Lloyd Mexico Economic Report - September 2001
Table of Contents
NEW ECONOMIC INDICATORS
AXTEL COMPETES FOR LOCAL PHONE MARKET
IS MEXICO CITY EXPENSIVE?
POWER SALES TO CALIFORNIA SUSPENDED
TUNA FISHING DISPUTE
FILM-MAKING IN BAJA CALIFORNIA
BONDS FINANCE TELEPHONE EXPANSION
UNCERTAIN FUTURE FOR FARMERS...
...ESPECIALLY COFFEE GROWERS
PETROCHEMICAL INVESTMENTS
OIL RESERVES COUNT-DOWN
BOOST TO GUAYMAS-SAN CARLOS
MORE BUSINESSLIKE GOVERNMENT?
SUSTAINABLE CHARCOAL
NEW ECONOMIC INDICATORS
The Conference Board (CB), based in New York, has announced the launch of two new CB indicators for Mexico: the Leading Economic Index and the Coincident Economic Index. The new indicators are intended to provide reliable, consistent data for foreign investors and analysts. The Leading Index combines six elements: the construction component of industrial production; the revenues Mexico gets for oil exports to the U.S.; the stock market's main (IPC) index; an inventories and sales measure; the rate that Banco de México charges for overnight government funds; and the real peso-dollar exchange rate, discounting inflation.
The elements comprising the Coincident Index are: industrial production; retail sales; employment as measured by Social Security Institute (IMSS) records; and the jobless rate, as measured by INEGI, the national statistics bureau. The two indicators should provide a much more useful indication of Mexico's economic performance than simpler alternatives such as the Gross Domestic Product (GDP).
AXTEL COMPETES FOR LOCAL PHONE MARKET
Axtel, based in Monterrey, is one of several companies now competing with Teléfonos de México in the local phone market. Minority holdings in the company are held by AIG Latin American Equity Partners, Bell Canada International, Metropolitan Life Insurance, the Soros Group and WorldTel. In its first two years of operation, Axtel has installed a total of 285,000 lines in 6 cities: Monterrey (86,000 lines), Guadalajara (68,000), Mexico City (107,000), León (7,000), Puebla (13,000) and Toluca (6,000). About 60% of these lines are residential and 40% business.
One of Axtel’s latest contracts is to install a mini-network of 103 lines for the municipal authorities of the town of Metepec in the State of Mexico. These lines are “intelligent” in the sense that all calls between municipal offices are now free, saving the municipality an estimated 30% of its previous local phone bill.
IS MEXICO CITY EXPENSIVE?
According to the Economist Intelligence Unit, Mexico City is still a relatively inexpensive place in which to live. The index tracks the living costs in 133 cities and compares them with the cost of living in New York, standardized at a figure of 100. Tokyo currently has the world’s highest living costs (140) while Mexico City came in at 85, well below Hong Kong, Oslo, London, Zurich, Beijing and Paris. If you’re looking for somewhere cheaper to live than Mexico City, then try Sao Paulo, Bangkok or Johannesburg.
POWER SALES TO CALIFORNIA SUSPENDED
The high demand for power in Baja California this summer has meant that Mexico has temporarily suspended power sales to California. The Federal Electricity Commission (CFE) reports that the state is now using 1700 megawatts of power, compared with its total installed capacity of 2000 megawatts. Baja’s power consumption is increasing at the very rapid rate of almost 8% a year. Several new plants, presently under construction, will help to boost Baja California’s power reserves and enable Mexico to resume sales of power to California in future years.
TUNA FISHING DISPUTE
About 20,000 families in Mexico are dependent on tuna fishing. This figure includes not only fishermen but also people working in associated processing and packing plants. Fisheries experts believe Mexico would supply up to 120 million dollars worth of tuna a year to the U.S. market, if current restrictions were lifted. In April 1999, the U.S. Commerce Department lifted a 9-year ban on tuna imports from Mexico, following evidence from the Interamerican Commission on Tropical Tuna that Mexican tuna fishing methods had become dolphin friendly. Unfortunately, a recent Californian court ruling still prevents Mexican tuna fishermen from using “dolphin-free” labeling, effectively excluding their products from the U.S. market.
Part of the conflict revolves around the very different methods of fishing employed in the two countries. Mexican tuna fishermen use large nets which, inevitably, capture some dolphins, since dolphins frequently intermingle with schools of tuna. However, all dolphins trapped in the nets are released by hand and returned (alive) back into the ocean. U.S. tuna fishermen use long- line fishing in which any species hooked is killed. What happens next? Mexico is hoping that the U.S. government will appeal the Californian ruling. If it doesn’t, Mexico will likely take the dispute to the arbitration panel of the International Accord for Dolphin Conservation and, if necessary, the World Trade Organization.
FILM-MAKING IN BAJA CALIFORNIA
The National Filming Commission estimates that 930 million dollars has been spent in the country so far this year on the filming of more than 3,000 audiovisual projects, from “shorts” to videos and full-length movies. The CNF says that about 60% of all filming applications come from domestic film-makers. The state which has benefitted most in recent years is undoubtedly Baja California, especially since the box-office hit Titanic was shot at specially built Twentieth Century Fox studios in El Rosarito in 1996. Now, Twentieth Century Fox has opened a movie theme park, “Foxploration”, near Popotla, some 30 kilometers south of Tijuana. The park includes interactive exhibits about all aspects of movie- making from set design and special effects to animation and costumes.
BONDS FINANCE TELEPHONE EXPANSION
América Móvil, Mexico’s largest wireless phone company, has issued 164 million dollars (1.5 billion pesos) worth of five-year bonds to finance the company’s continued expansion throughout the country. The firm also operates in Brazil, Guatemala, Puerto Rico, Colombia, Ecuador, Argentina and the U.S. The bonds will pay a fixed-rate of 11.33%, 70 basis points above the yield of Mexican government five-year, fixed-rate bonds. The bond issue continues a trend for major Mexican corporations to raise money on the domestic bond market rather than resorting to international markets. This trend is due, in part, to the ever-increasing demand for solid investment options of Mexico's private pension funds or Afores, which are now managing more than 20 billion dollars in worker's retirements savings.
The América Móvil bonds were rated investment grade by Standard & Poor's and Moody's. RELATED NEWS A sure sign of investors’ confidence in the Mexican economy is that the federal government’s latest 10-year fixed rate bond issue was heavily oversubscribed. Demand for the bond was more than triple the 100 million dollars (1 billion pesos) on offer. The bond carries an interest rate of 10.9%.
UNCERTAIN FUTURE FOR FARMERS...
Many of Mexico’s farmers are facing hard times. In the north of the country, a prolonged drought has caused a reduction in the area sown and has wreaked havoc on crop yields. Elsewhere, low prices for coffee, basic grains, sugar, cotton, bananas, cocoa and other cash crops, mean that farmers are receiving meager compensation for their labors. Unlike farmers in the U.S. and Canada, whose livelihoods are partially protected by tariffs and subsidies, Mexican farmers have been offered no solution by the current administration, except to modernize and adopt new crops. The Fox administration clearly believes that tariffs and subsidies are luxuries that the country cannot afford, and that importing cheap foodstuffs is preferable to striving for self-sufficiency in basic food production. Fox has suggested that many farmers could use irrigation water more efficiently and could specialize in export crops like winter vegetables, much in demand in the U.S. and Canada.
...ESPECIALLY COFFEE GROWERS
Bumper crops and an influx of coffee and cocoa from new suppliers, such as Vietnam, have led to a dramatic decline in cocoa and coffee prices on international markets. Coffee prices are now at 30-year lows, having fallen by about 50% since January 2000 to around 50 U.S. cents a pound. Cocoa prices fell to 28-year lows last year but have since staged a slight recovery. When Central and South American coffee- producing nations meet later this month in Mexico, they are expected to agree to reduce supplies of the bean in an effort to boost prices. They will then confirm their stance at the next meeting of the International Coffee Organization in London, a week later.
One part of the proposed “Coffee Improvement Plan” which seeks to improve the quality of coffee grown in Chiapas, Veracruz and Puebla, is the government-authorized destruction of up to 250,000 60-kilo sacks of lower-grade coffee, 5% of the predicted figure of 4 million sacks for 2001-2 season exports. Exporters will grade the beans and the poorest 5% will be converted to fertilizer or fuel.
PETROCHEMICAL INVESTMENTS
The petrochemical division of Petróleos Mexicanos (Pemex) is investing 160 million dollars (1.473 billion pesos) in expanding the output of three of its plants in the next twelve months. At Cangrejera, near Coatzacoalcos, in the state of Veracruz, the project will increase the plant’s output to 100,000 tons a year of ethylene and 75,000 of low density polyethylene. At the Morelos complex, capacity for ethylene and high density polypropylene production will be increased to 100,000 tons each annually. The third complex is Pajaritos, where an existing plant will be upgraded to double its output of vinyl chloride.
OIL RESERVES COUNT-DOWN
The BP Statistical Review of World Energy 2001 lists the proven petroleum reserves of major producing countries around the world. Saudi Arabia heads the table, with reserves of almost 262 billion barrels, sufficient, at present rates of extraction, to last for another 81 years. Mexico’s proven reserves, of around 30 billion barrels, will last 24 years, while U.S. reserves, approximately equal in volume to Mexico’s, will last only 10 years at current extraction rates. During the first half of this year, Mexico received 6.2 billion dollars from export sales of crude, 23% less than for the same period a year earlier.
This year, exports reached 1.74 million barrels/day at an average price of 19.74 dollars a barrel, compared with 1.6 million barrels/day at 24.2 dollars a barrel during the first half of 2000. Pemex has some of the lowest production costs per barrel of any major oil company, according to the Petroleum Intelligence Weekly. In 2000, Pemex’s cost per barrel was only 4.63 dollars, compared with 8.65 dollars for Exxon Mobil, 7.62 dollars for BP Amoco, 8.74 dollars for Texaco and 12.47 dollars for Philips.
BOOST TO GUAYMAS-SAN CARLOS
The Sonora state government, together with private sector investors, has announced plans to spend 120 million dollars on infrastructure improvements in the Guaymas-San Carlos area, a popular winter destination for U.S. and Canadian “snowbirds”. The area currently has 27 hotels (1,800 rooms) and is temporary home each year for around 935,000 visitors. The investments will include the modernization and expansion of Guaymas airport as well as the construction of the first stage of the new Bacochibampo marina. The marina, being built by Canadian company Technomarine, is an integral part of the Nautical Route project which involves several new marinas on either shore of the Sea of Cortés.
MORE BUSINESSLIKE GOVERNMENT?
The administration of all federal government departments will soon be results-oriented, rather than norms-oriented. The federal Office for Government Innovation has designed the new guidelines, called the “System for Evaluation and Compensation for Results” The new system identifies “seven key areas for improvement” and proposes that the degree of success of each department is measured by six “key measures” at regular intervals over the next five years. The seven key areas are: strategic results, client satisfaction, innovation and quality, decentralization, citizen participation and transparent accounting, austerity measures and sustainability.
SUSTAINABLE CHARCOAL
The Washington D.C.-based World Resources Institute has announced a million dollar financing package for Noram, Mexico’s main producer of “sustainable” charcoal. Noram is one of three companies in the world selling charcoal produced from forestry resources certified as sustainable by the Forest Stewardship Council. Noram, started in 1995 by Gilberto Rosas and Carl Ludvik, makes charcoal from wood obtained from pine-oak forests in the northern state of Durango. Oak produces a dense charcoal, with prolonged higher heat and less residue than the traditional charcoal used for barbecues. According to Noram, Mexico consumes 200,000 tons of charcoal a year, roughly the same amount as all European countries combined, but well below the 900,000 tons consumed annually in the U.S.
Mirrored with permission from Lloyd S.A. de C.V.
See their Page on Mexico Connect.
2001 Operadora de Fondos Lloyd, S.A.
© 2001 Allen W. Lloyd, S.A. de C.V.