Mexico Economic Weekly - December 11

UNCLAS MEXICO 003650 STATE FOR WHA/MEX, WHA/EPSC STATE FOR EEB USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD TREASURY FOR IA ENERGY FOR WARD, LOCKWOOD AND DAVIS E.O. 12958: N/A TAGS: ECON EFIN ETRD ENRG ELTN EAIR PGOV SENV MX SUBJECT: Mexico Economic Weekly - December 11 ¶1. (U) The Mexico Economic Weekly supplements individual reporting from the Consulates and the Embassy Mexico Economic Section to provide a sense of ongoing trends. Please contact Adam Shub (shubam@state.gov) or Sigrid Emrich (emrichs@state.gov) for questions or comments about this report. ¶2. (U) Table of Contents: TRADE/INVESTMENT: -------------- MEXICO STILL ATTRACTIVE TO FOREIGN INVESTMENT DESPITE FINANCIAL CRISIS (Mexico City) BUSINESS STYMIES GOVERNMENT'S TARIFF-REDUCTION PLAN (Mexico City) GUADALAJARA AIRPORT TO CLOSE TERMINAL, DEFER INVESTMENT (Guadalajara) MONTERREY REAL ESTATE DEVELOPER MOVING FORWARD (Monterrey) FULL IMPACT OF SLOWDOWN YET TO HIT INDUSTRIAL SITE DEVELOPERS (Matamoros) FINANCE/ECONOMY: -------------- SECURITY AND ECONOMIC CONCERNS CAUSE MONTERREY TECH ENROLLMENT DROP (Monterrey) CHIHUAHUA SAVINGS ACCOUNT DEPOSITS DECLINE 12%; CREDIT CRISIS AND POOR SECURITY CONDITIONS TO BLAME (Ciudad Juarez) NAFIN CREDIT PROGRAM CRITICIZED (Monterrey) GROUPO INDUSTRIAL SALTILLO CANCELS SALE (Monterrey) LABOR: -------------- MAQUILADORAS EXPECT TOUGH LABOR NEGOTIATIONS (Matamoros) ENERGY: -------------- LEADERS CONFIRM OPENING OF PEMEX MARKETS TO DRAW FDI (Matamoros) TRADE/INVESTMENT: -------------- ¶3. (U) MEXICO REMAINS ATTRACTIVE TO FOREIGN INVESTMENT DESPITE GLOBAL FINANCIAL CRISIS: Several U.S. companies recently announced significant investments and expansion plans in Mexico thanks to its proximity to the U.S., cheap labor and the peso depreciation, which makes exports attractive to foreign consumers. On December 5, Best Buy opened its second-largest store worldwide in Mexico. The company has plans to open more stores in central Mexico taking advantage of the expected population growth. Given the contraction in the U.S. construction and real estate sectors, American Standard decided to move its bath furniture production from the U.S. and Brazil to its Mexican plants in Aguascalientes and Tlaxcala. The government projects that FDI will reach US$ 20 billion in 2008, down about US$ 25 in 2007. 
(Mexico City) ¶4. (U) GOVERNMENT WILL DELAY REDUCTION AND ELIMINATION OF DUTIES: The National Confederation of Industrial Chambers (Concamin) succeeded in delaying the implementation of the government's bold tariff-reduction plan. According to members of Concamin, who this week met with Under Secretary Lorenza Martinez, the Secretariat of Economy agreed to postpone implementation until July 2009. According to the government's proposal, the average tariff would have been reduced from the current 10% to 2% in 2012. Martinez acknowledged negotiating with the industry, but refused to give a new date for the plan's implementation. The government had planned to reduce 80% of tariffs for third country imports, but Concamin submitted a more limited proposal to reduce only 33% of tariffs. Currently, 20% of products have a zero tax. The industry and the government will continue to discuss strategies to simplify foreign trade, including customs operations. (Mexico City) ¶5. (U) GUADALAJARA AIRPORT TO CLOSE TERMINAL, DEFER INVESTMENT: Grupo Aeroportuario del Pacifico (GAP),the operator of Guadalajara International Airport (GDL),has announced plans to close the second of its two terminals and defer planned investment in a second runway, an intermodal bus station, and other facility improvements. Terminal 2 was inaugurated in August 2007 at a cost of USD 5 million to serve the regional flights of AeroMexico Connect and Alma Airlines. When Alma suspended all service in November 2008, Terminal 2 lost 50 percent of its operations and became financially unviable. Figures for the first 10 months of 2008 indicate that passenger traffic at GDL grew by an anemic one half of one percent; the suspension of Alma service is likely to turn these numbers negative for the full year. (Guadalajara) ¶6. (U) MONTERREY REAL ESTATE DEVELOPER MOVING FORWARD: Notwithstanding the economic downturn, a prominent Monterrey-based real estate developer told post December 8 that his firm was moving forward with projects. Provided that a company had sufficient cash to ride out the recession, the contact noted, now was a good time to embark on investments that would bear fruit once the economy began to expand again. Indeed, the bear market conditions would help in getting better deals from the construction companies. The Monterrey Group of Ten companies are suffering, our contact concluded, because they had experimented with risky derivatives contracts and hadn't thought through the implications of borrowing short-term. Sticking to one's core business, he concluded, remains the best strategy. (Monterrey) ¶7. (U) FULL IMPACT OF SLOWDOWN YET TO HIT INDUSTRIAL SITE DEVELOPERS: The worst from the slowing economy has yet to come according to some industrial park managers in Reynosa and Matamoros. In regard to industrial site development, current plans are expected to move forward with few, if any, investors fearing the downturn enough to stop construction of new plants or expansions that are already underway. However, a significant slowdown in construction - starting with engineering layoffs followed by manual laborers- is estimated to begin in the first quarter of 2009 as current projects wrap up. Marketing and sales jobs are expected to be safe for the time being, with hopes of leasing available space, particularly as U.S. companies consider moves to the border region to save money on cheaper labor. Prologis, one of the world's largest industrial site developers, is still operating at 92 percent capacity in its Mexican industrial parks according to Juan Carlos Lopez, Prologis Vice President and Market Officer for Mexico. While Prologis expects a drop off in 2009, they are hopeful to maintain around 85 percent capacity, though many plans for new construction such as a new industrial park in Matamoros and further expansion in Reynosa, have been scrapped until the economy improves. (Matamoros) FINANCE/ECONOMY: -------------- ¶8. (U) SECURITY AND ECONOMIC CONCERNS CAUSE 45% DROP IN U.S. MONTERREY TECH STUDENTS: The number of U.S. undergraduate and graduate students will fall to 60 or 70 next year according to the Instituto Tecnolsgico de Monterrey (i.e., Monterrey Tec - a TOP private university in Mexico). Officials told Consul General Williamson and PAO Huizinga during their December 3 visit to the school that the expected 45% drop is a result of security fears and economic concerns. With respect to Mexican students, university officials said that the economic crisis was limiting the entry of new Mexican students and causing some current students to drop out. (Monterrey) ¶9. (U) CHIHUAHUA SAVINGS ACCOUNT DEPOSITS DECLINE 12%; CREDIT CRISIS AND POOR SECURITY CONDITIONS TO BLAME: Savings account deposits in Chihuahua's banking sector fell 12% from June to September, according to Mexico's National Institute of Statistics and Geography (INEGI). At the end of June, the gross savings deposit capitalization in the local banking sector stood at MX$ 40 million; by the end of the third quarter that figure had fallen to MX$ 35 million. In recent weeks Chihuahua banks have also tightened consumer credit availability and raised interest rates on credit cards. While savings deposits have declined, checking account deposits in Chihuahua have remained steady at MX$ 16.1 billion. While these saving rates are already low, their decline signals distress in the local economy. Local press accounts attribute the drop to a myriad of factors, including: 1) lower confidence in the local banking sector as a result of the international credit crisis; 2) the rise in unemployment in the state's manufacturing sector; and 3) the deteriorating security situation. Banking in El Paso, for instance, is considered by many to be safer both in terms of financial and personal security. (Ciudad Juarez) ¶10. (U) NAFIN CREDIT PROGRAM CRITICIZED: Nacional Financiera (Nafin) is failing to free up credit to small and medium sized businesses (PYMES, in Spanish),according to a December 4 statement by Federico Toussaint, the president of Caintra, Neuvo Leon's business association. Nafin's program to guarantee up to 12.5 million pesos of loans is not being accepted by banks, therefore companies are being denied credit or seeing their credit lines reduced. Toussaint plans to meet with the Secretary of Finance, Nafin and the Mexican Banking Association to resolve the matter. (Monterrey) ¶11. (U) GROUPO INDUSTRIAL SALTILLO CANCELS SALE: Group Industrial Saltillo (GIS),a large industrial conglomerate based in Coahuila, cancelled the sale of its home wares division on December 4. The company cited the volatile financial markets and weak overall economic conditions as reason for canceling the sale. The company planned to use the proceeds of the sale to reduce debt. The decision to cancel the sale also comes in the wake of US$536 million in derivatives losses announced in October. EconOff met with Fitch Ratings, a bond rating company, and was told that the future of the company remains uncertain. GIS is set to roll over a large portion of its debt next year and Fitch Ratings current has a negative outlook on the company's bond issues. (Monterrey) LABOR: -------------- ¶12. (U) MAQUILADORAS EXPECT TOUGH LABOR NEGOTIATIONS: The Matamoros Maquiladora Association (AMMAC) is beginning its latest round of labor negotiations this week with SOJIIM, the largest CTM union in Matamoros. According to AMMAC Labor Committee Director Angelica Gomez, the negotiations are expected to be difficult, primarily due to pressures from the workers in regard to inflation, the diminishing value of the peso versus the dollar, and lay-off fears in the local industry. According to AMMAC data, negotiations by individual companies have shown salary increases jump 25 percent since August, with summer negotiators settling at 4 percent increases and the most recent agreements at 5 percent or more. AMMAC is encouraging its members to work together, with President Monica Gonzalez Greer telling members in attendance at the December monthly meeting: "Historically, statistics clearly show that Association negotiations get better results for members than individual company efforts." Greer added that the number of members committed to group negotiations is down this year and that the union has been placing particularly strong pressure on maquiladoras to negotiate separate contracts this year. (Matamoros) ENERGY: -------------- ¶13. (U) LEADERS CONFIRM OPENING OF PEMEX MARKETS TO DRAW FDI: Government and industry leaders expect the energy reform package approved by the Mexican Congress in October to create opportunities for investment in ancillary services in the natural gas and petroleum sectors. According to members of the Secretary of Economy's office in the municipality of Reynosa, Tamaulipas - home to significant petroleum refining and natural gas exploration installations - changes in PEMEX are expected to attract significant new investments in ancillary service providers. The municipal government expects thousands of potential new jobs related to the industry. (Matamoros) Garza