Lloyd Mexico Economic Report - September 2000
Table of Contents
CONSUMERS SPEND, SPEND, SPEND...
MONETARY REGULATION BONDS
TEQUILA INDUSTRY STUMBLES
SECOND AIRPORT FOR CANCUN?
SUBURBAN LIGHT TRAIN
FROM STUDENT TO FIRST LADY
POST-ELECTION INVESTMENTS
FIGHT POVERTY WITH MICRO-CREDITS
EXPO GUADALAJARA EXPANDS
URGENT NEED FOR MORE POWER
LATIN AMERICA'S LARGEST EXPORTER
WATER SCARCITY AROUND THE CORNER?
CONSUMERS SPEND, SPEND, SPEND...
Consumer spending rose 7.9% during the first half of the year, compared with the same period a year ago. The consumer boom has been driven by falling inflation, low interest rates, a recovery in real purchasing power (the buying power of wages after inflation is taken into account) and by confidence in a smooth transition when the new government takes office later this year. After many years of export-led economic growth, domestic spending is now helping drive economic expansion.
All the country's major retailers have benefitted from the consumer spending surge. Wal-Mart de México, for example, reported second-quarter operating profits 23% higher than for the same period in 1999, with same-store sales up almost 6%; the comparable profits figure for Gigante, another large retail chain, was 9.2%. Car sales are also exceeding all expectations. The Mexican Automotive Industry Association (AMIA) reported that domestic retail vehicle sales exceeded 447,000 units for the seven months ending in July, 33.9% more than the same period last year. Analysts expect the booming economy to attract many new retail players to Mexico, especially since existing retailers serve only about 48% of the country's 98-million population.
MONETARY REGULATION BONDS
Last month, the nation's central bank, Banco de México, began issuing Monetary Regulation Bonds (BREMs), its own debt instrument. The bank is issuing about 100 million dollars worth of BREMs each week. The three-year bonds will pay interest every 28 days, with the rate adjusted daily, based on rates for commercial bank paper. BREMs are intended to soak up the economy's excess liquidity, and help keep inflation down. The first auction of BREMs was heavily oversubscribed. They will provide an additional investment option for the pension fund (Afore) system.
TEQUILA INDUSTRY STUMBLES
Tequila has enjoyed a faster global boom than any other spirit in the past few years, with about 50% of production currently being exported. The Tequila Regulatory Council (CRT) has reported that its 70 members produced 96 million liters of tequila in the first six months of 2000, only 3.22% more than the 93 million liters produced during the same period in 1999. This is a disappointing rate of growth given that CRT figures show that tequila production increased by 16.6% in 1997, 8.4% in 1998 and 12.27% in 1999.
The main stumbling block to higher production levels is a shortage of blue agave, the plant from which tequila is made. The agave takes up to 12 years to mature and, in the past three years, the number of agave plants in the tequila-producing region has actually fallen from 202 million plants to 107.5 million. Clearly, agave planting has to be undertaken on a massive scale, and as part of its recently announced 80-million-dollar expansion plan, Tequila Sauza, the largest tequila manufacturer, intends to plant more than 10 million agaves. The agave shortage has had several other effects on the industry. First, there has been a shift in production away from the highest grade (pure 100% blue agave tequila) towards lower quality tequilas which, by law, must contain at least 51% agave. During the first half of the year, production of the top grade fell by 47% while production of the second type rose 32.2%. In response to this shift in quality and the agave shortage, some of the 500 brands currently on the market are very likely to disappear.
Furthermore, there has been a dramatic increase in the price of agave, which distillers have partially passed on to tequila drinkers. About a year ago, growers received less than a peso a kilo for agave. Recently they have been able to command prices as high as 14.50 pesos per kilo, prompting tequila manufacturers to temporarily suspend purchases in protest. In summary, the industry appears to have been far more successful at self-regulation and at global marketing than at long-range planning. Tequila drinkers everywhere will be hoping that the industry can correct this imbalance over the next decade.
SECOND AIRPORT FOR CANCUN?
With its 25,368 hotel rooms, and an average occupancy rate of 80.6%, the resort city of Cancún, and its tourism-generated revenue, are crucial to the national economy. However, Cancun's international airport is already operating at near-capacity levels. The choice faced by the federal Transportation Secretariat would appear to be relatively simple: either expand Cancún's existing airport or authorize the construction of a second, alternative, airport. In the latter case, a likely location would be near Tul úm, 80 miles (130 kilometers) to the south; this would ease the pressure on Canc ún and act as a catalyst for future tourist developments further south along the coast, in the direction of Belize.
SUBURBAN LIGHT TRAIN
Mexico City's severely stressed public transport system may soon receive a much needed boost. The federal Communications and Transportation Secretariat, SCT, has unveiled a plan for a 240- kilometer-long light train network serving some northern parts of the city. The estimated cost of establishing the three major routes involved, with a capacity of 450,000 users a day, is 624 million dollars. Users would pay just over a dollar (10.50 pesos) a trip. The first stage of the plan links Huehuetoca, 40 kilometers north of the city, via Cuautitlán to Buenavista station, the central railroad terminus. The other routes are Naucalpan-Ecatepec (89.5 kilometers) and Los Reyes-Aragón (73 kilometers). Construction costs would be greatly reduced by incorporating existing under-used railroad lines into the network wherever possible.
FROM STUDENT TO FIRST LADY
Mexico's "first lady" not only accompanies the President on official business, but also, by tradition, heads the Integrated Family Development Agency, DIF, which runs numerous social service programs throughout the country. Normally, the first lady is the President's wife, but Vicente Fox, the President-elect, is divorced, so the role of first lady will be fulfilled by Ana Cristina Fox, the eldest of his four adopted children. Currently a law student at the Ibero-American University, she is just 20 years of age. In a recent media interview, she not only discussed youth and women's issues, but also expressed her interest in opening the official presidential residence, Los Pinos, to the public for weekly tours.
POST-ELECTION INVESTMENTS
Post-election euphoria, especially pronounced in the business community, has led to analysts predicting a veritable "gold rush" into Mexico of investors and foreign companies anxious to benefit from the next administration's anticipated pro-business stance. In the state of Nuevo León, Carlos Zambrano Plants, the head of economic development, is predicting more than 800 million dollars in investments in the second half of this year, mainly in Monterrey, the state's capital city. These investments include a 100-million-dollar plant for the South Korean firm, LG Electronics, which already operates plants in the border cities of Mexicali and Reynosa. Its Monterrey plant, due to open next March, will have the capacity to make 400,000 domestic refrigerators and 200,000 air conditioning units a year.
In Guadalajara, U.S.-based transport firm, Roadway Express Inc., has opened its ninth distribution center, with plans to open further centers, in Puebla and Toluca, later this year, while Solectron is to build two new plants in the city for a combined investment of around 35 million dollars. Elsewhere, Goodyear Tire & Rubber Company has announced it will construct its fifth plant in Mexico, Jabil Circuit is opening a new plant in Chihuahua, and Wendy's restaurant chain plans to open 100 new branches within the next ten years. Following the signing of a free trade agreement with the European Union earlier this year, many European companies have big plans in Mexico. They include the French vehicle manufacturer, PSA Peugeot Citroen, which is building a 200-million-dollar assembly plant in the state of San Luis Potosí. The Europe-Mexico free trade agreement will enable Peugeot to import parts from France and assemble vehicles for export to the U.S. and Canada. Volkswagen is also deciding where to locate a second plant, in order to boost the number of New Beetles it can turn out. The worldwide demand for that vehicle has outpaced the existing capacity of its Puebla plant.
FIGHT POVERTY WITH MICRO-CREDITS
An advisor to President-elect Vicente Fox has said that the incoming government will use experience gained from a program to help small firms in Guanajuato while Fox was State Governor (1995-1999) to set up a national program providing "micro- credits" to small companies and entrepreneurs. Norberto Roque, the head of the small business program for Fox's transition team, said that wealth creation is the only way to fight poverty and that micro-lending programs in several countries had met with high levels of success. The Guanajuato program provided loans of between 100 and 1000 dollars to housewives and small companies alike. More than 40,000 women, 9,000 farmers, and numerous small industrial companies benefited from the program. An estimated 95% of all Mexico's businesses fall into the category of small companies.
EXPO GUADALAJARA EXPANDS
A major expansion and remodelling of Expo Guadalajara, that city's exhibition center, is just about complete. Exhibition space has been doubled to 90,000 square meters, making Expo Guadalajara the largest trade show center in Latin America. The facility now boasts a new lobby, a fast food mall, four snack bars, improved loading areas and a multiple entry-way system allowing up to four exhibits to be held simultaneously, each with completely independent access. The business center has been upgraded and there is parking space for 2,000 vehicles.
URGENT NEED FOR MORE POWER
Nationwide, power demand is growing at record levels of 8.4% a year. As a result, the Federal Electricity Commission (CFE) has seen the power system's reserve margin (power supply capacity minus demand) fall to less than 6% at peak hours. Now, the CFE is speeding up the opening of several new power plants. Major projects affected by the decision include the 495-megawatt Rio Bravo II plant near the border city of Reynosa, now due to start up in May next year, the 250-megawatt plant in Hermosillo, Sonora, and the 541-megawatt Rosarito III plant in Baja California. These three plants will be privately operated by Electricité de France, Union Fenosa and ABB, respectively. The CFE hopes to add 11,500 megawatts in new capacity before the end of 2003. Several of the plants will be joint ventures with manufacturers. For example, Bloomberg News reports that both steel-maker Ispat International and paper-manufacturer Kimberly-Clark are planning to take shares in two new energy plants in Veracruz state. The natural-gas fired plants, due to come on line in 2003, will provide 651 megawatts and 279 megawatts of power respectively.
LATIN AMERICA'S LARGEST EXPORTER
The value of Mexican exports will reach 160 billion dollars this year, making the nation Latin America's largest, and the world's eighth-largest, exporter. Mexico is the U.S.'s second trading partner (after Canada) and continued export success will be partially dependent on successfully exploiting the estimated 350- billion-dollar annual purchasing power of the 30 million Hispanics living in the U.S..
WATER SCARCITY AROUND THE CORNER?
In a recent report, the Organization for Economic Cooperation and Development (OECD) describes how Mexico's drinking water supply has become the source of serious public health problems. The report states that most regions of Mexico have water that "is qualified as contaminated, either strongly or excessively." Besides the quality of water, the quantity available is also threatened, and many analysts say that water shortages will affect Mexico, especially the arid northern zones of the country, within the next 50 years. Based on 1997 data, the OECD report says that the water situation is particularly critical in poorer states, where higher mortality rates can be directly attributed to poor water quality. The OECD-recommended remedy? A massive investment in water treatment and distribution systems.
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© 2000 Operadora de Fondos Lloyd, S.A.
© 2000 Allen W. Lloyd, S.A. de C.V.