Economy

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• MEXICO-US: Car exports up, remittances steady

  05 May 2011 Hits: 159

  So far, the effects of the slowdown in the US economy on Mexico have been muted. Looking at Mexican statistics, the US economy does not appear to have hit the buffers, even though crisis-mongers in the US are talking up the prospect of a major turning point in capitalism. Mexico's exports of vehicles to the US leapt in January, while the final figure for remittances from the US to Mexico in 2007 showed a marginal increase.

  The Mexican vehicle industry illustrates the point that things are not as bad in the US economy as some people hope. In January 2008 the Mexican vehicle industry's exports were up by 33% (compared with January 2007) at 118, 416 vehicles. The main reason was a more than doubling of export sales by Volkswagen. General Motors also saw a major rise in exports. For both companies, the US is the main export market for their Mexican operations.

  For all the vehicle manufacturing companies, exports in 2007 to the US, though up, increased by less than motor executives had originally hoped. There were significant increases in exports of vehicles from Mexico to Europe and Latin America: European exports were up by 58% and exports to South America were up by 73%.

  The US, though, is the key market. In January 2008 vehicle exports to the US were up by 25%; this was a smaller rise than for exports to South America (up 38%) or Europe (up 82%). On the other hand at 99,842, vehicle exports to the US account for 84% of total Mexican vehicle exports.

  The January jump in exports was much higher than the trend. For 2007, vehicle exports from Mexico were up by 5% at 1,613,313 vehicles. In both January 2008 and indeed for 2007 as a whole, buoyant exports, mostly to the US, have helped the motor industry offset the effect of a sluggish domestic market. In 2007 domestic sales of new cars were down by 3.5% compared with 2006. This January new vehicle sales were down by 0.8% on January 2007.

  César Flores, the president of the Asociación Mexicana de la Industria Automotriz (AMIA), attributed the weakness of the domestic market (in which sales fell to 2004 levels) to four factors: consumers' uncertainty about how the fiscal reform (including the new Impuesto Empresarial de Tasa Única or IETU) which comes into force this year), will affect them; worries about fuel price increases; general worries about the economic outlook; and, finally, the huge business of importing used cars into Mexico. This trade, he said, had undermined domestic sales of cheap new cars.

  In 2007, Mexican car makers exported 80% of their production of 2.02m vehicles. This year China First Automobile Works Group (FAW Group), plans to start work on its first plant in the country: it will come into production in 2010.

  Remittances

  Overall, remittances from the US to Mexico were up by 1% in 2007 at US$23.979bn, according to figures from the central bank. The Banco de México blamed the growing anti-immigrant sentiment in the US for the slowdown in the growth of remittances: in 2006 remittance revenues were 16% higher than in 2005.

  It is worth noting that remittance revenues exceeded foreign direct investment (FDI), which amounted to US$23.23bn. Mexican policymakers are assuming that remittances will hold at their current levels in 2008 and that the flow will continue to make a major contribution to the country's balance of payments.

  Without remittances, the country's balance of payments would be under strain. There are growing signs that the government is over-stimulating the domestic economy. This is sucking in imports. The danger of this policy is that the government is relying on boosting the domestic economy to counter-act any slowdown in the US economy.

  Even with remittances, the county ran a US$7.37bn (0.8% of GDP) deficit on its current account. The biggest deficits were on trade (US$11.19bn for 2007) and services (US$20.533bn). Transfers (principally remittances) covered this. The most important items in the service account are tourism and interest and dividend payments. Foreign direct investment, which goes into the capital account, more than financed the overall current account deficit and led to an increase in central bank reserves.

  Overall exports in 2007 came to US$272bn, up 8.9% on 2006. Worryingly for policymakers, the bulk of the increase in export revenues came from oil exports, which set a new record in 2007 of US$42.885bn, up 10% on 2006. Over the next few years, unless oil prices rise further, oil export revenues are likely to fall as Mexican oil output diminishes.

  Imports were up by 10.6% on 2006, at US$283.23bn. Imports of capital goods were up by 13.7%, consumer goods by 16.7%, and intermediate goods by 8.9%. The finance minister, Agustí­n Carstens, argues that the government has the resources to pep up domestic demand - and so keep the economy moving - if the US economy turns down.

  Carstens' major initiative is the creation of the Fondo Nacional de Infraestructura, which he launched on 6 February. The fund will be set up with M$40bn (US$3.7bn). It will use the money to build infrastructure and create jobs. Carstens hopes that the fund will create 100,000 jobs in 2008. The money for the FNI was earmarked in the 2008 budget and is part of the government's strategy to counter the effects of any economic slowdown in the US. The FNI will back road, rail, bridge, sewage, mass transit and reforestation projects.

  The size of the boost is considerable, given that the construction industry in Mexico has a total annual output of around US$50bn. The general assumption in Mexico is that the construction industry would need to grow at around 10% to compensate for the slowdown in the US economy. Carstens' package is not far short of this. It is significant that the industry has the capacity to grow at double digit rates: it did so in 1996 and 1997 when it was bouncing back from the disaster of 1995. In the whole six years of the Fox administration, however, the fastest growth in construction was in 2006 when the rate hit 7%.

  Currently as the car production figures show, there is no sign that US demand has tumbled off a cliff. Indeed, the US economy does not seem even to be suffering from the problems it ran into in 2001 and 2002, which had a major effect on the Mexican economy and, arguably, undermined President Vicente Fox's administration.

  The government has already lowered its GDP growth target for 2008. It had been hoping for 3.8% but now concedes that 2.9% is more likely. This means that instead of creating 750,000 new jobs in the formal sector, the economy will create only about 600,000 for the 1m or so Mexicans joining the labour market.

  GDP growth in 2007: A surprisingly strong final quarter growth figure of 3.8% meant that in 2007 the annual growth rate was 3.3%.

  • Inflation

  The strength of domestic demand led to higher than expected inflation in 2007. The government set the Banco de México a target of 3% inflation for 2007. The rate for 2007 was actually 3.76%. Inflation in December was 0.41 %, down from November's 0.7%. In January, inflation was 0.46 %. The 12 month rate was also much the same as it was for 2007 at 3.7%.

  • Reserves

  The country's foreign reserves broke through the US$80bn barrier at the end of January. On 1 February they came to US$80.12bn. This was US$2.13bn more than at the end of 2007.

• OIL: Production decline accelerates at Pemex

  05 May 2011 Hits: 206

  Petróleos Mexicanos (Pemex) delivered another shock to local oil analysts with its ouput figure for January. This showed oil production at 2.95m bpd, 5.9% below January 2007's output.

  The January figure was in line with production figures for 2007, which showed output down by 5.3% to an average of 3.082m barrels per day (bpd). The main reason for the continuing fall is decline in output from Cantarell, the huge offshore field which accounts for a third of the country's total output. Cantarell's production, Pemex warned, will fall even more sharply from 2011.

  This may be too optimistic a forecast. In the first half of December 2007, Pemex's production fell to an average of 2.942m bpd. This was its lowest daily output for a decade. Production increased by 30,000bpd on 16 December, but crucially, the recovery did not take production back to 3m bpd, the longterm target for the company. As the January figure showed, Pemex is having difficulty pushing production back up to 3m bpd.

  If crude oil output stays under 3m bpd this year, there will be significant implications for the government's finances. The 2008 budget calls for oil production to average 3.2m bpd and oil exports to run at 1.7m bpd. In January 2008 exports were 1.43m bpd.

  Cantarell is now producing about 870,000bpd, well down on its peak production of 2m bpd in December 2003. Pemex has done well to cover this decline by producing 500,000bpd from two newer fields, Ku-Maloob-Zaap (KMZ) and Crudo Marino Ligero. Pemex, however, appears to have been surprised by the speed of the decline in Cantarell. Pemex had been forecasting that Cantarell would average 1m bpd in 2010 before falling to 600,000bpd in 2013 and 450,000bpd in 2015. Although the KMZ still has some scope for increased production in 2008 and 2009, Pemex is forecasting that production from this field will also start to fall from 2010.

  So, barring a major discovery, by 2016 Pemex's total production is likely to be down to about 2.1m bpd. This should be just enough to ensure that Mexico remains a net exporter of crude oil, but as it is already a substantial (and the Banco de México pointed out growing) net importer of fuel and refined products, the country will run a trade deficit in hydrocarbons. In 2007, Pemex exported crude oil worth US$37.9bn. In the first 11 months of 2007 it imported fuel and refined products worth US$12.2bn. The bulk of the imports were petrol and diesel. In January 2008, imports of refined products were up by 29%, while exports of crude oil were down by 9%, year-on-year.

  The big challenge for Pemex and the government is to develop the potential deepwater oil fields in the Gulf of Mexico. The problem is that the company simply does not have the exploration experience: finding oil in deepwater fields is an expensive business. Petrobras, the world leader in deep water exploration, drilled 63 exploration wells in 2006 and 44 of them were offshore. Pemex, by contrast, drilled 58 exploration wells in 2006 but 44 of them were onshore gas wells, drilled mostly by private sector subcontractors. In 2006 Pemex drilled only eight offshore exploration wells; in 2005, 14, and in 2004, 29.

  The one advantage Pemex has is that high international oil prices and the unsettled international geopolitical situation mean that Mexican oil, if it were available, would be an attractive proposition to international energy companies. Pemex could probably extract good terms from companies, if they were allowed to look for oil in Mexico.

  The government is signalling that it wants to open up the energy industry to foreign companies. The problem is how much to open it, and how. Any move to end Pemex's monopoly on exploration and production will involve changing the constitution. This will necessitate first a vote in favour from congress and then approval by the majority of the country's 32 state assemblies. It is far from clear that the reformers would win both these votes.

  The reformers received a mild boost on 21 February when Cuauhtémoc Cárdenas (son of former President Lázaro Cárdenas, who nationalised the oil industry in 1938) suggested that it would be possible, under current legislation, to increase foreign participation in areas of the industry in which Pemex does not have a monopoly. Cárdenas suggested focusing Pemex's monopoly on strategic areas such as refining; pipelines; exploration and production.

  The ruling Partido Acción Nacional (PAN), with some support from the Partido Revolucionario Institucional (which currently controls 20 of the 32 states), wants to go further than Cárdenas suggests. The PAN is proposing to allow foreign companies into the downstream part of the industry, such as refining or running pipelines and storage facilities.

  Even the PAN is doubtful about its ability to convince the country to allow foreign companies into upstream activities such as exploration and production.

  The problem with this solution is that Pemex will cut back in all these liberalised activities, as it did with petrochemicals, to focus on its monopoly activities. This will further handicap it, since it will not be an integrated company. It will most resemble the small exploration and production companies which take punts on finding oil in overlooked areas. These companies then sell out to bigger companies when they find oil and move on. Pemex, however, is far too big to have such a strategy.

  Another problem with opening up downstream parts of the industry is that it will imply changes to the way fuel is sold. Currently the price of petrol and diesel is controlled and subsidised by the government.

  The state of Pemex's finances also gives cause for concern. Although the government's reforms last year allowed it to keep more of its revenues, the company is still labouring under a huge debt of US$100bn. This is the legacy of years in which successive governments milked Pemex of its cash and forced it to borrow to finance its investment. The fairest option would be for the government to assume this debt. No politician however, from either the Left or the Right, wants to discuss the issue.

  Gas: Pemex played up its 13% increase in gas production in 2007 (and its 14% year-on-year increase in gas output in January 2008). In January the company produced a record 6.53m cubic feet a day. Gas is the only part of the energy industry which is open to foreign companies: they can only produce from dry gas fields (ie, fields where there is no oil). In December 2007 Pemex noted that gas production was running at 6.4m cubic feet a day.

  Prices: Mexico is budgeting on an average export oil price of US$49 barrel in 2008. In 2007, the average export price for Mexico's predominantly lower value heavy crude was US$61.6 a barrel. In January the average export price was US$79.6 a barrel. This is still comfortably above both the 2007 average and the 2008 forecast, but if the US did tumble into a recession, the price could threaten the conservative budget assumptions. The US still accounts for about 20% of the world's crude oil consumption.