Mexico: Economic Report: April 2012

British Embassy Mexico City

Summary

Jose Antonio Meade, Minister of Finance, said Mexico was in a good position to exceed its GDP growth forecast of 3.5 percent in 2012. Mixed views from private financial institutions.

Mexico recorded a deflation figure during the first fortnight of April.

The number of people employed in Mexico's informal sector reached 13,757,000 in March

Bank deposits and financial savings kept growing in February.

Federal Competition Commission has dropped the US$ 1 bn fine imposed in April 2011 to mobile company Telcel, which has now committed to cut interconnection rates.

Wal-Mart Stores Inc. is carrying out an internal investigation into suspected bribery practices conducted by Wal-Mart Mexico between 2003 and 2005 with officials of state and municipal governments.

OECD’s report on Transparency and Exchange of Information regarding Taxes, states Mexico has made good progress in this matter.

Mexico and China re-launching bilateral economic relationship.

Danish company Vestas to invest in a wind farm in Oaxaca.

* Minimum wage for 2012 has been set at 60.50 pesos

OVERVIEW

On April 21, during his participation in the IMF and WB meetings, Jose Antonio Meade, Minister of Finance, said Mexico was in a good position to exceed its GDP growth forecast of 3.5 percent in 2012, thanks to a noticeable improvement of the international economic scenario. Meade explained in an interview that global economic prospects had improved in recent months, and that an agreement to double the IMF's resources would be an important part of the puzzle.

During April’s first fortnight headline inflation reduced -0.42% f/f below market expectations. The fact that inflation remains under control reinforced Banco de Mexico’s neutral stance. The Central Bank’s Board held its third meeting of the year on April 27 and left unchanged the reference rate at 4.5%, as it has been for the past 26 monetary policy meetings (since July 2009).

According to one leading analyst the board expressed a more optimistic appraisal on growth and inflation, while relative monetary policy conditions and the exchange rate remain the board’s main concerns.

While the same analyst continues to think that Banxico will remain on hold for a long period of time, others are foreseeing impairment in global growth conditions; therefore they expect an interest rate cut for the next Board meeting in June.

Slower than expected growth in the US (2.2% observed vs 2.5% expected) during the first quarter might have an impact on Mexico’s growth in 2012, therefore taking also into account that inflation is pretty much under control, our view is similar to Monex’s that Banco de Mexico should cut rates in the next meeting to be held on June 8. However, prevailing fears over Eurozone developments and volatility might keep the Central Bank from easing monetary policy.

According to figures released by the National Institute of Statistics and Geography (INEGI), the number of people employed in Mexico's informal sector reached 13,757,000 in March, or 750,000 more people than in March 2011. INEGI's National Survey of Jobs and Occupation for March revealed that the informal sector accounted for 28.76 percent of the economically active population or 0.61 percent more than in March 2011.

In February 2012 bank deposits (including demand and time deposits) grew 10% in annual nominal terms, while financial savings (which include every type of savings instrument, both bank and nonbank) grew 17% in nominal annual terms during the same month.

TELCEL FINE

On May 3, the Federal Competition Commission (COFECO) reached an agreement with Carlos Slim’s mobile company Telcel to drop the fine imposed back in April 2011 for US$ 1 bn (please refer to April 2011 economic report). Based on the Competition Law, Telcel had appealed for a review of the case.

Leonardo Curzio, journalist and opinion leader, interviewed Cofeco’s president Eduardo Perez Motta, who explained that Telcel had committed to cut interconnection rates (a fee charged to other mobile companies to use Telcel’s network) from 95 to 36 cents per minute, and to 30 cents in 2014. Perez Motta highlighted that Mexico was among the five most expensive countries in the OECD, and with the new rates it would become one of the four cheapest ones within the OECD.

Curzio questioned Perez Motta if an already imposed fine could be dropped when a company had carried out monopolistic practices. Cofeco’s head replied that if Telcel hadn’t committed to cut interconnection fees, a long legal process (maybe for several years, according to Perez Motta) would have started. Perez Motta stressed that the mobile company would have ended up paying the fine, but consumers would not have been benefitted with a cheaper service while the process ran, which he said it would represent now savings for consumers for around 78 bn pesos (US$ 6 bn) per year. He also pointed out that the watchdog is entitled to re-impose a fine up to 8% of the company’s annual revenue (the original fine was equivalent to 10% of Telcel’s annual revenue) should evidence be provided that Telcel is not complying with the fees cut.

THE “WAL-MART GATE”

Wal-Mart Stores Inc. is carrying out an internal investigation into suspected bribery practices conducted by Wal-Mart Mexico between 2003 and 2005 with officials of state and municipal governments. According to Mexico’s Ministry of Economy (SE), those practices if true would have been intended to acquire land and to obtain licenses and permits with the purpose of accelerating the construction and opening of new stores.

SE has clarified that there had been no indication of involvement of federal officials in the alleged bribery practices of Wal-Mart Mexico so far. The SE added that the government had no jurisdiction in the matter because state and local agencies had issued the permits and zoning approvals for the company. However, due to calls from lawmakers and good government groups to not let such bribery allegations be taken lightly, the Ministry of Public Administration said on April 25th that it would review permits related to the approval of stores and seek information from American authorities.

This might become a difficult issue for Mexico’s government. President Calderón has celebrated Wal-Mart’s growth in Mexico; which entered the Mexican market in 1991 and has opened more than 2,100 stores and restaurants. Furthermore, Walmart has become Mexico’s largest private retailer and employer, and has taken steps to support Calderón’s environmental causes, including promoting clean energy in its buildings.

We contacted the National Association of Supermarkets and Department Stores (ANTAD) and they pointed out that ANTAD was looking forward to knowing the results of the investigation, while stressing that the Association was committed to respecting law and regulations, and to carrying out ethical corporate and commercial practices.

OECD’s REPORT: “GLOBAL FORUM ON TRANSPARENCY AND EXCHANGE OF INFORMATION FOR TAX PURPOSES PEER REVIEWS: MEXICO 2012”

The OECD released the Phase 1 of the above mentioned report, which analyses Mexico’s legal and regulatory framework for transparency and exchange of information.

The main findings from the report were:

Mexican committment to the internationally agreed standard for exchange of information (EOI) in tax matters.

Mexican signature of double tax conventions (DTC’s) and taxation information exchange agreements (TIEAs) with 60 jurisdictions, the large majority of which are currently in force and allow Mexico to exchange information to the standard.

Mexico is in advanced stages of negotiation of DTCs ant TIEAs with further jurisdictions, mostly Global Forum members, including OECD and G20 members.

The Phase 2 Peer Review of Mexico is scheduled for the second half of 2012.

FOREIGN TRADE

Bruno Ferrari, Ministry of Economy, held a bilateral meeting with China's Commerce Minister Chen Deming under the Trade Ministerial Meeting of the Group of 20 (G20) held in Puerto Vallarta, Jalisco on April 18-20.

Both officials celebrated the re-launch of bilateral economic relationship, which seeks to address the imbalance that affects Mexico and lay the groundwork for a more balanced and sustainable trade in the long term. As part of the negotiations, both countries reached an agreement to prevent unfair practices from China in the footwear sector, but keeping open the Mexican market to competition. Furthermore, the agenda points to identifying business opportunities in strategic sectors for Mexico.

Ministers highlighted the outcomes of the Forum for Promoting Trade and Investment Mexico-China held in Mexico City on April 18, which was inaugurated by the Minister Chen Deming and Minister of Communications and Transport, Dionisio Perez Jacome. Sales contracts worth approximately US$ 300 mn were signed and plans to invest US$ 260 mn were agreed. The Forum gathered around 250 Chinese and Mexican entrepreneurs with interests in sectors such as food and beverage, agribusiness, textile, mining and chemicals.

Furthermore, five Mexican companies have been approved to export pork to China (world’s biggest pork consumer), once the export license for this product is agreed. Other products in which China has accelerated its procedures to allow 100% entry to its market are agave tequila and Persian lemon.

Currently, China is the second largest trade partner for Mexico as a supplier, and the third as a purchaser.

FOREIGN DIRECT INVESTMENT

According to Danish Minister of Trade and Investments Pia Olsen Dyhr, the largest wind farm in Latin America -- with a generating capacity of 396 MW -- will be built in the Mexican state of Oaxaca, thanks to an alliance between Denmark's Vestas and Mexico's FEMSA. The Danish minister, who will travel to Mexico to sign the corresponding agreements with Energy Secretary Jordi Herrera and Economy Secretary Bruno Ferrari, explained that the wind farm would be located in the Isthmus of Tehuantepec, and would include 132 turbines provided by Vestas. The power generated will be used to supply the energy needs of Heineken N.V. subsidiary Cuauhtemoc Moctezuma and FEMSA divisions Coca Cola FEMSA and Oxxo. We had previously highlighted the investment opportunities in this sector in our May 2011 Economic Report.

Disclaimer

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