Lloyd Mexico Economic Report February 2004
Table of Contents
2004 budget and economic growth
Stock market hits record high
Billion dollar bond offer
Rise in minimum wage
Lowest inflation
Record tequila exports
Tequila: world heritage status?
Progress for pulque
Movie-making center in San Miguel
Gift certificates for supermarkets
Satellites spy on forest fires
Nafta: success or failure?
Long distance bus lines
Alliance for deep wells
2004 budget and economic growth
The government has announced that the fiscal deficit target for 2004, based on tax revenue of 146 billion dollars, is 0.3% of GDP (Gross Domestic Product). This is a marked improvement over the equivalent 2003 figure of 0.5%.
Tax revenue from Mexico's 7.65 million taxpayers is equivalent to 12.4% of GDP. Over 30% of government revenue comes from state-owned oil giant Petroleos Mexicanos (Pemex). The budget projections are based on an average price of 20 dollars for a barrel of oil, a figure some analysts believe is conservative.
Both public and private sector institutions believe that GDP will grow by about 3.4% this year. The interest rates on Treasury Certificates (CETES) are expected to average 6% and the exchange rate by year-end is predicted to be about 11.4 pesos to the dollar.
Stock market hits record high
At the start of the year, the Mexican Stock Market's main Index, the IPC hit a succession of new highs, reflecting investor confidence in Mexico's economic policy and budgetary decisions.
Foreign reserves were also at an all-time high, totaling 57.435 billion dollars, 9.451 billion dollars more than a year earlier. The strength of foreign reserves helps to guarantee the stability of the peso on international currency markets.
Billion dollar bond offer
Last month, Mexico took advantage of historically low borrowing rates to offer a one billion dollar five-year bond issue, priced at 70 basis points over the three-month LIBOR (London InterBank Offered Rate). The lead managers for the transaction were Deutsche Bank and Citigroup Global Markets. The issue was heavily oversubscribed.
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 3.65% to 45.24 pesos (just over four dollars) a day. In Zone B (Monterrey, Guadalajara, Tampico, Altamira and some other medium-sized cities) the daily rate increased 4.5% to 43.73 pesos, and for Zone C (the remainder of the country) the rate rose 4.5% to 42.11 pesos.
The minimum wage, based on an 8-hour work day, is paid to about 8 million workers in Mexico's 40-million strong workforce.
Lowest inflation
In 2003, inflation, as measured by changes in the National Consumer Price Index, fell to 3.95%, its lowest rate for 35 years. The central bank (Banco de México, Banxico) target for this year is 3% plus or minus one percentage point, in line with private sector forecasts of around 3.8%.
In related news, Banxico has announced a revised baseline for its National Index of Producer Prices. In order to bring the statistics up to date for future comparisons, the Index value of 100 has been reset to correspond to prices of December 2003.
Record tequila exports
Tequila exports topped 100 million liters for the first time ever last year, according to the Tequila Regulatory Council. The U.S. takes 78% of all tequila exports. Exports were equivalent to almost 75% of total tequila production, with domestic sales falling to around 36 million liters, well below the 82.8 million liters sold in 2000.
Industry experts blame this dramatic decline in domestic sales on the substantial increase in prices over the past four years. The price rise resulted, in part, from a shortage of agave, the plant from which tequila is distilled. This led to a short-fall in production, even as export demand was booming.
Tequila: world heritage status?
Mexico's amazing cultural, historical and natural diversity, which make it a world leader in tourism, has led to it having more sites (23) on the UNESCO (United Nations Educational, Scientific and Cultural Organization) World Heritage list than any other country in the Americas.
Now, the World Heritage Department of the National Anthology and Historical Institute (INAH) has formally proposed that the agave landscapes and old industrial haciendas of the Tequila region, in the state of Jalisco, be included on the UNESCO list.
The proposal emphasizes that the cultivation of agaves (for textile fibers and food) dates back to pre-Columbian times and that the methods required to distill tequila, introduced by the Spanish, resulted in a particularly happy fusion of the two cultures.
Progress for pulque
Over the past decade, first tequila, and then mescal, both produced from agave plants, achieved celebrity status on the world drinks' stage. The next agave-derived drink in line for top honors may be pulque, an un-distilled product of the fermentation of agave.
Unlike tequila and mescal, pulque dates back to well before the arrival of Spanish conquistadors in the sixteenth century. The popularity of pulque, once the nation's best-known drink, began to decline in the second half of the twentieth century. However, in recent years, the spiraling cost of tequila has led to a resurgence in pulque sales.
In the 1970s, an attempt was made to commercialize pulque in cans. The attempt, a joint project of the Agriculture Secretariat (then SARH) and pulque producers in the state of Hidalgo, ran into some unexpected problems. One was that pulque continued to ferment after canning, resulting in some cans exploding in transit!
Subsequent research by chemists at the National University (UNAM) led to successful trials of vacuum-packed aluminum containers that inhibit fermentation and guarantee quality. Proponents hope that brands like "Néctar del Razo", now on sale in supermarkets, will usher in a new era of success for pulque.
Movie-making center in San Miguel
San Miguel de Allende's attractive colonial center has long been a popular venue for movie-making. Now, an ambitious proposal has been unveiled for a state-of-the-art film production complex in the city. An estimated 48 million dollars would be invested on developing a 100-hectare site.
The complex would include a film school, residential and office areas and a tourist "eco-park" featuring rides and restaurants. The residential section of the development will consist of 100 homes, some of which will be retained as temporary housing for transient movie stars. Work is due to begin next month and is expected to take three years to complete.
The proposal, made by The Film Colony, a private corporation, is well-timed, since the federal government recently announced that it will no longer continue to fund the long-established Churubusco studios and film school in Mexico City. The new San Miguel production complex will create up to 900 new jobs and greatly increase the attractions of making films in the city.
Gift certificates for supermarkets
2003 was another excellent year for Wal-Mart de México, the nation's largest retailer, with sales totaling 10.95 billion dollars, 9.3% higher in real terms than during 2002. Wal-mart may be outpacing its competitors in the retail sales race, but three of them have joined forces to fight back.
The Commercial Mexicana, Soriana and Gigante chains created a joint company in 2003 to explore cost-saving options. Last month, they began promoting gift certificates, called "Valle Sinergia", that can be used for purchases in any store in any of their chains; this is a landmark departure from traditional retailing practices in Mexico.
In addition, the three firms are exploring possible economies of scale and considering sharing technology and logistics systems.
They also have their own individual plans. Gigante (400 stores in Mexico) decided to enter the U.S. market in 1999. With 8 stores already, and a further 4 due to open this year, Gigante hopes to cash in on the massive Hispanic purchasing power north of the border.
Soriana (139 stores), on the other hand, is continuing to expand within Mexico, investing 230 million dollars this year to open 25 new stores across the country. To support its growth, the firm is also opening new distribution centers later this year in Villahermosa (Tabasco) and Querétaro.
Satellites spy on forest fires
Better satellite coverage should enable potentially devastating forest fires to be detected much earlier, allowing for a correspondingly quicker response. During the 2004 season, remote images obtained daily during up to 10 sweeps of the country by satellite will be monitored by scientists looking for fire outbreaks. Mexico is already sharing this satellite remote sensing capability with Guatemala and other central American nations.
Nafta: success or failure?
Ten years on, has NAFTA been a success or a failure? Since the North American Free Trade Agreement (NAFTA) took effect on January 1, 1994, the value of trade in North America has doubled, and intra-regional foreign investment has tripled, leading to considerable growth in manufacturing industries and plenty of opportunities in commerce.
Mexico's exports have increased 400% since 1990 to about 160 billion dollars a year, while imports have risen only 300% to around 168 billion dollars. An aggressive policy of seeking free trade agreements with a large number of countries has transformed Mexico into the 8th largest player in the world in terms of value of trade.
However, this success, focused in central and northern Mexico, has only served to increase the divide between the relatively prosperous north of the country and the poorer south.
Despite NAFTA, trade disputes continue for several products, including sugar, tuna and steel. Last month, tariffs were finally removed on a list of used items, including trailers (for freight, housing or camping), certain bicycles and motorcycles, tow trucks, sewing machines and computers.
In addition, new cars can now be imported free of duty. Several taxes still have to be paid as vehicles cross the border, however, including "new vehicle tax" (ISAN), value-added tax (IVA) and road-tax (tenencia), which probably offset any savings due to lower vehicle prices in the U.S. Even so, numerous new car dealerships have sprung up near the border, especially in Tijuana, hoping to attract clients by undercutting the prices charged for vehicles by dealerships in the interior.
Long distance bus lines
Mexico's long distance bus system is envied by the rest of the world. Regular services link all major cities day and night. Networks of shorter routes reach almost every corner of the Republic. Passengers complete their journeys with a minimum of delay on new vehicles that offer unrivaled comfort.
Even the price is right. For instance, a bus from Mexico City to Acapulco costs less than the toll charges for a private car. Over shorter distances, buses have no competition, but for longer distances, the time saved by flying may be worth the extra expense. Between Mexico City and Cancún, a luxury bus ticket (22 hours) costs 195 dollars; flying costs 325 dollars but saves 20 hours.
The National Chamber for Passenger and Tourist Buses estimates that the 40,000 buses owned by its members are responsible for about 3.5 billion passenger movements each year. The major bus companies include ADO, Estrella Blanca and Flecha Amarilla, each dominant in a particular region. ADO is investing 375 million dollars over the next few years to replace more than half of its 4,500-strong fleet.
Not surprisingly, there is stiff competition among bus manufacturers. Mercedes Benz meets about 50% of national demand. Grupo MAN Ferrostaal (Germany), Europe's third largest bus-maker, recently announced plans to build an assembly plant in Mexico, hoping to capture up to 10% of the domestic market, with natural-gas powered vehicles.
Alliance for deep wells
Petróleos Mexicanos (Pemex) is negotiating with several multinational oil companies, including ExxonMobil, Petrobras, Shell, Unocal and Chevron, with a view to forming partnerships to drill for oil deep under the ocean in the Gulf of Mexico. The deepest Pemex well at present is Chuktah-1, drilled in 2002 to a depth of 384 meters, but the other companies have experience in drilling wells up to 3,000 meters deep.
The negotiations are part of a concerted effort by Pemex to develop new sources of crude and natural gas to ensure that high levels of production can be maintained far into the future. The current administration has announced that it would like to have about 60 additional offshore oil platforms operating by 2006.
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.
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© 2004 Operadora de Fondos Lloyd, S.A.
© 2004 Allen W. Lloyd, S.A. de C.V.