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Lloyd Mexico Economic Report February 2006

Inflation at all-time low

The central bank (Banco de México) reports that inflation in 2005 fell to 3.33%. This is the lowest annual rate since the current method of calculation was first introduced in 1968.

The economic outlook for this year is good. Consumer confidence rose sharply in December, and analysts are predicting that the economy will grow by 3.6% over the year, in line with government targets.

President Fox has reiterated the importance of the federal government having a budget surplus this year, saying that "there will be no more debts, which only mortgage the future of our children."

World-class cement firm

Mexican cement manufacturer Cemex was the best firm in the Americas in a recent survey of the top firms in emerging market economies. The survey, by Fast Company, the IMD Business School and Egon Zehnder International consultancy, placed Cemex ninth worldwide in the "most admired companies" category.

Cemex, which has plants in more than 50 different countries, is the world's fourth largest cement manufacturer. Its innovative use of computerized delivery systems has enabled it to achieve enviable levels of operating efficiency, while meeting demanding delivery deadlines, even in congested urban areas such as Mexico City.

Cleaner fuels

Official Mexican Standard 086, [Norma Oficial Mexicana (NOM) 086] governing the phasing in of low-sulfur fuels for all vehicles, came into force last month. It was welcomed by environmental and health experts, since it will reduce toxic emissions.

By October this year, Premium gasoline's sulfur content will be reduced from its present average of 208 ppm (parts per million) to between 30 and 80 ppm. The sulfur content of Magna gasoline will be reduced to a similar level by 2008. Low sulfur diesel fuel (less than 15 ppm) is being introduced first into the north of the country; it will be available nationwide by 2009.

To meet these targets, Pemex is investing 2.697 billion dollars at its refineries. Improvements to the Lázaro Cárdenas refinery in Minatitlán (Veracruz), the oldest in Mexico, will be part of a three-year, 2.4-billion-dollar overhaul, raising its capacity from 185,000 to 290,000 barrels of crude a day.

Free trade talks

Mexican officials continue a grueling agenda of free trade discussions. Talks are being held with the four members of Mercosur (Argentina, Brazil, Paraguay and Uruguay), as well as with Ecuador, Panama and Peru who want to join the G3 group (Mexico, Colombia and Venezuela). Mexico also hopes to hold free trade talks with South Korea.

The agreement signed last April with Japan has been very successful, with Japanese investments in Mexico rising by 1.3 billion dollars in its first nine months, an increase of 30%. Mexican exports to Japan have risen by 25% over that time.

Support for renewable energy

The Agriculture Secretariat is actively promoting the use of alternative sources of energy, particularly wind and solar power. Fewer than 8,000 farmers and fishermen currently use wind or solar power to pump or heat water, dehydrate products, make ice or provide the power needed for electric fencing.

Converting to renewable energy requires some capital expenditures. The Secretariat believes that the short-term costs of new equipment, for which some grants are available, will be more than offset by the long-term savings from cheaper future power costs.

Power contract

Recent contracts awarded by the Federal Electricity Commission include one to General Electric Company to boost the output of the Laguna Verde nuclear power plant by about 20%. The upgrade is due to be completed by 2010.

CFE has also awarded contracts worth 63.6 million dollars to Spanish firm Iberdrola for seven 400-kilowatt and 230-kilowatt electricity substations, and 86 kilometers of high-voltage transmission lines, in the northern border state of Tamaulipas.

Meeting natural gas demand

Pemex expects domestic natural gas production to rise by 4.8% a year and reach 7.1 billion cubic feet a day by 2010. But even this is not enough to meet future demand, which is rising by 5.7% a year.

The shortfall will be made up by imports of natural gas from U.S. fields, via cross-border pipelines, and of Liquefied Petroleum Gas (LPG) [Gas Licuado de Petróleo] by ocean-going tankers to coastal terminals and regasification plants.

Record year for tequila

The Tequila Regulatory Council [Consejo Regulador del Tequila] (CRT), which represents 111 registered tequila makers, reports that the industry broke all records last year. Total production in 2005 reached 209.7 million liters, 19.5% higher than 2004.

About one-third of the total was the highest quality 100% blue agave tequila and the remaining two-thirds was classified as mixed tequila (tequila containing non-agave sugars).

Production of high quality tequila shot up 63% as manufacturers sought to meet the rising demand in the U.S. (where tequila accounts for 5% of all the spirits consumed), Europe and Japan. Tequila exports rose 7.33% in 2005, to 117 million liters.

Aircraft industry takes off

Bombardier, the Canadian manufacturer of transportation equipment, is building an aircraft components plant on 35 hectares near Querétaro's international airport. The company chose Querétaro over competing locations in Asia because of the city's skilled workforce.

Last month, 300 employees began specialist training courses, developed in association with the Technological University of Querétaro, [Universidad Tecnológica de Querétaro]. Production is scheduled to begin in May and the new factory will eventually provide 2,000 jobs.

Bombardier plans to invest 200 million dollars over the next seven years, enabling the plant to produce the small and medium-sized aircraft used by regional airlines and executives throughout the Americas.

Airport for Riviera Maya

In order to ease future congestion at Cancún International Airport and provide an alternative access point for international vacationers, a new airport is planned for the Rivera Maya south of the resort. The 120-million-dollar airport is likely to be built in either Puerto Aventuras or Tulum.

Some 2.3 million tourists visit the Riviera Maya area each year and its popularity is growing extremely rapidly. Tourism officials say that the area will offer as many hotel beds as Cancún in three years time.

The first two groups to express an interest in bidding for the Riviera Maya airport concession are Aeroplazas-Advent and Asur (Aeropuertos del Sureste), the operator of Cancún airport.

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.

2006 Operadora de Fondos Lloyd, S.A.
© 2006 Allen W. Lloyd, S.A. de C.V.

Published or Updated on: July 20, 2006
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