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Despite financial jitters, MNCs are still hot on Mexico
Development Business / January 16, 1999

By Larry Luxner

WASHINGTON -- Mexico's 1998 GDP growth is forecast at 4.2%, but the official projection for 1999 have been revised downward from 3% to 2.4%. Finance Minister Angel Gurria says, however, that if the Mexican Congress accepts the basics of a lean federal budget next year, the economy -- led by a thriving export sector -- can grow by 3%.

Inflation in 1999, meanwhile, will decline from 17.6% in 1998 to 13% in 1999, according to the government. However, Santander Investment, in its November 1998 Global Economic Research Report, notes that strong consumer demand in 1998 will take inflation to 18.2%; the forecast for 1999 inflation has been adjusted upward slightly, from 15% to 16%.

Nevertheless, Gurria says Mexico is not in crisis at all.

"You have to watch your language," he told reporters recently, "because crisis is what is happening in Russia, where there are real political, financial and social crises." Gurria added that the "financial instability" which Mexico has been going through recently is "a result of the worldwide volatility which was transmitted to Mexico through stock and capital markets, and which has been combated by the authorities using the tools at hand."

He said the government of President Ernesto Zedillo favors the creation of an international authority which would monitor financial systems in each country in order to avoid further crises, though he added that Mexico cannot restrict capital flows, as has been suggested by the International Monetary Fund -- which views the restriction of speculative capital as a valid means of forestalling the damage caused by capital flight in times of international crisis.

"The Mexican economy keeps growing in spite of a reduction in oil income and unstable international financial markets," says the Mexican Embassy in Washington.

In his State of the Union address on Sept. 1, Zedillo forecast an average growth rate of 5% a year for the 1996-2000 period, which he said implied around 4% annual growth in 1999 and 2000. In the context of a slowing U.S. economy, weak oil prices and high domestic interest rates, says Santander, "this number now looks optimistic."

Interestingly, during the first half of this decade, Mexico received half of all foreign investment in Latin America. Over the past few years, however, Brazil has taken over as the leading recipient of foreign investment, and in 1997 captured 36% of all foreign capital; Mexico, meanwhile, got 20%. Analysts say that's because in the early 90s, privatizations generated massive income, but that the "second wave" of privatizations has failed to appear in Mexico. Brazil, meanwhile, has entered that second wave, while Mexican authorities debate the merits of the issue and money goes elsewhere.

On the plus side, Duff & Phelps Credit Rating Co. plans to maintain its favorable credit ratings for Mexico. DCR says Mexico has a sufficiently strong basic economy to withstand the current crisis, and "has made a lot of effort this year to reduce the risks of foreign debt and to ensure that it reaches its macroeconomic goals."

According to the Mexican Secretariat of Finance and Public Credit, Mexico's industrial production rose 7% in the 12 months ending June 30, 1998. Output by domestic manufacturers increased by 7.9%, while output by export-oriented maquiladoras rose by 9.5%. Due to higher energy use by companies, homes and the government, utilities grew 7.3% in June 1998, while construction activity rose 3.4% and mining activity was up 3.3%.

Mexico currently ranks as the 10th biggest exporting nation in the world, with total 1997 exports exceeding $110 billion, and exports so far this year reaching $67 billion.

Employment in Mexico's 2,952 maquiladora plants recently surpassed one million, according to government data. Tijuana (Baja California) is the city with the largest number of maquila factories (666, employing 147,175), while Ciudad Juarez (Chihuahua) has the largest concentration of maquila workers (203,713 in 252 plants). The apparel/textile sector has 820 factories employing 202,572 workers, while the electrical/electronic machinery sector employs the largest number of workers (253,844 in 469 factories).

During the first half of this year, Mexico was the only Latin American country to rank among the United States' 10 most important trading partners in the electronics sector, and in fact was the second-most important worldwide, after Japan. The Electronics Industry Alliance says Mexico sold a record $9.7 billion worth of electronics goods to the United States from January to June 1998, a 24% increase over last year, and bought almost $2 billion from the U.S., a 17% increase.

Mexico is also an increasingly important buyer of U.S. goods -- a trend likely to continue as long as the Mexican economy keeps growing. But the relationship between Mexico and the United States -- which along with Canada are the three members of the North American Free Trade Agreement -- aren't without problems.

In late September, Mexico requested the creation of an arbitration panel to resolve the two-year-old controversy derived from the Clinton administration's refusal to allow Mexican trucks access to California, New Mexico, Arizona and Texas, as well as for Mexicans to invest in cross-border transportation services within U.S. territory.

The Mexican Embassy in Washington says that as of Dec. 18, 1995, the United States should have allowed such access to U.S. border states and, starting on Jan. 1, 1997, Mexican investors were supposed to have had access to this sector. However, despite numerous meetings held between officials from both countries, the United States has still not eliminated the restrictions which it unilaterally adopted.

"In spite of its decision to continue these procedures to resolve the dispute," says the embassy, "Mexico is still open to finding a negotiated solution that allows the parties to fulfill their commitments under NAFTA."

On a separate issue, U.S. and Mexican officials are still negotiating a Mexican request to increase import levels of garments made without fabric formed in North America.

Mexican importers have saturated the amount of supplies allowed in under the so-called tariff preference levels for the first time since NAFTA took effect in 1994.

Allan Grant, a senior trade analyst at International Development Systems Inc. in Washington, says one type of tariff prference level, which includes all types of cotton or man-made fiber apparel, was filled Sep. 11, when supplies reached 45 million square-meter equivalents. Another category -- this one for garments sewn in Mexico of pieces cut in the U.S. but with fabric made outside of a NAFTA country -- was filled at 25 million square feet on Sep. 3.

Once the limits are reached, importers will have to pay higher tariffs when the goods cross the U.S. border. According to Grant, more and more Asian garment manufacturers are taking advantage of Mexico's low labor costs and the favorable tariffs given to Mexican-made products by setting up factories in Mexico itself.

"The first couple of years of NAFTA, they were underutilized, but last year they started to be used up," Grant told The Journal of Commerce. "This year, they're filled up and it's a nightmare for people."

Meanwhile, the Mexican government has cut investment in the generation of electricity to the bone, a move described by unions and opposition parties as a strategy to privatize the sector. Authorities reply, however, that the necessary funds simply aren't available.

In order to meet demand, Mexico would have to invest over $25 billion in its power grid by the year 2005 -- a figure that can only be met with private-sector participation, says Mexico's Energy Secretariat. To do so with public resources would be "practically impossible." The government is pushing for legal reforms that would throw the energy sector open to private investors, who today generate around 8% of electric power in Mexico through short-term agreements.

Authorities say energy demand will grow 6% a year between now and 2005, meaning Mexico's current capacity of 35,000 megawatts will have to be increased by a third.

Despite the problems, foreign investment in Mexico's manufacturing sector continues unabated. Typical of new manufacturing investments is Alabama-based SCI Systems Inc. which announced in September that it's building a 100,000-square-foot "greenfield" facility in Apodaca, Nuevo León. The plant, to complement existing SCI facilities in Mexico City and Guadalajara, will make direct broadcast satellite receivers for a large European multinational, as well as electronic subassemblies for a family of medical products for a U.S. company.

SCI says it selected the Monterrey area "because of its growing importance as an industrial center in Mexico, its readily available and skilled labor, and its transportation proximity to the United States."

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