of construction to rise 18.5% this year and by a further 26.5% in 2001. The company, whose current building activities are concentrated in rapidly growing states such as Sonora, Sinaloa, Puebla, Baja California, Guanajuato, Quintana Roo, Querétaro and Nuevo León, is also reported to be considering developing low-income housing in the southern U.S. next year. Ara's land reserve includes a mammoth 3.3 million-square-meter property, suitable for up to 22,500 homes, acquired last year in Texcoco on the outskirts of Mexico City.

PERMITS TAKE TOO LONG

A study released by the Business Coordination Council (Consejo Coordinador Empresarial, CCE) shows that the process of simplifying the paperwork required to open a new business still has a long way to go. According to the study, completing the new business "obstacle course" for permits requires more than 90 days in Mexico City and the states of Mexico, Michoacán and Puebla, compared with 45 days or less in Colima, Nayarit, Chiapas, Sonora and Sinaloa.

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

© 2000 Operadora de Fondos Lloyd, S.A.
© 2000 Allen W. Lloyd, S.A. de C.V.

Published or Updated on: March 18, 2000
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