Lloyd Mexico Economic Report February 2005
Table of Contents
Economy remains strong
Tax breaks
Rise in minimum wage
Popularity of movie-going
Stock market index revised
Update on population
Replacing one oil field by another
Expansion of Mexico City airport
Billions to boost power
Record year for tourism
Green construction
Silicon Border
Economy remains strong
Private sector analysts agree that growth this year should exceed the central bank's conservative target of 4%. Last year, the economy grew 4%, faster than most analysts originally predicted back in January 2004. Inflation last year was 5.4%, due partly to higher than anticipated oil and gas prices, as well as a significant rise in the cost of electricity. The central bank is confident that inflation will be further reduced this year.
Key interest rates remain low. At press time, the rate for 28-day CETES was about 8.4%. The stock market gave investors excellent returns last year, with the main index breaking through the 13,000 point barrier at year-end.
Moody's, the major ratings agency, upgraded Mexico's foreign currency debt issues (from Baa2 to Baa1) last month, reflecting the economy''s reduced vulnerability to external influences and events.
Tax breaks
Modifications to tax regulations this year should benefit business activity, according to the Finance Secretariat. The main tax on corporate activity, ISR (Impuesto Sobre la Renta), has been reduced from 34% to 30%, and will be reduced still further to 28% in 2007. Allowable tax deductions have been extended to include some of the cost of employee profit-sharing, and also for investments in projects generating energy from renewable sources.
Individuals also benefit this year, with the highest rate of personal income tax falling from 32% to 30%, also with a further reduction to 28% in 2007. In addition, the tax threshold, below which no tax is paid, has been raised to an annual figure of 76,000 pesos (6,800 dollars).
Rise in minimum wage
New minimum wage rates took effect January 1. The minimum wage is used as the basis for many rental and labor agreements as well as for calculating numerous other fees and charges.
The minimum wage in Zone A (Mexico City, Baja California, Baja California Sur, Acapulco, several major border cities and parts of Veracruz) rose by 3.45% to 46.80 pesos (just over four dollars) for an 8-hour work day. In Zone B (Monterrey, Guadalajara, Tampico, Altamira and some other medium-sized cities) the daily rate increased 3.70% to 45.35 pesos, and for Zone C (the remainder of the country) the rate rose 4.61% to 44.05 pesos.
Having different percentage increases for the three zones over the past few years has considerably reduced regional disparities in minimum wages.
Popularity of movie-going
Movie-going remains a very popular recreation in Mexico, according to the latest numbers, which show that a record 165 million seats were sold nationwide in movie houses last year, a 20.4% increase on 2003. This is a much greater rate of increase than occurred over the same period in the U.S. (4%) or Canada (13.4%). Mexico's National Cinematographic Chamber reports that the most popular foreign movie in 2004 was Shrek 2.
Stock market index revised
This month's annual revision by the Mexican Stock Market (Bolsa Mexicana de Valores) of the firms included in its main index, the IPC (Índice de Precios y Cotizaciones), sees six newcomers on the 35-strong list. Replacing four firms — Iusacell, Grupo Sanborn, Kof and Savia — that are no longer considered representative of the overall market, are housing developers Urbi and Homex, Gruma (tortillas and cornflour), Desc (manufacturing), GCC (cement) and IMSA (steel).
Update on population
Mexico remains the 11th most populous country in the world, with the population crossing the 105 million mark last year. A recent report from the National Population Council says that the population increased by 1.1 million people during 2004, the net result of 1,985,000 births, 469,000 deaths and an out-migration of about 398,000 during the year.
Mexico currently has one of the lowest crude death rates (4.5 per 1000) in the world, due to the fortuitous combination of a youthful population and good medical and public health standards. The average life expectancy for someone born last year is estimated to be 75.2 years.
Replacing one oil field by another
The offshore Cantarell oil field, first exploited in 1975, currently provides 62% of all the hydrocarbons produced in Mexico, but production is expected to decline over the next decade as reserves are exhausted.
In order to boost its oil output over the next 18 months to around 4 million barrels a day, Petróleos Mexicanos (Pemex) is proceeding with its plans to develop the land-based Chicontepec oil field, requiring investments of more than 10 billion dollars between now and 2019. The field, covering 3,731 square kilometers in the states of Puebla and Veracruz, and requiring wells drilled to depths of over 1,700 meters (5,100 feet), has reserves of over 12 billion barrels of crude.
This oil will be relatively costly to extract. At present, Pemex's costs of extraction per barrel are low compared with most major producers, but company figures show that the percentage of oil coming from low-cost sources is likely to drop from 44% in 2001 to 23% in 2015.
Expansion of Mexico City airport
A major 440-million-dollar expansion and remodeling of Mexico City airport is on schedule to be completed before the end of this year. The work includes new pre-boarding areas and baggage claim facilities for national flights, which are already in use, as well as the construction of an additional terminal. The second terminal will enable passenger movements to increase by about 50%, boosting the airport''s capacity to around 31.5 million passenger movements a year.
Billions to boost power
The Federal Electricity Commission (CFE) will award contracts worth 3 billion dollars this year for power projects. They include the construction of thermal plants at Lázaro Cárdenas (Michoacán) and Tamazunchale (San Luis Potosí), as well as expansions to the La Ventosa wind power project in the Isthmus of Tehuantepec. Also on the drawing board is a massive new billion-dollar hydro plant, La Parota (Guerrero), scheduled to be completed by 2011.
CFE power plants nationwide require several billion cubic feet of natural gas a day. CFE recently awarded a 15-year supply contract for 235 million cubic feet a year of gas, destined for its Baja California power plants, to Sempra Energy. The deal will save CFE 20 million dollars a year beginning in 2008.
In association with Shell, Sempra is building a regasification terminal north of Ensenada. The terminal will receive imports of liquified natural gas from countries like Indonesia and Malaysia. An additional storage and regasification plant is planned for Manzanillo.
Record year for tourism
The Tourism Secretariat (Sectur) reports that 2004 was a record year for tourism. The number of tourists rose 9.6% to 20.5 million, and the tourism sector generated 10.621 billion dollars in revenues, 12.3% more than 2003. The average expenditure per visitor was between 675 and 700 dollars, 3% higher than the previous year.
Hotel occupancy across the country averaged 57.21% during 2004, 2.5 percentage points higher than during 2003. The integrally planned resorts (Cancún, Loreto, Los Cabos, Huatulco and Ixtapa) enjoyed rates of 69.06% (up 4.7 points), while traditional beach resorts increased by about the same amount to 61.04%. Business centers did less well, with the average rate for Mexico City, Guadalajara and Monterrey being just 55.65%.
Green construction
The Mexican Green Building Council (Consejo Mexicano de Construccióón Sustentable, CMCS) aims to have a national system for voluntary environmental certification of buildings in place by 2007. CMCS is closely modeled on "green design" principles, such as LEED (Leadership in Energy and Environmental Design), which aims for high levels of sustainability in the usage of water, energy and construction materials, while simultaneously ensuring superior interior environmental quality.
CMCS estimates that following LEED principles adds 5% on average to construction costs, which can be recovered through utilities savings in less than 4 years. Countries with similar codes already in place include Australia, U.S. and Canada. The first building in Mexico to qualify as LEED-certified is likely to be the corporate headquarters of HSBC bank, currently under construction on Paseo de la Reforma in Mexico City.
National pawn shops
The period from December to February is traditionally the busiest time of the year for the chain of National Pawn Shops (Monte de Piedad). The chain, founded exactly 230 years ago this month, has budgeted 600 million dollars this year for up to 20 million customer loans. In its efforts to be accessible to even more families in need, it plans to add 20 new branches during 2005 to its existing chain of 105 across the country.
Silicon Border
The government is supporting a plan by California-based Silicon Border Development to build a 10,000-acre, specialized industrial park in Mexicali (Baja California) making semiconductors, chips, advanced electronic circuits and other high tech products. Providing the infrastructure necessary for the park will require investments of around 450 million dollars.
At present, no firm in Mexico makes the silicon wafers that are used as semiconductors, which are at the heart of the transistors and microprocessor chips used in all kinds of electronic devices.
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.
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2005 Operadora de Fondos Lloyd, S.A.
© 2005 Allen W. Lloyd, S.A. de C.V.