Mexico: Economic Report – June 2012

British Embassy Mexico City

Summary

Monthly economic activity trend indicator (IGAE) indicates GDP grew at 4.7% in annual terms during April.

Banco de Mexico left the reference interest rate unchanged at 4.5%

Remittances grew 6.5% in annual terms from January – May.

Commercial bank lending to the private sector grew 10.7% in annual terms in May

Countries negotiating the Transpacific Partnership (TPP) extended an invitation for Mexico to join the grouping.

The Presidents of Chile, Colombia, Peru and Mexico signed documentation formalising the Pacific Alliance

The Federal Competition Commission approved the merger of Grupo Televisa and Iusacell, subject to a successful completion of a tender for a new television operator in the market within the next two years.

Anheuser-Busch InBev will pay US$ 20.1 bn to take full control of Grupo Modelo brewery.

* Minimum wage for 2012 has been set at 60.50 pesos

OVERVIEW

The IGAE (GDP monthly proxy) expanded 4.7% in annual terms in April, above market expectations (4.2%). April’s performance was mainly the result of stronger-than-expected growth in services output.

Banco de México held its fourth Board of Governors meeting on June 8 and unanimously decided to leave the reference rate unchanged at 4.5%. The majority of Banxico’s board members believe that the evolution of prices continues to be favorable, expecting them to remain in line with the central bank’s forecasts. Nevertheless, some members signaled that even though inflation expectations remained well anchored, they were at a level close to the ceiling of the 1%-pts variability interval around the target. All members agreed that the main risk to inflation was pass-through from peso depreciation; though pass-through had proved to be low recently, it could increase if the exchange rate remained depreciated.

Commercial bank lending to the private sector grew 10.7% in annual terms in May, accelerating with respect to the 9.7% pace of expansion sustained over the first four months of the year. In line with reporting that consumer confidence is growing, consumer credit continued to lead the expansion in credit availability, accumulating seven consecutive months of growth rates above 19%. Credit to firms expanded at an annual 9.9% in May, and mortgage credit expanded 6.4% in annual terms during May.

Remittances rose 6.5% in annual terms from January – May, reaching US$ 9.7 bn. Some analysts have stated that migrants might have been taking advantage of peso’s weakness (particularly in May when Peso depreciated almost 11%) to send more money home.

FOREIGN TRADE

Transpacific Partnership (TPP)

The US made a formal announcement that countries negotiating the Transpacific Partnership (TPP) had extended an invitation for Mexico to join this initiative after a bilateral meeting between Obama and Felipe Calderon in the margins of G20 Summit. Mexico had been lobbying hard to join this grouping, with Under-Secretary of Trade Francisco de Rosenzweig visiting many of the TPP countries over the last six months. Mexico will be an active player in TPP once current members clear legal procedures to incorporate more countries into the regional initiative, which is likely to occur by the last quarter of 2012. In the meantime, Mexico’s Ministry of Economy will carry on with the consultation process with member countries and national industries.

The TPP and NAFTA will run concurrently (i.e. the TPP will not supersede NAFTA) as the US is not willing to cover some NAFTA issues with the wider TPP grouping. However, the TPP will show higher levels of ambition on issues such as labour and employment and IP. The TPP will have its own dispute settlement mechanism which will deal with any dispute before members approached the WTO.

The importance of TPP to Mexico can be analyzed under two broad perspectives:

American

Highly strategic initiative for the US, which will not only open its market but will also try to influence the liberalization terms of trade and investment flows in the Asia-Pacific region.

Since Mexico’s productive structure is significantly linked to the US, TPP will imply a bigger competition for Mexico’s exports in the US market.

TPP’s initiative opens a possibility for Mexico to further integrate its production to US exports to Asia, helping to enlarge Mexico’s market diversification.

Participating in TPP is important for Mexico to remain an attractive destination for investment within the North American region.

Asian

Asia-Pacific is the world’s the most economically dynamic region. Once finalised, the TPP will formalize trade links and promote integration between the Americas and Asia.

Mexican exports to Asia have shown the highest growth for the last 6 years: 20.3% average annual growth rate.

TPP members such as Australia, Malaysia, Singapore and Vietnam are increasingly important players in world trade. Their exports have been benefited from growing Chinese and Indian demand, and their imports demand is also rising. In terms of market diversification, negotiating preferential trade terms through the TPP with economies such as the Australian, Singapore, the Malaysian and Vietnamese would benefit Mexico since economic cycle in these markets is closer to fast growing economies like China and India.

If Mexico joins the TPP, it would become a very attractive investment destination for other member countries’ companies, given its network of FTA’s and integration initiatives within Latin America.

Under the threat of a rise in protectionism, joining the TPP would ensure Mexico a preferential access to Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam.

The TPP represents more than 500 million people (7% of world’s population). 12 negotiation rounds have taken place so far and the next one will be held next July in San Diego, California. The TPP is currently the largest multilateral trade negotiation due to its broad product coverage and the economic size of its members. TPP includes nine negotiator countries: Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Singapore, United States, Peru and Vietnam, which in 2011 accounted for 18% global imports, 15% of exports, and 26% of global GDP.

Total trade in 2011 between Mexico and the TPP members reached US$ 466 bn. Mexico exported US$ 280 bn to the region and imported US$ 186 bn. With the inclusion of Mexico, Canada and Japan, the TPP’s share of global GDP would rise to 38%, imports share would increase to 27% and the exports one would climb to 24%.

The TPP covers not only traditional trade issues, such as Goods and Services Trade, Investment, Intellectual property, technical barriers to trade, government purchases, labour market, environment; but also “next generation” issues: regulatory convergence, SME’s, digital technology, public companies, supply chain, integration of rural/marginalized zones, competition.

Mexico is conscious of the linkages between the TPP and the Pacific Alliance (see below). Whilst there are currently no plans to try to join the two blocs together, Mexico’s overarching objective will be to streamline the PA countries into the trade policy regime that is currently being knitted across the Asia Pacific region. These were like-minded, free-trade friendly countries, interested in single-windows and economies of scale and had a respect for investment – all things which PA countries were also interested in.  However, Mexico was currently content to make what progress it could on the two groupings simultaneously; the PA was now focusing on cooperation between trade promotion agencies and stock markets. 

Pacific Alliance

On June 6, Presidents Sebastian Pinera (Chile), Juan Manuel Santos (Colombia), Ollanta Humala (Peru) and Felipe Calderon (Mexico) signed documentations formalising the document officially creating the Pacific Alliance. The four Presidents approved the bylaws of a trade bloc that is designed to establish a free trade area among the coastal countries in the western part of the region; facing Asia and the Pacific (please see our February Economic Report). The Presidents of Costa Rica and Panama, who attended the summit as observers, have expressed interest in joining this new bloc.

One of the stated objectives of the Pacific Alliance is to increase trade with Asia. The Alliance is starting with free movement of goods and people by the end of 2012. The Stock Exchanges from Lima, Bogotá and Santiago joined together and formed in 2011 an integrated stock exchange known as Mila, which Mexico’s Stock Exchange might join soon.

TELECOM

On June 14, the Federal Competition Commission (CFC) approved the ‘concentration’, or merger, of Grupo Televisa (owned by Emilio Azcarraga Jean) and Iusacell (Grupo Salinas of Ricardo Salinas Pliego), subject to the successful completion of a tender for a third television chain within the next two years. If a new television chain is not established during the next two years, an automatic dissolution process would take place, resulting in either Grupo Televisa or Iusacell being obliged to sell their part of the company to their partner.

Further conditions aimed at preventing collusion risks and promoting larger competition in open and restrictive TV markets should be met by this new, third chain. The automatic dissolution process will also take place if the new chain does not meet these criteria, as well as Grupo Televisa and Iusacell receiving a fine for up to 10% of the companies’ annual revenue. Both Grupo Televisa and Iusacell sent letters to the CFC (on the week of June 18-22) accepting the conditions set by the watchdog.

Some analysts see advantages in the deal, mainly regarding competition, price strategies and market share. The size of the new Grupa Televisa/Iusacell mobile company will help to even the market, giving competition to Carlos Slim’s telcel (under the umbrella of Americamovil). In additional, Slim is continuing to ask Cofetel (Federal Telecommunication Commission) to approve the concession for Americamovil to supply pay TV, which could also increase competition in the telecomms sector.

The President of the Mexican Association for Rights to Information (a non-profit pressure group) said that the conditions established by CFC didn’t solve the main issues related to competition in TV, since CFC hadn’t set any conditions to prevent Televisa and TV Azteca (which is in the same group as Iusacell) from bidding the new TV chains through new subsidiaries. The Association considered that the CFCs resolutions may have have benefitted Televisa during the Presidential election period.

Gabriel Sosa Plata, an expert in telecoms from the leading Mexican university UAM, considers that smaller paid-for television companies such as MVS would be entitled to file an injunction against the CFC resolution on the grounds of it actually containing anti-competition measures which in reality would hamper the market, causing difficulties for companies willing to buy content from Televisa and TV Azteca.

ANHEUSER-BUSCH BUYS GRUPO MODELO BREWERY

Anheuser-Busch InBev (owners of Budweiser) and Grupo Modelo (owner of Corona) announced on June 29 that Anheuser-Busch InBev would acquire the remaining stake in Grupo Modelo that it did not already own, for US$ 9.15 per share, in cash in a transaction valued at US$ 20.1 bn or MXN 278.6 bn. Grupo Modelo will continue to operate under its current branding, but will now be wholly owned by the Belgian conglomerate. This ‘mega-brewery’ will lead the global beer industry, producing roughly 400 million hectoliters of beer annually across 24 countries. Estimates of revenue for 2012 are US$ 47 bn.

Grupo Modelo’s name and headquarters in Mexico City will be maintained, and the company will continue to have a local board. Carlos Fernández, María Asunción Aramburuzabala and Valentín Díez Morodo will continue to play an important role on Grupo Modelo’s Board of Directors. Two Grupo Modelo board members will join AB InBev’s Board of Directors.

In a related transaction, Grupo Modelo will sell its existing 50% stake in Crown Imports, the joint venture that imports and markets Grupo Modelo’s brands in the U.S., to the American firm Constellation Brands for US$ 1.85 bn, giving Constellation Brands 100% ownership and control. As a result, Grupo Modelo’s brands will continue to be imported, marketed and distributed independently in the U.S. through Crown Imports on similar economic terms it receives today, while AB InBev will ensure the continuity of supply.

Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.