Mexico - iuj.ac.jp€¦ · The presidential election on July 2nd will be fiercely contested, as Vicente Fox of the PAN currently stands a real chance of ousting the PRI from power

COUNTRY REPORT

Mexico

May 2000

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

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ISSN 0269-5936

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Mexico 1

EIU Country Report May 2000 © The Economist Intelligence Unit Limited 2000

Contents

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2000-017 Political forecast8 Economic policy outlook9 Economic forecast

12 The political scene

17 Economic policy

22 The domestic economy22 Output and demand24 Employment, wages and prices26 Financial indicators27 Sectoral trends

31 Foreign trade and payments

List of tables

9 International assumptions summary10 Gross domestic product by expenditure11 Forecast summary17 Consolidated public finances22 Growth in gross domestic product by sector23 Growth in gross domestic product by component of demand25 Consumer prices32 Foreign trade, Jan-Mar32 Current account33 Capital account

List of figures

13 Gross domestic product13 Peso real exchange rates25 Industrial production index26 Wages and unemployment

2 Mexico


26 Unemployment rate27 Interest rates27 Exchange rate28 Equity prices32 Foreign trade

Mexico 3


Summary

May 2000

The presidential election on July 2nd will be fiercely contested, as Vicente Foxof the PAN currently stands a real chance of ousting the PRI from power. Thenew government is not expected to change the basic economic policy orient-ation. Strong domestic demand and the risk of sharp monetary tightening inthe US pose a challenge to policymakers in the short term. Strong momentumin the first half of the year will support GDP growth of 5% in 2000, but theexpected slowdown in domestic and US demand will reduce GDP growth to3.5% in 2001. We expect the peso to weaken in the second half of 2000,creating price pressures, but the downward trend in the CPI should resume in2001. The trade and current-account deficits will widen in 2000-01.

Mr Fox has closed the gap on Francisco Labastida of the PRI in a campaigncharacterised by personal attacks rather than policy issues. Mr Labastida hasenlisted the help of the PRI old guard and state governors to bolster hisflagging candidature. A congressional body is considering whether to strip thetourism minister’s immunity from prosecution for alleged embezzlement.

The fiscal deficit for 1999 was within target, at 1.14% of GDP. The budget for2000 has been reallocated, although thanks to the expected oil windfall theexercise may have been largely symbolic. The monetary programme targetsyear-end inflation of 10%. New financial legislation has been approved. ThePunto Final debtor-relief programme has come to an end.

GDP growth rose to 5.2% in the fourth quarter of 1999 and gathered speed inthe first quarter of 2000 as private consumption strengthened. Nominalinterest rates have eased in line with inflation, which fell to 9.7% year on yearin April. The peso is relatively stable and reserves have reached historical highs.In the banking sector BSCH (Spain) has bought Serfín and Scotiabank (Canada)has bought Inverlat, while BBVA and Banamex are battling over Bancomer.

The trade boom has continued thanks to strong domestic and US demand,along with high oil prices. Import growth surpassed that of exports in Marchfor the first time since December 1998, widening the accumulated 12-monthtrade deficit to US$5.6bn, from a low of US$5.2bn in November. The current-account deficit narrowed to the equivalent of 2.9% of GDP in 1999. FDIreached US$11.6bn, while portfolio flows reached US$3.9bn. Mexico hassigned free-trade agreements with the EU, Israel and the “Northern Triangle”.Moody’s Investors Service has upgraded its rating of Mexican public debt toinvestment grade.

Editor: Robert WoodEditorial closing date: May 17th 2000

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule.

May 17th 2000

Outlook 2000-01

Economic policy

Foreign trade andpayments

The political scene

The domestic economy

4 Mexico


Political structure

United Mexican States

31 states and the Federal District (Mexico City). States are divided into municipalities

Presidential, within a system in which one party has formed the government since thelate 1920s

The president is elected for a single six-year term and appoints the cabinet; ErnestoZedillo Ponce de León took office on December 1st 1994

Bicameral Congress: 128 members of the Senate hold office for six years. The 500-member Chamber of Deputies is elected for three-year terms; 300 members are electedon a first-past-the-post basis, 200 by proportional representation

State governors are elected for six years; each state has a local legislature and has theright to levy state-wide taxes. Municipal presidents are elected every three years

There are 68 district courts and a series of appellate courts with a Supreme Court; the lawis split between federal and state law

August 1994 (presidential and congressional); July 1997 (congressional); next electionsscheduled for July 2000 (presidential and congressional)

The PRI has long dominated Mexican politics, but the 1988 elections created a politicalopening, which increased substantially with the 1997 election

Government—Partido Revolucionario Institucional (PRI); opposition—Partido AcciónNacional (PAN), Partido de la Revolución Democrática (PRD)

Ernesto Zedillo Ponce de León

Agrarian reform Eduardo Robledo RincónAgriculture, livestock & rural development Romárico Daniel Arroyo MarroquínAttorney-general Jorge Madrazo CuéllarCommerce & industrial promotion Herminio Blanco MendozaCommunications & transport Carlos Ruiz SacristánComptroller & administrative development Arsenio Farell CubillasEnergy Luis Téllez KuenzlerEnvironment, natural resources & fisheries Julia Carabias LilloFinance & public credit José Angel Gurría TreviñoForeign relations Rosario Green MacíasHealth José Antonio González FernándezInterior Diódoro Carrasco AltamiranoLabour & social welfare Mariano Palacios AlcocerNational defence Enrique Cervantes AguirreNavy José Ramón Lorenzo FrancoPublic education Miguel Limón RojasSocial development Carlos Jarque UribeTourism Oscar Espinosa Villarreal

Guillermo Ortiz Martínez

Official name

Political divisions

Form of government

The executive

National legislature

Regional governments

Legal system

National elections

National government

Main political organisations

President

Cabinet members

Central bank governor

Mexico 5


Economic structure

Annual indicators

1995 1996 1997 1998 1999

GDP at market prices (Ps bn) 1,837.0 2,504.0 3,179.0 3,791.0 4,623.0

GDP (US$ bn) 286.2 329.5 401.5 415.0 483.6

Real GDP growth (%) –6.2 5.1 6.8 4.8 3.7

Consumer price inflation (av; %) 35.0 34.4 20.6 15.9 16.6

Population (m) 90.0 91.8 93.7 95.6a 97.4a

Merchandise exports fob (US$ bn) 79.5 96.0 110.4 117.5 136.7

Merchandise imports fob (US$ bn) 72.5 89.5 109.8 125.4 142.1

Current-account balance (US$ bn) –1.6 –2.3 –7.5 –16.0 –14.0

Reserves excl goldb (US$ bn) 15.3 19.2 28.1 31.5 31.0

Total external debtc (US$ bn) 166.9 157.8 149.3 160.0 166.6a

Debt-service ratio, paid (%) 27.8 35.4 33.0 20.8 20.5a

Exchange rate (av; Ps:US$) 6.42 7.60 7.92 9.14 9.56

May 16th Ps9.56:US$1

Origins of gross domestic product 1998 % of total Components of gross domestic product 1998 % of total

Agriculture 5.8 Private consumption 68.5

Industry 28.9 Government consumption 9.8

Mining 1.4 Fixed investment 19.3

Construction 4.4 Stockbuilding 2.7

Electricity, gas & water 1.7 Exports of goods & services 29.1

Manufacturing 21.4 Imports of goods & services –29.5

Services 68.1 Total 100.0

Total incl others 100.0

Principal exports 1999 US$ m Principal imports 1999 US$ m

Manufactured goods 122,185 Intermediate goods 109,358 of which: maquiladora 63,748 of which: maquiladora 50,409

Oild 9,921 Capital goods 20,527

Agricultural goods 4,144 Consumer goods 12,174

Minerals 453 Total 142,059

Total 136,703

Main destinations of exports 1998 % of total Main origins of imports 1998 % of total

US 81.9 US 73.9

Canada 4.6 Japan 4.0

Japan 1.0 Germany 3.7

Spain 0.8 France 1.2

a EIU estimates. b Gross reserves; IMF methodology. c World Bank figures. d Includes oil products.

6 Mexico


Quarterly indicators

1998 1999 2000 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Government finance (Ps bn)Revenue 938 1,511 2,122 448 1,155 1,845 2,591 n/aExpenditure 897 1,477 2,165 441 1,102 1,841 2,656 n/aBalance 41 34 –43 7 53 4 –65 n/a

OutputIndustrial production (1993=100) General 123.2 125.7 125.4 122.1 128.6 131.0 131.1 n/a Manufacturing 129.8 130.4 131.2 128.2 136.0 137.0 137.4 n/a Mining 117.1 115.5 115.7 113.3 111.1 111.4 112.3 n/a

Employment, wages & pricesEmployment (‘000) 11,155 11,370 11,592 11,578 11,753 12,013 12,281 12,300 % change, year on year 6.5 9.9 8.1 6.0 5.4 5.7 5.9 6.2Unemployment rate (% of the labour force) 3.2 3.2 2.8 2.9 2.6 2.3 2.2 2.3Average nominal monthly wages 162.5 167.5 196.6 183.8 192.8 197.4 231.5 n/a % change, year on year 18.5 17.9 18.2 18.6 18.6 17.9 17.7 n/aConsumer prices (1995=100) 184.1 190.0 199.3 211.4 216.9 221.3 226.6 n/a % change, year on year 15.1 15.6 17.5 18.6 17.8 16.5 13.7 n/aProducer prices (1995=100) 179.5 186.0 196.0 204.9 208.7 213.0 217.5 n/a % change, year on year 12.5 13.5 16.6 17.3 16.3 14.5 10.9 n/aBMV stockmarket index (1978=0.78) 4,282.6 3,569.9 3,959.7 4,930.4 5,829.7 5,050.5 7,129.9 7,473.3 % change, year on year –3.9 –32.9 –24.3 –1.7 36.1 41.5 80.1 51.6

Financial indicatorsExchange rate Ps:US$ (av) 8.65 9.46 10.02 9.96 9.45 9.37 9.46 9.41 Ps:US$ (end-period) 9.04 10.11 9.86 9.52 9.49 9.36 9.51 9.23Interest rates (av; %) Deposit 12.1 14.2 16.1 13.4 8.7 8.5 7.9 6.7 Lending 22.0 31.4 39.1 34.4 24.2 23.8 21.1 18.2 Money market 20.6 29.9 36.4 31.6 22.9 22.4 19.5 17.5M1, (end-period; Ps bn) 262.4 260.9 308.1 290.6 301.9 316.2 395.5 n/a % change, year on year 19.3 15.3 15.4 14.0 15.1 21.2 28.4 n/aM2, (end-period; Ps bn) 920.6 989.8 1,074.1 1,089.9 1,099.3 1,134.3 1,199.3 n/a % change, year on year 16.3 22.4 19.7 23.4 19.4 14.6 11.7 n/a

Sectoral trendsCrude oil production (m b/d) 3.54 3.46 3.45 3.54 3.32 3.30 3.22 3.39

Foreign trade (US$ m)Exports fob 29,837 28,586 30,895 30,101 33,705 35,273 37,624 37,981 Maquiladora 12,985 13,338 14,640 13,609 15,690 16,601 17,849 n/a Oil 1,860 1,717 1,544 1,549 2,132 2,900 3,340 3,849Imports fob –31,023 –31,025 –33,451 –31,207 –34,620 –36,275 –39,962 –39,320 Maquiladora 10,345 10,657 11,804 10,711 12,424 13,123 14,151 n/aTrade balance –1,186 –2,439 –2,556 –1,106 –915 –1,002 –2,338 –1,339

Foreign payments (US$ m)Services balance –493 –440 –459 75 –451 –836 n/a n/aIncome balance –3,364 –3,457 –3,248 –3,670 –3,249 –3,155 n/a n/aCurrent account balance –3,481 –4,789 –4,636 –3,339 –2,954 –3,375 n/a n/aReserves excl gold (end-period) 30,646 29,266 31,799 31,284 31,346 32,585 31,782 36,371

Sources: IEA, Monthly Oil Market Report; IMF, International Financial Statistics; Banco de México, Indicadores Económicos; INEGI; STPS.

Mexico 7


Outlook for 2000-01

Political outlook

The political scene is currently dominated by the presidential and con-gressional elections scheduled for July 2nd. The crucial issue is whetherMexicans want a change of regime after more than seven decades of uninter-rupted Partido Revolucionario Institucional (PRI) government. Elections will befiercely contested, as an opposition candidate, Vicente Fox of the PartidoAcción Nacional (PAN)-Partido Verde Ecologista de México (PVEM) alliance,stands a real chance of ousting the PRI from government. If the election resultsare very close, political conflict cannot be ruled out.

Whoever is elected president in July (taking office on December 1st) willprobably lack the support of a working majority in Congress. In Mexico’sconstitution the legislature is designed to act as a powerful counterweight tothe executive—although this check on executive power was long concealed bythe PRI’s dominance in all branches of government (until it lost its majority inthe lower house in 1997) and by the president’s control over the PRI. Anotherpower to be reckoned with will be the independent Banco de México (Banxico,the central bank). These factors will constrain the new administration’s roomfor manoeuvre. In any case, both the PRI candidate, Francisco LabastidaOchoa, and Mr Fox are aware of the discipline that the international capitalmarkets impose on policymaking, and are unlikely to diverge much fromMexico’s basic economic orientation. The new government will undoubtedlytry to reach agreements with the parties in opposition, but consensus will bedifficult to build and even harder to maintain. This could delay importantpending legislation, including tax reform and electricity privatisation. From2001 political parties may well seek radical reforms to adapt the politicalsystem to the new circumstances, perhaps modifying the current proportionalrepresentation system or introducing a second round of voting in elections.

Mr Labastida’s initial lead in the polls has been whittled away as a result of hisown lacklustre campaigning and Mr Fox’s charismatic performance, which hasdrawn support from young, urban inhabitants and from business. Mr Fox’svictory in an important televised debate in late April has forced Mr Labastida tochange his ailing campaign strategy, putting to one side talk of forging a “newPRI” and hastily restoring links with the old guard to get it to rally behind him.This should bolster support among traditional voters, but recourse totraditional PRI methods of mobilising votes will heighten tensions and increasethe risk that the opposition will dispute the result in the event of a narrowvictory for Mr Labastida. Ironically, it may actually serve to strengthen the anti-PRI vote.

In terms of the electoral platforms of the two leading candidates, there isconsiderable overlap. Mr Labastida and Mr Fox are both promising stronggrowth; the generation of 1m or more new jobs a year; inflation close to levelsin developed countries; disciplined fiscal management; a comprehensive taxreform to reduce the government’s dependence on oil; and assistance to

Domestic politics

Election watch

8 Mexico


farmers and small businesses. The main area in which the two candidates differis on energy policy. Both support the current government’s policy of openingelectricity up to private investment, but Mr Labastida would not touchPetróleos Mexicanos (Pemex), the state oil company, whereas Mr Fox wouldconsider bringing private capital into Pemex if it proved politically viable inthe incoming Congress. With little to divide the two candidates on policy, themain issue facing voters is whether they want to oust the PRI from power, and,if so, whether they are comfortable with the leadership of Mr Fox. CuauhtémocCárdenas, the centre-left Alliance for Mexico candidate, standing for the thirdtime, is lagging behind in third place in the polls, but will win some of theanti-PRI vote from loyal supporters, particularly the urban poor.

Illegal immigration, drug-trafficking, money-laundering and policy on Cubawill remain thorny issues in Mexico-US relations. But mutual self-interest willensure that bilateral relations are conducted in a businesslike manner,whatever the outcome of both countries’ presidential elections in 2000.

Economic policy outlook

The central goal of the president, Ernesto Zedillo, will be to ensure a smoothtransfer of power in 2000, breaking the cycle of economic crisis that hasmarred the past four changes of government. The authorities’ prudent manage-ment of the public finances, flexible exchange-rate management, soundmonetary policy and skilful debt management have left the economy lessvulnerable than it was six years ago. However, a surge in domestic demand inrecent months indicates that the economy is in danger of overheating.Monetary tightening to dampen demand could strengthen the peso andextend the import boom. Policymakers may opt instead to cool the economyby lowering government spending after the elections. But policymakers willhave to remain wary of political uncertainty emerging from the elections,along with any external shocks, such as a sharper than expected tightening inshort-term US interest rates.

The EIU expects the government to more than meet its target of reducing theoverall non-financial public-sector (NFPS) deficit to 1% of GDP in 2000. Giventhat the budget was predicated on an average oil price of US$16/barrel and onaverage production some 100,000 barrels/day less than is now likely followingthe relaxation of production quotas under the March OPEC agreement, weestimate that the government will receive an oil windfall of around US$3.8bn,which we expect to be used in part to retire public debt.

Both of the two leading presidential candidates would maintain prudent fiscalpolicies in 2001, even if neither is likely to match Mr Zedillo’s commitment tofiscal discipline. A tax reform eliminating value-added tax (VAT) exemptionswill raise the tax take and make the public finances more robust. Even so, therewill be little room for an expansionary fiscal stance given the large amount ofbudgetary resources that will be absorbed each year in meeting the real interestcost on liabilities of the Instituto para la Protección al Ahorro Bancario (IPAB,the Institute for the Protection of Bank Savings).

International relations

Fiscal policy

Policy trends

Mexico 9


Economic forecast

The global economy is expanding extremely rapidly, and we now expect worldgrowth in 2000 to average 4.4% (measured on a purchasing power parity basis).The US economy continues to boom, and 2000 looks set to be the strongestyear of the current expansion. Japan’s economy is improving, and is set to postits second consecutive calendar year of positive growth. The euro-areaeconomies are starting to grow more rapidly after a difficult 1999, and theemerging markets are picking up—Asia is well into a very strong bounceback.Global growth is still skewed uncomfortably towards the US, but less so than in1999. We expect a slight global slowdown in 2001, almost entirely as a result ofa policy-driven deceleration in the US. Much of the rest of the world willcontinue to see strong growth.

There are significant risks to these forecasts. The longer the US economycontinues to grow above its trend rate, the more difficult it will be for the FederalReserve Board (the US central bank) to engineer a soft landing, givenimbalances in the US economy, including a negative private-sector savings rate,stretched equity valuations, and a large and growing current-account deficit. Ahard landing for the US economy would have adverse consequences for the restof the world, given its weight in global GDP and its importance as an exportmarket for both the developed and developing world. It would be particularlydamaging for Mexico, as a result of the two countries’ close commercial ties.Moreover, a sharp downturn in the US could have an adverse impact oninternational liquidity and capital flows to emerging markets.

International assumptions summary(% unless otherwise indicated)

1998 1999 2000 2001

GDP growthUS 4.3 4.2 4.9 3.1OECD 2.4 2.8 3.6 2.8EU 2.6 2.1 3.0 2.7

Exchange ratesUS$ effective (1990=100) 119.3 116.3 115.9 110.9¥:US$ 130.9 113.9 108.0 105.0US$:€ 1.12 1.07 0.99 1.09

Financial indicatorsUS$ 3-month commercial paper rate 5.3 5.2 6.3 6.1¥ 2-month private bill rate 0.7 0.3 0.1 0.6

Commodity pricesOil (dated Brent; US$/b) 12.8 17.9 22.0 18.8Gold (US$/troy oz) 294.1 278.8 290.0 300.0

Food, feedstuffs & beverages (% change in US$ terms) –13.9 –18.6 –2.1 4.9

Industrial raw materials (% change in US$ terms) –19.6 –4.3 17.5 9.4

International assumptions

10 Mexico


Gross domestic product by expenditure(Ps bn at constant 1993 prices; % change year on year in brackets unless otherwise indicated)

1998a 1999a 2000b 2001b

Private consumption 980.3 1,022.8 1,073.9 1,116.9 (5.4) (4.3) (5.0) (4.0)

Public consumption 146.7 148.2 149.7 152.7 (2.2) (1.0) (1.0) (2.0)

Gross fixed investment 278.8 295.0 324.5 340.7 (10.3) (5.8) (10.0) (5.0)

Final domestic demand 1,405.8 1,466.0 1,548.1 1,610.3 (6.0) (4.3) (5.6) (4.0)

Stockbuilding 47.3 36.1 42.2 46.9 (0.2)c (–0.8)c (0.4)c (0.3)c

Total domestic demand 1,453.1 1,502.1 1,590.3 1,657.2 (6.0) (3.4) (5.9) (4.2)

Exports of goods & services 431.1 490.9 539.9 581.0 (12.1) (13.9) (10.0) (7.6)

Imports of goods & services –436.1 –492.0 –553.9 –606.9 (16.5) (12.8) (12.6) (9.6)

Foreign balance –5.0 –1.1 –14.0 –25.9 (–1.1)c (0.3)c (–0.9)c (–0.8)c

GDP 1,448.1 1,501,0 1,576.3 1,631.3 (4.8) (3.7) (5.0) (3.5)

a Actual. b EIU forecasts. c Contribution to GDP growth.

The strengthening of the economy in the last quarter of 1999 gathered furthermomentum in the first quarter of 2000. The buoyancy of the US economy isensuring continued dynamism in Mexico’s manufacturing sector: in the firstthree months of the year industrial production grew by almost 9% year onyear. A 12.5% rise in gross fixed investment in February shows that theelections are not deterring investment, and rising employment, increasedpurchasing power and lower interest rates are powering a boom in privateconsumption: in the first quarter the bill for consumer goods imports rose by44% year on year. We expect the boom to moderate in the coming months asthe peso weakens and growth in the US begins to slow. Even so, the mom-entum of the economy at present should ensure a strong performance over theyear as a whole.

In 2001 we expect the economy to slow in response to a slowdown in the USand external financing constraints, which will begin to bite as the current-account deficit widens. A sharper slowdown than currently forecast is possibleif the macroeconomic imbalances in the US are worked out in a disorderlyfashion and the US economy goes into recession.

The continued downward trend in inflation is having a benign effect onexpectations, with most analysts now forecasting that year-end inflation willbe below the central bank’s 10% target. This, in turn, will lead wage settle-ments, which were running at well over the inflation rate in early 2000, tomoderate. However, we continue to expect volatility in the foreign-exchangemarket to feed through into consumer prices in the second half of the year,leading to year-end inflation slightly above target. In 2001 there may be some

Inflation

Economic growth

Mexico 11


lagged effect from currency weakness on consumer prices. However, this will beoffset by a slowdown in domestic demand, and over the year as a whole weexpect further progress towards the central bank’s long-term goal of conver-gence with the inflation levels of industrialised countries by the end of 2003.

Firm oil prices and capital inflows supported the peso early in 2000, keepingconsumer price rises in check despite increases in the prices of key items, suchas tortillas and transport. A rise of 3.4% in the consumer price index during thefirst four months of 2000 brought the annual inflation rate down to 9.7%, itslowest level since December 1994 and below the year-end target of 10%.

Forecast summary(% unless otherwise indicated)

1998a 1999a 2000b 2001b

Real GDP growth 4.8 3.7 5.0 3.5

Industrial production growth 6.3 3.8c 5.0 4.0

Unemployment rate (av) 21.8 19.1 18.5 19.5

Consumer price inflation Average 15.9 16.6 10.2 10.1 Year-end 18.6 12.3 10.6 9.6

28-day Treasury-bill rate 24.8 21.4 15.0 15.0

Public-sector balance (% of GDP) –1.3 –1.1 –0.8 –1.3

Exports of goods fob (US$ bn) 117.5 136.7 155.5 171.5

Imports of goods fob (US$ bn) –125.4 –142.1 –162.3 –181.9

Current-account balance (US$ bn) –16.0 –14.0 –19.1 –23.8 % of GDP –3.8 –2.9 –3.5 –4.3

Total foreign debt (year-end; US$ bn) 160.0 166.6c 178.5 192.4

Exchange rates (av) Ps:US$ 9.14 9.56 9.85 10.88 Ps:¥100 6.98 8.39 9.37 10.49 Ps:€d 8.16 8.96 10.20 10.11

a Actual. b EIU forecasts. c EIU estimate. d Ecu before 1999.

The appreciation of the peso since the start of 1999 has brought the realexchange rate (based on consumer price differentials between Mexico and theUS) close to levels prevailing in 1993-94 before the maxi-devaluation. Unlike sixyears ago, the peso’s appreciation has not so far led to macroeconomic im-balances. Export earnings growth (helped by high oil prices) has prevented asignificant widening of the trade deficit so far, but this is likely to change in thecoming months as domestic demand strengthens further and oil prices declinefrom first-quarter highs. We expect a widening trade deficit to lead to aweakening in the exchange rate by the end of 2000, and volatility over theelectoral period cannot be ruled out either. However, the economy’s basicallysound fundamentals and the floating exchange-rate regime should allow anyweakening to be absorbed without seriously damaging medium-term prospects.

Strong domestic and US demand was reflected in buoyant trade flows in thefirst quarter of 2000, but import growth outstripped that of exports in Marchfor the first time since December 1999, a trend we expect will continue.

External sector

Exchange rates

12 Mexico


Consumer imports were particularly strong in the first quarter, jumping by44% year on year. Although we expect a weakening in the peso to have astabilising effect on the external accounts in the second half of the year, thetrade and current-account deficits will be considerably higher than in 1999.

Our forecasts for the trade accounts in 2001 show a lower rate of both exportand import growth, reflecting a slowdown in both US and domestic demand. Itremains to be seen how vulnerable Mexican producers would be to a recessionin the US, a risk that cannot be discounted. Margins would certainly comeunder pressure, but we would expect Mexican suppliers to maintain andpossibly even increase their market share at the expense of US and third-partyproducers. Even so, the dynamic trend of Mexican exports since the NorthAmerican Free-Trade Agreement (NAFTA) came into operation in 1994 wouldbe interrupted.

The political scene

The presidential campaign began officially in early January 2000, once thecandidates had registered, although campaigning has in effect been under waysince mid-1999. Of the six registered candidates, attention has focused on thetop three contenders: Francisco Labastida Ochoa, the nominee of the rulingPartido Revolucionario Institucional (PRI); Vicente Fox Quesada, candidate ofthe centre-right Alliance for Change, formed by the Partido Acción Nacional(PAN) and the green Partido Verde Ecologista de México (PVEM); andCuauhtémoc Cárdenas Solórzano, supported by a five-party, centre-left Alliancefor Mexico, which is headed by the Partido de la Revolución Democrática (PRD).The other three candidates, despite long political careers and public namerecognition, have failed to attract much attention: Manuel Camacho Solís of thePartido del Centro Democrático (PCD, a PRI splinter), Porfirio Muñoz Ledo,running for the Partido Auténtico de la Revolución Mexicana (PARM), andGilberto Rincón Gallardo, the nominee of the Partido Democracia Social (PDS).

The presidential campaignunfolds

Mexico 13


The campaign has been characterised by continual personal attacks betweenthe candidates and by a lack of specific policy statements. Mr Fox has adopteda particularly abrasive style towards Mr Labastida, leading the PRI candidate toadopt a similar style even though it does not suit his sedate style ofcampaigning and has led to some blunders. In his most serious gaffe,Mr Labastida accused Mr Camacho (a former PRI member) of being “morallyresponsible” for the assassination of Luis Donaldo Colosio (whose mantle as aPRI moderniser Mr Labastida was trying to appropriate), the PRI presidentialcandidate, in March 1994; Mr Camacho immediately sued for defamation.Mr Cárdenas has concentrated on presenting the PRI and PAN as beingessentially the same—both guilty of widespread corruption and economicmismanagement.

Mr Labastida became the election favourite after his sweeping victory in thePRI primary in November. Since then, as a result of a lacklustre campaign, hehas lost popularity, although he still remains the slight favourite. Mr Fox’scharismatic performance, in contrast, has helped him narrow the gap as thecampaign has unfolded. He won an important televised debate in late April,changing his strategy by not attacking Mr Labastida and projecting himselfinstead as a statesmen. Opinion polls in mid-April (before the televised debate)gave Mr Labastida voter support of 35-40%, compared with 28-32% for Mr Fox,and this gap has since narrowed further. Mr Cárdenas, standing for the thirdtime, lags far behind in third place with ratings of 10-15%. The combinedsupport for the other three candidates is below 5%. As votes for them wouldprobably otherwise have gone to the main opposition candidates, theirparticipation is boosting Mr Labastida’s chances.

The erosion of Mr Labastida’s lead and a mediocre performance in the televiseddebate have sent shockwaves through the PRI, forcing Mr Labastida to alter hiscampaign strategy radically. His campaign manager and close political ally,Esteban Moctezuma, has been sidelined, making way for party heavyweightsand restored ties with the old guard. The 21 PRI governors have announced thatthey will now actively give their support to Mr Labastida “within the law”.Mr Labastida will probably deploy some of these leading PRI figures to attackMr Fox personally. The PRI has also set up a commission to enlist the help offederal civil servants, a sign that Mr Labastida will now rely more heavily on thePRI’s traditional methods of mobilising voters. He will also ditch his earlier talkof forming a “new PRI”. Though this strategy should bolster Mr Labastida’s voteamong traditional PRI sympathisers, it will make it impossible for him to comeacross as a candidate of change—allowing Mr Fox to assume this importantmantle for himself, and perhaps hardening the anti-PRI vote in the process.

In contrast to previous presidential campaigns, the three main candidates haveat their disposal similar levels of public funding. Based on the results of the1997 congressional election, the autonomous Instituto Federal Electoral (IFE,the Federal Electoral Institute) has awarded the PRI Ps910.2m (US$95m), thePAN Ps671.5m, and the PRD Ps653.4m. However, both the PAN and the PRDcandidates can also draw on the public funds allocated to their alliancepartners. With the PVEM’s allocation, Mr Fox’s funding rises to Ps905.4m,

Mr Labastida’s lead slips

The main candidates havesimilar official spending

Personal attacks, not issues,dominate the campaigns

Mr Labastida brings the oldguard into the campaign

14 Mexico


while the funds allocated to the five-party coalition behind Mr Cárdenas givehim a total of Ps1bn. The PAN and particularly the PRI will benefit most frombusiness and individual contributions. Mexican law limits these to a maximumof 5% of the total allocated by IFE to each party, but IFE’s capacity to verify theamounts raised and spent is minimal.

In what has become a worrying trend, candidates have attacked IFE and theTribunal Electoral del Poder Judicial de la Federación (TEPJF, the electoraljudiciary) when resolutions have gone against them. IFE enjoys credibilityamong voters, but it would be undermined if criticisms from the candidatescontinued. Mr Fox, for example, recently declared that he would not recognisea PRI victory unless it was by an overwhelming margin, although this wasprobably electoral posturing.

Three recent decisions have proved controversial: after protests brought by thePRI and other parties, the TEPJF overruled the IFE in early January, when itannounced that neither Mr Fox’s photograph nor his silhouette could appearon the ballot paper, as the PAN candidate intended. In mid-February the TEPJFruled that the PRI was using the colours of the national flag lawfully in itselectoral symbol (this has long been a bone of contention), and in March IFEdetermined (in a divided decision) that Mr Fox would not face any punish-ment for declaring that the PRI was involved with illegal drug-traffickers, underthe consideration that Mr Fox was exercising his freedom of speech. IFE iscurrently deciding whether Andrés Manuel López Obrador of the PRD iseligible to stand for mayor of Mexico City (he registered to vote in Tabasco in1997), in what will be its most politically charged decision in recent months.The credibility of the electoral authorities will be crucial in the event of theirbeing called on to resolve any possible electoral disputes.

With six candidates vying for voter support and no second round of voting inthe election, the most probable outcome at this stage is a PRI win with lessthan 50% of the valid vote. Portraying himself as the main opposition con-tender, Mr Fox continues to urge the other non-PRI candidates (notablyMr Cárdenas) to step aside and support his candidacy as a means of ousting thePRI. However, changes to the electoral law approved in 1996 prevent a politicalparty or coalition from putting forward the candidate of another party oralliance. The possibility of the opposition forming a broad coalition expired atthe beginning of January, when the candidates were registered. A presidentialcandidate could step aside unofficially and ask his supporters to vote foranother candidate, but his name would remain on the ballot paper, causingconfusion. Moreover, such a step would lose many votes for that party orcoalition in the legislative election. Mr Cárdenas and the other oppositioncontenders have said they will not step aside unofficially in favour of Mr Fox,although Mr Muñoz Ledo and Mr Camacho might do so nearer the election.

By mid-April all the political parties had nominated their candidates for thecongressional election. Although the selection process sparked fierce clasheswithin both the PRI and the PRD, there were very few desertions, partly becauseit was too late in the electoral calendar for any potential defectors to be nom-

The IFE’s impartiality isquestioned

Congressional list selectionsspark internal clashes

A common oppositioncandidacy is unrealisable

Mexico 15


inated by other parties. The only serious problem that the PRI faced was in thestate of Baja California. Contrary to expectations, no member of the cabinetresigned to become a candidate; the highest-ranking officials to leave thegovernment to seek places as legislators were the director-general of theInstituto Mexicano del Seguro Social (IMSS, the Mexican Institute for SocialSecurity) and a few under-secretaries (from the interior and finance ministries).The congressional list of the PRI is made up of many familiar names, with onlya few representatives from the “technocratic” wing of the party. Felipe Calderónheads the PAN’s list, suggesting that he would lead the party in Congress. In thepast, Mr Calderón has encouraged the PAN to co-operate with the PRI.

The gubernatorial election campaigns have heated up, as several contests arequite open and are being fiercely contested. A broad opposition coalitionheaded by the PAN and the PRD has nominated a former—and popular—PRImember, Pablo Salazar Mendiguchía, for the governorship of Chiapas (wherethe election will take place on August 20th)—a formula that has provedsuccessful in the past. The PAN has a strong chance of retaining Jalisco,although the PRI will put up a strong fight. The opposition also stands achance of winning in Morelos on July 2nd, particularly if parties unite behinda common candidate, as the elected PRI governor was forced to resign amidaccusations of corruption. The PRI can be reasonably confident of victory inthe election in Tabasco on October 15th, because the south-eastern state is astronghold of Roberto Madrazo, the outgoing governor.

In Mexico City the campaign has been as acrimonious as the presidentialcampaign, and there will be no repeat of Mr Cárdenas’s landslide victory whichswept the PRD to power in 1997. The contest is a three-horse race, with thePRD candidate, Mr Lopez Obrador, currently in the lead. The PRD has a solidsupport base, particularly among the urban poor. Mr Fox’s rise has so far failedto boost the appeal of the PAN’s candidate, Santiago Creel. The PRI’s candidate,meanwhile, is a charismatic and well-known contender, Jesús Silva Herzog. Forthe first time in the city’s history, the authorities (known as “delegates”) of the16 boroughs in which Mexico City is divided will also be elected, instead ofbeing nominated by the president or the city governor.

In late March the Procuraduría General de Justicia del Distrito Federal (PGJDF,the Mexico City attorney’s office) accused the tourism minister, Oscar EspinosaVillarreal, of embezzlement during his governorship of Mexico City (1994-97).A congressional committee voted to let a four-member congressional bodydecide (on the basis of evidence presented by the PJGDF and Mr Espinosa)whether to remove his legal immunity as a federal cabinet secretary—itself afirst in Mexico’s political history—and press charges. The case hinges on thediscovery by the Mexico City comptroller’s office that Mr Espinosa divertedPs420m into an account of one of his senior aides without any receipts tosupport the expenditure.

The case sparked an open confrontation between the executive and the PRD-led Mexico City government, which discovered the alleged embezzlement in1998 but delayed bringing it out into the open until the electoral period tomaximise the political impact. The congressional body will decide whether to

Congress considers a case ofembezzlement by minister

The gubernatorial electionsheat up

16 Mexico


strip Mr Espinosa of his immunity and allow the PJGDF to press charges bymid-June, several weeks before the election. President Ernesto Zedillo initiallysprang to Mr Espinosa’s defence but is not expected to intervene while thecongressional body deliberates.

On February 6th, after nearly ten months, the student strike (by far the longestin its history) at the Universidad Nacional Autónoma de México (UNAM), thelargest public university in the country, with 275,000 students, came to anabrupt end, when the Policía Federal Preventiva (PFP, a federal police force)took over the main university campus and arrested the students occupying itwith no violent clashes or casualties. Two weeks before this a new proposal byUNAM’s president, Juan Ramón de la Fuente, obtained the overwhelmingsupport of students and academics in a plebiscite. The plan met most of thedemands made by the Consejo General de Huelga (CGH, the General StrikeCouncil) and had as its centrepiece a proposal to call a university congress thatwould make binding resolutions on the workings of UNAM. Classes startedagain on February 14th.

In total, over 1,000 students were placed under arrest, but most were freedquickly. The strike leaders (about 40 awaited trial in early May) were formallyaccused of theft and damage to public property (initially the federal govern-ment considered bringing terrorism charges, but this proposal was droppedafter a public outcry). Student groups have continued to protest, particularlythrough temporary occupations of buildings, and negotiations over the estab-lishment of a university congress have foundered amid increasing oppositionfrom CGH sympathisers.

At the end of March the 59-year-old Felipe Arizmendi Esquivel was appointedthe new bishop of San Cristóbal de las Casas, succeeding Samuel Ruiz, whoresigned in November 1999 (following canon law, as he had turned 75). It willbe difficult for Monsignor Arizmendi to fill the shoes of his predecessor, asMonsignor Ruiz is still the only person that the Ejército Zapatista de LiberaciónNacional (EZLN) will recognise as a mediator. However, the new bishop isfamiliar with the conflict, as he had been serving as bishop of Tapachula,another city in Chiapas. He is considered to be independent of the governmentand a critic of the EZLN, even though he supported Monsignor Ruiz when thelatter was criticised by the government for his alleged support of the Zapatistas.

Two new guerrilla groups emerged in February-March. The Fuerzas ArmadasRevolucionarias del Pueblo (FARP, the Popular Armed Revolutionary Forces)and the Ejército Villista Revolucionario del Pueblo (EVRP, the Villista PopularRevolutionary Army) claimed responsibility for several small explosions inPuebla and Mexico City respectively (with no casualties). Both are presumed bythe interior ministry to be small splinters from the Ejército PopularRevolucionario (EPR, Popular Revolutionary Army). Although the emergence ofthese guerrilla groups poses little threat, such incidents heighten tensionsduring the election period.

The UNAM strike ends, butthe conflict continues

Two small guerrilla groups emerge

Chiapas continues instalemate

Mexico 17


Economic policy

The public-sector finances (central government, state-owned enterprises underdirect budgetary control and public entities under indirect control) posted adeficit of Ps52.5bn (US$5.5bn) in 1999, down by 6% in real terms on thedeficit in 1998. This is equivalent to 1.14% of GDP, within the government’starget of 1.25%.

The marked increase in oil prices since March 1999 led to a rise of 5.2% in realterms in overall oil revenue, raising its share in overall revenue slightly, to32.5%. Tax revenue rose by 10% in real terms in 1999, thanks to improvedcollection and economic growth. Income tax revenue grew by 8% in realterms, while revenue from value-added tax (VAT) rose by 8.2%. Tax revenue onproduction and services jumped by 18.5% in real terms (partly because ofincreased petrol duties in the first half of the year). On the spending side,commitment to fiscal discipline was evident. Although public expenditureincreased by 4% in real terms, this was mainly because of the 26.4% rise in thecost of servicing the public debt. Primary expenditure, which excludes interestcharges on public debt and is the best indicator of the underlying spendingstance, increased by only 0.5%, well below the level of output growth.

Consolidated public finances(Ps m)

1998 1999a % real change

Revenue federal government & PEDBCb 783,046.0 954,937.3 4.6 Federal government 545,175.7 671,345.4 5.6 Taxation 404,225.2 518,377.0 10.0 Non-taxation 140,950.5 152,968.4 –6.9 PEDBC 237,870.2 283,591.9 2.3 Pemex 82,066.4 101,461.0 6.0 Others 155,803.9 182,130.9 0.3

Oil revenue 252,990.4 310,396.4 5.2

Non-oil revenue 530,055.6 644,541.0 4.3

Expenditure federal government & PEDBC 830,609.7 1,006,981.6 4.0 Public debt financial cost 111,264.3 163,983.3 26.4 Primary expenditure 719,345.4 842,998.4 0.5

Federal government & PEDBC balance –47,563.7 –52,044.2 –6.1

PEIBCc balance –354.9 –465.1 12.4

Overall balance –47,918.6 –52,509.3 –6.0

a Preliminary figures. b Public entities under direct budgetary control. c Public entities under indirectbudgetary control.Source: SHCP.

In 1999 the government maintained its policy of shifting its financing to thedomestic market as a means of developing local capital markets andproviding suitable instruments for a growing pool of private pension funds.Gross public domestic debt (excluding liabilities of the Instituto para laProtección al Ahorro Bancario, IPAB) increased in nominal terms by 33.9%during 1999, from Ps378.3bn at the end of 1998 to Ps506.4bn a year later

The fiscal deficit is belowtarget in 1999

Domestic public debtincreases

18 Mexico


(equivalent to 11% of GDP). Net domestic debt, which adjusts for publicassets such as privatisation proceeds deposited in the Contingency Fund,increased during the same period from Ps35.2bn to Ps52.1bn. Thus, the netdomestic debt at the end of December totalled Ps454.3bn (equivalent to 9.8%of GDP). The average maturity of domestic debt by the end of 1999 was 561days, a five-year high.

At the end of December gross public external debt stood at US$92.3bn (netexternal debt was US$83.4bn), 4.9% of which was short term. The amount isalmost unchanged (down by just US$5m) from the year-end 1998 figure. Thetotal gross public debt/GDP ratio at the end of 1999, at 30.1% (with externaldebt constituting 19.1% of GDP), is among the lowest in the OECD region. Butthis does not include IPAB liabilities, which amount to about 15.5% of GDP,bringing Mexico’s burden more in line with the OECD average.

On February 29th the Ministry of Finance officially announced the reallocationof the budget, following changes approved by the Chamber of Deputies at theend of 1999 which increased social expenditure (including pensions) byPs7.62bn while keeping the fiscal deficit target unchanged from the executive’soriginal proposal, at 1% of GDP.

The budgets of the presidential office and of several ministries were reduced byPs4.4bn, and that of public enterprises and state-owned bodies by Ps3.22bn.The brunt of the reduction was borne by the ministries of education (Ps1.2bn),communications and transport (Ps1.48bn), and environment, natural resourcesand fisheries (Ps651m), along with the state oil company, Petróleos Mexicanos(Pemex; Ps1.5bn), the electricity company, Comisión Federal de Electricidad(CFE; Ps700m), and the Instituto Mexicano del Seguro Social (IMSS, the socialsecurity institute; Ps700m). The cuts fall more heavily on investmentexpenditure (Ps4.82bn, mostly by Pemex and the communications andtransport ministry) than on current spending (Ps2.8bn).

However, the process of reallocating expenditure was politically charged:President Ernesto Zedillo made clear his annoyance that social (recurrent)expenditure had been increased based on the assumption that oil prices wouldbe much higher in 2000 than originally estimated by the finance ministry, as itwould make public spending more dependent on oil prices.

The reallocation was apparently intended to prevent opposition lawmakersfrom taking the credit for raising social spending and making the executiveappear tight-fisted. It looks, however, as though the reallocation will in theend have been purely a symbolic exercise, as we expect average oil prices toexceed the figure assumed in the budget, giving the government an oilwindfall. In February the government quietly announced that any extrarevenue derived from oil exports (almost one-third of all public revenue isoil-related) would first be allocated to the budget items that were cut, withthe rest going to retire public debt. Until mid-April the price of the Mexicanbasket of export crudes averaged US$23.9/barrel, while the governmentassumption for 2000 as a whole is US$16/b (originally US$15.5/b, butincreased after negotiations with legislators). An increase of US$1/b in the oil

The budget for 2000 isofficially reallocated

The budget reallocation ispolitically charged

Mexico 19


price brings about Ps5bn in additional revenue to the state coffers, so anaverage price of US$17.5/b during the year would be enough to make thebudget reallocation a symbolic exercise.

The Banco de México (Banxico, the central bank) presented its monetaryprogramme for 2000 in mid-January, confirming the year-end inflation targetof 10% that had already been announced in November. Banxico’s credibilityhas been strengthened by lower than targeted inflation in 1999 and con-tinuing falls in consumer prices in early 2000. Banxico has restated itsmedium-term target of lowering inflation to around 2-3% by 2003 and has saidthat it will react to any shocks by tightening monetary policy so as to controlinflationary expectations. The monetary programme aims to maintain the levelof net international reserves during the year.

Banxico is moving towards an inflation-targeting strategy, which is becomingincreasingly popular among central bankers. Until recently Banxico targetedmovements in the monetary base as an indicator of future inflation, but theauthorities are now questioning the usefulness of monitoring it so closely. Inthe second half of 1999 growth in the monetary base was well in excess ofthe rate projected in the monetary programme, yet inflation ended the year0.7 percentage points below target. The authorities believe that with rela-tively low levels of inflation the correlation between the two diminishes. Theauthorities will now use a broader range of indicators in addition to themonetary base to study the path of inflation. To keep economic agents betterinformed on its thinking, the central bank began publishing quarterly reportson inflation in April.

On January 18th, only days after presenting its monetary programme, Banxicoannounced that it was increasing the “short”, or corto, from Ps160m toPs180m, (after a year without altering the level), arguing that inflationaryexpectations were still above its year-end target of 10%. (The corto restrictsmarginal liquidity in the money markets, sending a signal to the commercialbanks that Banxico wants to see interest rates higher). The decision was mainlyintended to reassure markets that Banxico is prepared to tighten policy to meetits target. Annual inflation fell below 10% in April, but the monetaryauthorities will be cautious about relaxing policy prematurely. In fact, in mid-May Banxico pre-empted US Federal Reserve (the US central bank) tighteningby increasing the corto to Ps200m.

Mexico’s 17-month IMF stand-by programme came under review and wasapproved by the Fund on March 17th, allowing the government to draw downUS$1.2bn, out of a total of the US$4.1bn agreed amount (to be used torefinance debts owed to the IMF since the 1995 crisis). The government had torequest an official waiver as the primary fiscal surplus was slightly lower thanexpected, but all other macroeconomic targets were met or even exceeded. TheIMF, however, officially cautioned Mexico against an accommodative monetarypolicy, expressing its concerns over the increase in the monetary base observedat the end of 1999.

The monetary programmefor 2000 is outlined

Monetary policy istightened in January

The IMF programme isreviewed and approved

20 Mexico


After several months of negotiations, legislation designed to strengthen thefinancial system was passed by Congress just before the end of the legislativesession in late April. Both houses passed the Federal Law on Credit InstitutionGuarantees (originally sent by Mr Zedillo to Congress in April 1999), which isintended to shorten the process of bank foreclosure on borrowers’ collateralpledges or properties upon loan default. Just a few days previously, the Chamberof Deputies approved a new bankruptcy law (which the Senate had consented toin December 1999), which replaces legislation dating back to 1943.

At the end of March the Punto Final (“full stop”, Mexico’s last debt-reliefprogramme) officially came to an end. The scheme offered large discounts todebtors if they kept up payment on their loans or paid them off. Accordingto the Asociación de Banqueros de México (ABM, the Mexican Bankers’Association) 1.12m debtors (mortgage holders, small businesses and farmerswere eligible) entered the scheme, some 85% of those eligible. Three-quarterschose to pay off their loans completely. Punto Final brought the total cost ofthe various debtor support schemes to an equivalent of 3.3% of GDP andhelped to increase the quality of banks’ assets by reducing the number ofpast-due loans. In December 1999 banks reported past-due loans totallingPs80.8bn out of total loans of Ps906bn (8.9%, down from 9.7% in Septemberand 11.4% in December 1998).

On March 1st IPAB started a weekly auction of bonds, denominated bonos deprotección al ahorro (BPAs), to refinance debt assumed by its predecessor, theFondo Bancario de Protección al Ahorro (Fobaproa, the Banking Fund for theProtection of Savings), during the 1994-95 financial crisis.

Contrary to the Fobaproa promissory notes (officially registered as temporarydebt), BPAs are tradeable. The Fobaproa debt capitalised all interest payments,creating a lack of liquidity on banks’ balance sheets, a factor in the sustaineddecline in credit since the crisis. To avoid swamping the market, thegovernment stopped issuing the five- and ten-year bonos de desarrollo (Bondes).Since their first auction, each weekly sale of three-year BPAs has been over-subscribed. IPAB expects to issue between Ps60 and Ps80bn during 2000. At theend of March it announced that in the second quarter of 2000 weekly auctionsof BPAs should be in the Ps2-2.5bn range, well above the Ps1-1.5bn issuedduring March. In the second half of 2000 IPAB may issue bonds with amaturity of up to seven years.

IPAB expects to obtain Ps20bn by selling the assets it absorbed as part of thebank rescue. These funds will help to offset the huge cost of rescuing thebanking system. IPAB has decided to sell its portfolios of bad loans outright—previously it had auctioned the rights to manage them. The result of the firstauction (19,972 commercial and industrial loans held by Banco SantanderMexicano, with a nominal value of Ps6.94bn) was announced on March 8th.The winner was Firstcity Commercial Corporation, which offered Ps1.43bn,20.6% of the nominal value of the loans.

IPAB issues bonds

New financial legislation isfinally approved

Punto Final comes toan end

IPAB sells assets absorbedin bank rescue

Mexico 21


IPAB has also started the sale of the large properties that form part of its loanportfolios. At the end of March it completed the auction of the first package ofhotels belonging to the luxury Camino Real chain, formerly belonging to thefailed Banco Unión, receiving US$271m for seven hotels. During the firstquarter of 2000 total asset sales brought in Ps7.5bn. By the end of March thedebt owed by IPAB amounted to Ps722bn, equivalent to 15.5% of GDP, ofwhich it estimates it can recover around 20% through asset sales. Theremainder is to be paid over a 20-year period.

In addition, IPAB will obtain the proceeds from the sale of Banca Serfín andBancrecer. On May 8th Banco Santander Central Hispano (BSCH) outbid HSBCwith an offer of Ps14.65bn for Serfín, about one-tenth the amount the govern-ment had injected into the bank.

As the issuing of BPAs instead of Bondes caused a decrease in the averagematurity of domestic debt, the government will start issuing new (and old)debt instruments to compensate during the second quarter of 2000. A move tolengthen maturities will be assisted by declining local interest rates andinflation. Once per quarter the government will issue a five-year fixed-ratebond (the first auction, on May 16th, was for Ps1bn). The five-year bond is thefixed-rate peso-denominated instrument with the longest maturity (in Januarythe government began issuing three-year bonds). From April 17th the financeministry began placing five-year floating-rate Bondes every two weeks. TheseBondes will have a six-month coupon using 182-day certificados de la Tesorería(Cetes) as the reference rate. The overall amount of debt to be auctioned duringthe second quarter will not exceed Ps146.25bn, similar to the amount issued inthe first quarter.

On April 10th, as part of its attempts to increase the maturity of domestic debt,the government swapped Udibonos (index-linked bonds) with a nominal valueof Ps25.16bn for similar instruments with a longer maturity. The swapinvolved 17 different issues of Udibonos, ranging from very short-term paperto four-year bonds. The new paper, also in the form of Udibonos, came inthree-, four-, five- and ten-year maturities.

In an effort to increase liquidity in the secondary market of fixed-rate publicdebt, the government is to create the role of “market-maker”. Banks andbrokerages which apply and are the most important participants in the moneymarket between March 1st and May 31st will become official market-makersduring the second half of the year. Those chosen will have to participate in allprimary auctions of government debt, along with offering and selling rates forCetes and other fixed-rate bonds every working day. Market-makers will havethe option to buy a certain amount of debt offered by the government or toobtain liquidity through loans from the central bank in exchange for publicdebt on a daily basis, along with an increased credit line with Banxico to buypublic debt and exclusive periodic meetings with finance ministry and centralbank officials to discuss any issues in the money market. New market-makersmay participate every six months, with the least active player dropping out atthe end of each six-month period.

New debt instruments are offered

The money market isspurred

22 Mexico


Banks and brokerages were supposed to disclose their strategies and plans fortrading financial instruments over the Internet by the end of April, and, followingapproval of their plans, were to be allowed to begin trading. However, theComisión Nacional Bancaria y de Valores (CNBV, the National Banking andSecurities Commission) has moved the deadline back to July. New rules forInternet securities trading were announced by the CNBV at the beginning ofFebruary and will regulate trading when it begins. The rules will cover all electronicreception, registration and exercising of stock buy or sell orders for issues currentlylisted on the stock exchange. At the end of January the two top financialinstitutions, Grupo Financiero Banamex-Accival (Banacci) and Grupo FinancieroBancomer, launched e-trade simulators and are poised to launch real trading.

From April 1st all state and municipal governments that wish to contract debtthrough bond issues or (commercial or development) bank loans require a creditrating from an established agency. This scheme is intended to make any localdebt issuing more market-oriented, and will replace the guarantees granted bythe finance ministry (fiscal transfers from federal government were used ascollateral) under which local governments were previously able to borrow.

The domestic economy

Output and demand

During the fourth quarter of 1999 GDP grew by 5.2% year on year, confirmingthe upward trend that began in the second quarter and reversing the slowdownthat began in the second quarter of 1998. The strong fourth-quarter perform-ance lifted GDP growth for 1999 to 3.7%. Transport and communications,which registered an 8.8% expansion during the year, was the most dynamicsector. Manufacturing grew by 4.1%. Mining was by far the worst performer,with activity contracting for the fifth consecutive quarter, although this isrelated to production cuts by oil exporters.

Growth in gross domestic product by sector(% change, year on year)

1998 1999 Year 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year

Agriculture 0.8 5.0 1.8 2.9 3.9 3.5

Mining 2.7 –1.4 –5.1 –3.5 –2.9 –3.2

Manufacturing 7.3 1.6 4.7 5.1 4.8 4.1

Construction 4.2 3.9 5.6 2.5 5.9 4.5

Electricity, gas & water 1.9 4.0 4.8 3.5 5.3 4.4

Commerce, restaurants & hotels 5.6 –0.9 1.9 5.9 9.2 4.1

Transport & communications 6.3 7.6 8.9 9.4 9.2 8.8

Financial services 4.5 2.3 2.1 2.6 3.8 2.7

Community services 2.8 0.7 1.4 2.0 2.0 1.5

Total 4.8 1.8 3.1 4.3 5.2 3.7

Source: Instituto Nacional de Estadística, Geografía e Informática (INEGI).

e-trading is delayed

Rules for local governmentborrowing change

Growth speeds up in thefourth quarter

Mexico 23


Growth in gross domestic product by component of demand(% change, year on year)


Private consumption 5.4 2.2 3.3 4.0 7.6 4.3

Government consumption 2.2 1.8 1.6 –1.3 1.4 1.0

Gross fixed capital formation 10.3 3.8 6.1 5.2 8.1 5.8

Exports of goods & services 12.1 7.8 14.2 18.8 14.6 13.9

Imports of goods & services 16.5 4.5 11.4 16.6 17.9 12.8

GDP 4.8 1.8 3.1 4.3 5.2 3.7

Source: INEGI.

The most dynamic component of aggregate demand was exports, whichincreased by 14.6% in the fourth quarter (and by 13.9% in 1999 as a whole). Thisincrease was explained by the dynamism of non-oil exports, particularly thosefrom the maquiladora (in-bond) industry. Aggregate demand increased by 8.3%during the fourth quarter (and 5.8% in 1999 as a whole) and gross fixed-capitalformation by 8.1% (5.8% in the year as a whole), driven entirely by the privatesector. Spending on imports of machinery and equipment increased by 19.5%during the fourth quarter (15.5% in the year), and that on goods of domesticorigin by 3.2% (1.9%).

The contrast between the private and public sectors was striking, as privateinvestment expanded by 9% in 1999 while public investment contracted by15.3%. Consumption presented a similar picture: that in the private sectorincreased by 7.6% in the last quarter of 1999 (and 4.3% in the year), withexpenditure on durable goods up by 7.2% and that on non-durables up by5.8%. Consumption expenditure by the government increased by just 1.4%during the fourth quarter and by 1% in 1999 as a whole.

The latest evidence suggests that growth gathered steam during the first quarterof 2000. Gross fixed-capital formation increased by 15.9% year on year (thehighest increase since March 1998) in January and by 12.5% in February,compared with average growth of 8.1% in the fourth quarter of 1999. More-over, industrial production has been showing a clearly upward trend sinceDecember 1999. According to preliminary estimates by the Instituto Nacionalde Estadística, Geografía e Informática (INEGI, the state statistical authority),industrial production grew by 8.3% in January and 9.7% in February, thehighest growth rate since March 1998.

In February manufacturing activities grew by 10.6%, compared with 9.1% inJanuary. The maquiladora industry increased its production by 16.2% inJanuary and 17% in February, while other industry grew by 8.5% in Januaryand 10.1% in February. Construction was up by 7.8% in January and 7.6% inFebruary, while the output of electricity, gas and water increased by 5.7% inJanuary and 7.2% in February. Mining activities expanded by 0.4% in Januaryand 4.7% in February, reversing the slide of the past year.

GDP growth gathers speedin the first quarter

The private sectordrives growth

24 Mexico


The mini-boom in private consumption continued in the first quarter of 2000.Retail sales surged by 16.5% in February (and 11.2% in January)on the year-earlier period, while wholesale sales increasing by 10.9% and 6.1% respectively.According to figures from the Asociación Nacional de Tiendas de Autoservicioy Departamentales (ANTAD, the National Association of Supermarkets andDepartment Stores), during February purchases in its department stores grewon average by 11.8% on an annual basis, while purchases in supermarketsincreased by 9.8%. The figures for January were 7.7% and 5.5% respectively. InMarch, according to information from the Asociación Mexicana de la IndustriaAutomotriz (AMIA, the Mexican Auto Industry Association), 139,301 vehicleswere sold, an increase of 38.7% on the year-earlier period. The increase forFebruary was an even more impressive 54.1%.

Employment, wages and prices

During March the unemployment rate in urban areas (a narrow measure basedon a survey comprising people of at least 12 years of age who were unable tofind work) was 2.15%, below the 2.71% recorded in the year-earlier period. Theaverage unemployment rate in the first quarter of 2000 was 2.29%. A muchmore useful indicator of the level of unemployment is the partial unemploy-ment rate in urban areas, also published by INEGI, which indicates the numberof people working fewer than 35 hours per week. That rate was 17.2% inFebruary 2000, a clear improvement on the 20.7% registered in February 1999.The number of permanent workers registered at the Instituto Mexicano delSeguro Social (IMSS, the Mexican Institute for Social Security) increased from12.98m in December to 13.06m in February, slightly lower than the 13.11mregistered in November 1999 (an all-time high).

Wage settlements have been falling. According to preliminary estimates by theMinistry of Labour and Social Welfare, wage negotiations during Marchresulted in average increases of 12.7%, below the 12.9% recorded duringJanuary and February and well below the 16.1% recorded in December.

Private consumption surges

Jobs are created, whilewage increases fall

Mexico 25


Inflation has maintained its downward path, although the rapid plunge of the lastmonths of 1999 has given way to a more gentle decline. In April year-on-yearinflation fell to 9.7%, below the government’s year-end target of 10% and thelowest 12-month inflation rate since December 1994. The downward trend ininflation is explained by the stability of the peso, which has a particularly strongbearing on inflationary expectations in Mexico. The peso’s stability has loweredthe price of imported goods and also prevented domestic producers from raisingtheir final prices because of competition from imported goods. Changes ininternational oil prices do not affect gasoline prices in Mexico, thanks to a specialvariable tax. The stability of the peso has set in motion a virtuous cycle ofdeclining inflation expectations, lower wage settlements and falling interest rates.

Consumer prices(% change)

1999 2000 Monthly Cumulative Annual Monthly Cumulative Annual

Jan 2.5 2.5 19.0 1.3 1.3 11.0

Feb 1.3 3.9 18.5 0.9 2.2 10.5

Mar 0.9 4.9 18.3 0.6 2.8 10.1

Apr 0.9 5.8 18.2 0.6 3.4 9.7

May 0.6 6.4 18.0 – – –

Jun 0.7 7.2 17.4 – – –

Jul 0.7 7.9 17.0 – – –

Aug 0.6 8.5 16.6 – – –

Sep 1.0 9.5 15.8 – – –

Oct 0.6 10.2 14.9 – – –

Nov 0.9 11.2 13.9 – – –

Dec 1.0 12.3 12.3 – – –

Source: Banco de México.

Inflation reaches single-digit levels in April

26 Mexico


Financial indicators

The peso has remained fairly stable in nominal terms, a trend in evidence sincethe second quarter of 1999 thanks to high oil prices, fiscal and monetaryprudence, dynamic exports (see Foreign trade and payments) and economicgrowth. During the first two months of 2000 the 48-hour contract (sell bid)fluctuated in the Ps9.4-9.6:US$1 range. The decision by Moody’s InvestorsService in March to upgrade Mexico’s external debt rating brought a surge ofoptimism that strengthened the peso. During March and the first half of Aprilthe exchange rate fluctuated within the Ps9.2-9.4:US$1 range, mainly tradingbetween Ps9.3 and Ps9.4 to the dollar. Average daily volatility was relatively high:0.42% during January, 0.26% in both February and March, and 0.39% in the firstthree weeks of April. Concerns over the extent of monetary tightening in the USweakened the peso slightly in the first half of May, to Ps9.6:US$1.

Nominal interest rates have decreased in line with inflationary expectations.After rising to 17% in late January following an increase in the “short”, or corto(see Economic policy), the interest rate offered by benchmark 28-day certificadosde la Tesorería (Cetes, Treasury bills) fell below 13% by mid-March and remainedat nominal levels not seen since December 1994, until concerns over monetarytightening in the US pushed rates to 14.5% in May. The yield on 91-day Cetesfollowed a similar trend, at a higher spread (usually 75-150 basis points more). Asmonthly inflation has fallen from the seasonally high levels of December andJanuary, annualised real interest rates have increased markedly.

For almost a year the Banco de México (Banxico, the central bank) has notmade any contingency sales of dollars in the exchange markets because it hasnot needed to smooth currency volatility (the last intervention took place onMay 25th 1999, and only US$65m was sold). Gross and net internationalreserves at the central bank have increased markedly as, among other trans-actions, Banxico has purchased dollars through an established mechanism ofauctioning dollar put options to the commercial banks (at the end of Februaryand March the full amount offered was bought and exercised, US$250m ineach month). Gross international reserves increased from US$30.7bn at theend of 1999 to US$34.1bn on April 14th—a historical high and well within the

The peso remains relativelystable in nominal terms

International reservesreach historical highs

Mexico 27


range that the monetary authorities consider ideal (US$30bn-40bn). Netreserves increased during the same period by US$2bn, from US$29.5bn toUS$31.5bn (a record of US$32.7bn had been reached on March 24th). Thelatter definition is net of the money owed by the country to the IMF (thegovernment paid US$912m to the IMF at the end of January).

Investors have been guided less by renewed optimism about Mexico’s prospectsthan by US stockmarket performance. The Indice de Precios y Cotizaciones(IPC, the stock exchange index) began the year slightly above the 7,000-pointmark and surged to 8,320 points on March 9th before plunging during thefollowing weeks as US technology stocks fell amid expectations of rising USshort-term interest rates. By May 9th the IPC stood at 6,250 points, a loss of12.4% in the year to date in nominal and dollar terms.

Sectoral trends

In a move co-ordinated with members of OPEC (Mexico is not a member) tobring world prices gently off a nine-year peak the government increased crudeexports by 150,000 barrels/day as of April 1st. The increase is in effect untilJune 30th, when it will come under review. This was less than half the325,000 b/d Mexico shaved off exports during 1999, and in percentage termsfell short of the amount by which OPEC countries agreed to increase their owncrude exports at the end of March. The relaxation of the production curbs hadthe intended effect, at least in the short term. Expecting an increase in supply,international prices were already easing, in the case of the Mexican basket ofcrudes from a peak of US$29.27/barrel on March 9th. By mid-April that pricehad fallen to US$20.82/b, bringing the average price since the beginning of2000 down to US$23.89/b. However, prices have risen again since and furtherproduction increases may be needed if OPEC is to meet its objective ofstabilising prices in the US$20-25/b range. The official oil price assumptionused in Mexico’s budget calculations is still at US$16/b for 2000, but theMinistry of Energy is revising its estimate to US$20/b.

Bolsa volatility is triggeredby US stockmarket trends

Oil exports are increased toreduce international prices

28 Mexico


According to information released by the state oil company, PetroleosMexicanos (Pemex) on March 18th, as of January 1st the proven and probableoil and gas reserves of the country were equivalent to 58.2bn barrels(representing 40 years of production), a small drop on the 58.7bn barrelsrecorded a year earlier. The financial results for 1999 show that earnings beforetaxes reached Ps206.7bn, a 34% increase on the previous year. However, aftertaxes (the company operates under a special tax regime) Pemex posted a loss ofPs1.44bn on Ps319.81bn in revenue, which jumped by 28% from 1998 owingmostly to the sharp increase in oil prices over the past year.

Despite repeated attempts by President Ernesto Zedillo, the opposition partiesin the Chamber of Deputies have refused to consider his proposed changes tothe constitution, which would allow the full participation of private investorsin electricity generation. The item was not even included in the agenda of thecongressional sessions that took place between March 15th and April 30th.Any similar initiative will have to wait at least until the new Congressassembles in September.

Private investments, however, have continued under the current legislation,which allows several schemes for private investor participation. As companiesare permitted to produce electricity for self-consumption, Grupo Alfa was ableto award a 25-year, US$500m contract for an electrical plant to Spain’sIberdrola at the end of March. The 388-mw plant, to be located in Monterreyand scheduled to be completed by April 2002, will supply several of the largeindustrial conglomerates based in the city.

On March 20th the Comisión Reguladora de Energía (CRE) awarded Gaz deFrance a permit to distribute gas to over 68,000 consumers in 51 municipalitiesin the states of Puebla and Tlaxcala. The bidding process for permits todistribute gas in Guadalajara (the second largest city in the country) andneighbouring municipalities opened in January. Interested parties were due topresent their bids in April and the winner will be announced in June.

Production of automobiles has increased markedly and remains closely tied toexports. According to figures from AMIA, during March vehicle productiontotalled 161,457 units, an increase of 24.7% on the year-earlier period, with76.7% of the total sold outside the country (slightly above the 73.9% recordeda year earlier). During the first quarter of 2000 production was on average 19%higher than in the year-earlier period, well above the 1.5% increase observedduring the last quarter of 1999.

New investments in the sector are mainly for export. General Motors began anexpansion of its vehicle assembly plant in Ramos Arizpe (where it currentlybuilds the Cavalier, Pontiac Sunfire and Chevy Monza) in the first quarter of2000, with the intention of doubling the size of the plant (mainly tomanufacture the new Pontiac Aztek). At the beginning of February EatonCorporation announced that it would build a US$100m plant to produceheavy truck transmissions in San Luis Potosí.

Oil reserves fall slightly,and Pemex faces losses

Electricity reforms are puton hold until after election

More gas distributionpermits are awarded

Export demand boostsvehicle production

Mexico 29


On February 21st a bankruptcy court judge in Mexico City officially declaredTaesa insolvent, three months after the airline was banned from flying in thewake of a crash that killed 18 people. Taesa has US$380m in debts, of whichUS$120m, with no guarantees, is owed to the Instituto para la Protección alAhorro Bancario (IPAB, the Institute for the Protection of Bank Savings). After itwas suspended from flying in November, Taesa fended off creditors in courtwhile searching desperately, and unsuccessfully, for a new investor or partner.The company did not have exclusive rights to fly to any Mexican cities, butother airlines have already filled some of the routes it left vacant, notablyAllegro Airlines, a charter operator.

The future of the Controladora Internacional del Transporte Aéreo (Cintra, theinternational air transport holding company) remains unclear. Whether theholding company, which controls four airlines—including the domestic giantsAeroméxico and Mexicana—should remain united to create a “nationalchampion”, or be broken up to foster competition (particularly on domesticroutes), is a thorny issue that the authorities have yet to resolve.

Three groups registered interest in operating a group of 13 airports that formthe Grupo Aeropuertario del Centro-Norte (1st quarter 2000, pages 25-26),including those in the tourist resorts of Acapulco and Zihuatanejo, and thenorthern business hub of Monterrey. The winner will be announced onMay 19th. The privatisation of the Mexico City airport will be left to the nextadministration, as the government has dithered over the site for a secondinternational airport for the capital.

At the end of March the government declared void an auction of Mexpost, thecourier and parcels division of the Mexican Postal Service (with a 3.5% share ofthe domestic market). The Ministry of Communications and Transport rejectedthe lone bid it received from Chronopost, the express arm of the French postoffice, La Poste, on the grounds that it did not “guarantee the best terms” forthe government (it did not give the terms of Chronopost’s bid). Four otherbidders pulled out of the auction at the last minute. The ministry did not saywhen or if it would reopen the bidding process for Mexpost.

On May 8th IPAB announced that a Spanish bank, Banco Santander CentralHispano (BSCH), had won the bidding for Banca Serfín, the third largest bank inMexico, with 560 branches, 2.5m clients and US$18bn in assets. BSCH offered topay Ps14.64bn, which is 1.59 times Serfín’s book value. The offer was 20% higherthan that of HSBC (which already has a 19.9% stake in the bank). IPAB and itspredecessor, the Fondo Bancario de Protección al Ahorro (Fobaproa, the BankingFund for the Protection of Savings) had injected Ps123bn into Serfín since 1995 tocapitalise it adequately and save it from bankruptcy.

On March 31st the Mexican branch of BBVA, a Spanish bank, and Mexico’ssecond largest bank, Bancomer, signed a merger and capitalisation agreement.But this process was derailed at the beginning of May when Banamex, Mexico’slargest bank, made a bid for Bancomer, offering to pump US$2.4bn into themerged group instead of the US$1.2bn capital injection offered by BBVA, inexchange for 40% of the merged BBVA-Bancomer. A merged Banamex-

Taesa is officially declaredbankrupt

Privatisation effortscontinue

BSCH buys Serfín

BBVA and Banamex battleover Bancomer

30 Mexico


Bancomer would form the largest banking group in Latin America, with amajority of Mexican capital. With the entry of foreign banks into Mexico,Banamex’s directors have played the nationalist card. Bancomer hired CreditSuisse First Boston to evaluate the offers, seeking to maximise the long-termshareholders’ value. BBVA is looking to obtain a substantial position in theMexican market, particularly after the purchase of Serfín by BSCH, and isexpected to raise the bidding.

Banamex’s directors have rejected concerns that the merged group would enjoy amonopoly in several markets. However, when in the recent past both banksmade noises about a possible merger the Comisión Federal de Competencia(CFC, Federal Competition Commission) let it be known that such a movewould almost certainly be blocked, as the merged bank would control 40% ofbanking assets. The CFC has pointed out that although in terms of lending toMexico’s 500 largest firms there was plenty of competition from foreign banks,in terms of lending to small and medium-sized companies, and mortgage, creditcard and consumer credit services a merged, Banamex-Bancomer would bedominant. Most probably, assets and businesses would need to be sold for thepotential Banamex-Bancomer merger to be approved by the CFC.

At the end of March Canada’s Bank of Nova Scotia (Scotiabank) purchased 45%of Inverlat for US$40m from IPAB. Scotiabank, which had been managingInverlat since 1996, raised its stake in the bank from 10% to 55%, paying intotal US$215m for a cleaned up bank that ranks eighth in terms of capital andfifth in deposits. According to IPAB, which will keep a 45% stake in the group,it had cost some US$4.9bn to keep Inverlat afloat for the past four years.

Another acquisition, that of Banco del Atlántico by Bital, was expected to beconcluded at the end of June. In February 1998 Bital took over administrativecontrol of Atlántico, but the buy-out process was never concluded, asFobaproa-IPAB retained ownership of the latter (spending some Ps6.6bn toclean it up). Sharp differences have emerged, however, on the amount ofreserves that Bital should have created for Atlántico. As both banks havecompletely integrated their operations already, the process cannot be reversed,and IPAB and Bital have no option but to reach an agreement. When theprocess is concluded, Bital can consider acquiring another bank, possiblyBancrecer, which is due to be privatised at the end of 2000.

Talks on interconnection fees and regulations to guarantee fair competitionbroke down between the domestic giant Teléfonos de México (Telmex) andcompetitors Alestra (part-owned by AT&T) and Avantel (45% owned by MCIWorldCom) during the last week of March, pushing the Comisión Federal deTelecomunicaciones (Cofetel, the telecommunications watchdog) to announcethat Telmex would face quality and price regulations. However, on April 18thTelmex requested judicial protection from the decision, a tactic it hasemployed successfully in the past. (In January 1999 Cofetel had concededdefeat in another attempt to rein in Telmex following a judicial victory by thephone company.) Long-distance competitors currently need to feed intoTelmex’s local network to provide services, as Telmex controls about 11m fixed-line connections to homes and businesses, nearly all of the land-line links in

Scotiabank buys Inverlat

Phone operators quit talksover Telmex dominance

Mexico 31


the country. Competition for international calls has led Telmex to drop its ratesto consumers while increasing local and regional rates significantly, wherecompetition is minimal. The government’s apparent failure to rein in Telmexand foster greater competition to benefit consumers in telecoms weakensconsensus on pushing through other structural reforms in the economy.

The biggest threat to Telmex may come from the US government. In early Aprilthe office of the US Trade Representative (USTR) accused Mexico of failing toopen its telecoms market and threatened to take the dispute to the World TradeOrganisation (WTO). The US will determine by July 28th whether anyadditional action is appropriate (the announcement followed an annual reviewof major US trading partners and their compliance with WTO telecomsagreements). Mexico has said it is willing to discuss US complaints. The USTRpressure follows a US$100,000 fine that the US Federal CommunicationsCommission (FCC) imposed on Telmex in February for denying some servicesto Avantel and Alestra.

Foreign trade and payments

Data for March confirm that the trade boom that began in the second half of 1999has continued, buoyed by strong domestic and US demand. However, importgrowth (16.9%) surpassed export growth (15.3%) in March, reversing a trend inevidence since January 1999 in which export growth outstripped that of imports,and probably signalling the start of a trend of widening trade deficits. On theexport side, the huge rise in oil export receipts only partly explains the boom, as oilexports represent a relatively small share of total exports. Despite the realappreciation of the peso, manufacturing exports have continued to surge, drivenby persistently strong demand in the US economy. Maquiladora (in-bond) industryexports continue to show the greatest dynamism. With regard to imports, thestrength of the peso and greater consumer confidence contributed to a jump of43.7% in consumer goods imports in March, providing evidence of a mini-consumption boom. Growth in intermediate and capital goods was consistentwith the dynamism of export-oriented industries, particularly maquiladora.

The trade boom continues

US pressure to take Telmexto the WTO


Foreign trade, Jan-Mar(US$ m; fob)

1999 2000a % change

Exports 30,101.2 37,980.9 26.2Oil 1,548.9 3,849.3 148.5Non-oil 28,552.2 34,131.6 19.5 Agriculture 1,516.2 1,537.0 1.4 Minerals 98.1 112.0 14.2 Manufacturing 26,937.9 32,482.7 20.6

Imports 31,207.0 39,320.3 26.0Consumer goods 2,442.6 3,509.8 43.7Intermediate goods 24,187.7 30,385.9 25.6Capital goods 4,576.7 5,424.6 18.5

Trade balance –1,105.8 –1,339.4 21.1

a Preliminary.Source: Instituto Nacional de Estadística, Geografía e Informática (INEGI).

In the first quarter of 2000 the trade deficit was up by 2.1% on year-earlierlevels, but remains manageable. The accumulated 12-month trade deficit,which reached US$5.6bn in March, has started to widen again after a low ofUS$5.2bn in November.

During the fourth quarter of 1999 the current-account deficit reachedUS$4.47bn, down by 3.2% on the year-earlier level of US$4.79bn. The deficitfor the year as a whole stood at US$14bn (2.9% of GDP), down by 10.9% on1998 thanks to a smaller trade deficit. The current-account deficit in 1999 wasthe result of deficits in the trade (US$5.36bn), income (US$13.35bn) andservices (US$1.62bn) accounts, which were only partly offset by a surplus inthe transfers account (US$6.32bn). In the services account, receipts fromforeign tourists exceeded expenditure by Mexican tourists abroad by US$3.1bn.The main expenditure in the income account was US$8.83bn in interestpayments on external debt, a rise of 4.3% on 1998. Nearly the entire surplus onthe transfers account during the quarter was explained by remittances fromMexicans working abroad, mainly in the buoyant US economy (US$5.91bn).

Current account(US$ m)


Exports fob 117,460 30,101 33,705 35,273 37,624 136,703

Imports fob 125,373 31,207 34,620 36,275 39,962 142,062

Trade balance –7,913 –1,106 –915 –1,002 –2,338 –5,361

Services (net) –559 205 –314 –700 –810 –1,619

Income (net) –13,266 –3,752 –3,379 –3,227 –2,990 –13,348

Transfers (net) 6,012 1,362 1,659 1,629 1,665 6,315

Current-account balance–15,726 –3,291 –2,950 –3,300 –4,473 –14,013


The current-account deficitnarrows

Mexico 33

EIU Country Risk Service May 2000 © The Economist Intelligence Unit Limited 2000

Capital account(US$ m)


Liabilities 17,032 4,371 3,511 4,616 4,284 16,782 Indebtedness 6,173 1,267 414 –46 –322 1,313 Foreign investments 10,859 3,104 3,097 4,662 4,606 15,469 Direct 11,311 2,929 2,798 2,417 3,424 11,568 Portfolio –452 175 299 2,245 1,182 3,901

Assets 432 –2,972 228 –6 111 –2,640

Capital account balance 17,464 1,399 3,739 4,609 4,395 14,142


The current-account deficit was financed by the surplus in the capital account,which reached US$4.4bn in the fourth quarter of 1999, bringing the total for 1999to US$14.14bn. This was down by 19% on 1998 thanks to a large fall in externalborrowing, which was only partly offset by an increase in foreign investment.

During 1999 the net inflow of foreign investments, both direct and portfolio,reached US$15.47bn, a rise of 42.2% on 1998 levels. Foreign direct investment(FDI) remained strong but stable, reaching US$11.57bn, slightly above theUS$11.31bn observed in 1998. A huge increase was observed in foreignportfolio investment (FPI), which reached US$3.9bn, with US$3.77bn goinginto the stockmarket and US$132m into the money market, in sharp contrastto the US$452m in FPI outflows registered in 1998. At the end of March thestock of FPI in Mexican securities stood at US$74.84bn. Foreign investors’holdings of government debt stood at Ps22.8bn.

Net external borrowing reached US$1.31bn in 1999, a large fall from US$6.17bnthe year before. The non-banking private and public sectors increased theirindebtedness, but this was counterbalanced by a reduction of debt in both theprivate and public banking sectors, as well as the Banco de México (Banxico, thecentral bank). Net international reserves increased by US$594m during the year,while the errors and omissions item registered an inflow of US$463m.

On March 23rd, after it had been approved by the Mexican Senate and theEuropean Parliament and, in a preliminary manner, by all EU governments(negotiations had been concluded in November), Mexico and the EU signed acomprehensive free-trade agreement (FTA; 1st quarter 2000, pages 30-31) inLisbon. The agreement awaits ratification by some EU members, but isexpected to come into force on July 1st 2000. When fully implemented, theagreement will cover 100% of EU-Mexico trade in industrial products, 99.5% oftrade in the fisheries sector and 62% of trade in agricultural products.

Also in March, an FTA was signed between Mexico and Israel (negotiations hadbeen concluded in February). As with the FTA signed with the EU, the agree-ment is attractive to Mexico not only because of the prospect of increasedtrade, but also because of the possibility of foreign investors using the countryas a platform to export to countries that are open to Mexican products.

The capital account surplusnarrows

Foreign investmentsincrease substantially

FTAs signed with EU, Israeland the “Northern Triangle”


On May 10th the government concluded negotiations on an FTA with the socalled Northern Triangle of Guatemala, Honduras and El Salvador, a process thatbegan eight years ago. The FTA will come into force on January 1st 2001. Tariffswill be reduced to zero on industrial goods by 2012 and on agricultural goods by2013. Sensitive items such as beer and steel have been given special treatment,and public procurement was kept out of the agreement and will be addressedlater. The Mexican government hopes the FTA will improve the economicprospects of Chiapas, given its location, and that Mexican small and medium-sized businesses will find a natural market in the Northern Triangle countries.

In February Mexico and Brazil started negotiations (scheduled to last untilJune) on an accord to expand bilateral trade. Any deal would come into forcein connection with a broader Mexico-Mercosur accord. The negotiations havetaken place after several years of frosty commercial relations (in 1997 anagreement on Latin American integration was not renewed, resulting inprotectionist measures on the part of both nations). By mid-April negotiatorshad reached agreement on the sensitive automotive sector, according a mutualannual quota of 40,000 light vehicles and a tariff of 8%.

At the beginning of April the minister for commerce and industrial production,Herminio Blanco Mendoza, travelled to Japan to explore the possibility ofnegotiating an FTA. However, he found great resistance from producers in theagricultural sector and general reticence, as Japan has never negotiated abilateral FTA.

On March 7th Moody’s Investors Service, an international rating agency,increased the rating on Mexico’s long-term external public debt from Ba1 toBaa3, which is an investment grade. This was first time that Mexican uncol-lateralised public debt had received investment grade status. A week later,Standard & Poor’s, another rating agency, upgraded its rating from BB to BB+(with a positive outlook), one level below investment grade. In May Fitch IBCAfollowed suit, moving its BB rating on long-term external public debt to BB+,one level below investment grade.

Moody’s announcement triggered some euphoria in the markets, which policy-makers tried their best to quell, fearing a repeat of the swings in sentiment thatculminated in the December 1994 peso crisis. Even before Moody’s announce-ment, the sovereign had been active in the international capital markets in anongoing attempt to refinance its external debt payments. According to theMinistry of Finance, US$11.4bn in debt matures in 2000, representing some12.4% of the total public external debt. US$2.8bn was paid and/or rolled overin the first quarter, with US$4.4bn scheduled to be serviced in April-June. Ofthe total, US$1.93bn is in trade-related credit lines, while US$1.47bn is owed tocommercial banks, US$554m to bondholders, and US$411m to the World Bankand the Inter-American Development Bank (IDB). In the second half of 2000the government will have to repay US$4.3bn in maturing debt.

On January 21st the sovereign issued a US$1.5bn global bond with a ten-yearmaturity, bearing an interest rate of 9.875%, a spread of 315 basis points over theUS Treasury benchmark. This is 234 basis points lower than the yield on a

Moody’s upgrades publicdebt to investment grade

Free-trade talks progresswith Brazil, but not Japan

Sovereign taps capitalmarkets

Mexico 35

EIU Country Risk Service May 2000 © The Economist Intelligence Unit Limited 2000

US$1bn bond sold in February 1999. On March 1st the sovereign repeated itssuccess in the Eurobond market, issuing a ten-year €1bn bond. The bond has a7.5% coupon and was issued at a spread of 210 basis points over the benchmark.Previous issues (in June 1999 and September 1997), each for €400m, were issuedat spreads of 337 and 230 basis points over their respective benchmarks.

At the end of March the government implemented two buybacks of Bradybonds: on March 23rd it issued US$500m in ten-year global bonds and usedthe proceeds to retire US$534m in Brady bonds (releasing US$230m incollateral in the form of US Treasury zero-coupon bonds). On March 29th afurther US$500m in Brady bonds was swapped for bonds issued by the govern-ment. Through this operation US$210m in collateral bonds was released.

In March a US$55m loan was agreed between Mexico and the World Bank(along with a US$8.9m donation from the World Environment Fund) tofinance projects in marginalised rural areas. Nacional Financiera (the maindevelopment bank) will act as a financial agent. The loan will have a 12.5-yearmaturity and pay the dollar Libor interest rate. The Japanese government(through the Japanese Bank for International Co-operation) has granted theBanco Nacional de Obras y Servicios Públicos (Banobras, the National Bank forPublic Works and Services) a loan of ¥22.1bn (US$211m). The 25-year loan, atan undisclosed preferential interest rate, will be used to build hydraulic infra-structure in the Baja California peninsula.

Mexico contracts debt withthe World Bank and Japan

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Mexico - iuj.ac.jp€¦ · The presidential election on July 2nd will be fiercely contested, as Vicente Fox of the PAN currently stands a real chance of ousting the PRI from power