Mexico looks for
US$22B in investments in 1997
"New finance package allows a build now pay later
plan to infrastructure development "
Boosted by last year's strong economic performance, following the US-funded economic restructuring in 1995, the Mexican government is hoping to attract some US$22 billion in additional domestic investment to boost the national economy to a higher growth rate in 1997.
"It's a very ambitious program," says Alejandro Valenzuela, the finance ministry's chief of staff, "but we know the economy is poised to deliver this kind of performance as the new legislation and incentive structure are now in place.
"Confidence in the local market is growing, and now, foreign
investors are beginning to realise the potential of Mexico's unique
position as the link between North and Central America.
Of the $22 billion, the government plans to contribute $12 billion,
while private companies will invest about $10 billion, he said.
The Government, lead by the President, is confident that those investments, combined with higher exports and higher consumer spending, will help Mexico exceed its 1996 economic performance.
In 1995 Mexico succeeded in pulling off a rapid turnaround from one of its deepest recession in more than 60 years. The Mexican economy will most likely end up growing more than 4 percent in 1996. That is a vast improvement from 1995 when the economy contracted 6.2 percent.
In the first nine months of last year, Mexico recorded a 4.4 percent growth rate from the year-ago period. Keeping the momentum to surpass the performances of 1996 is what the Government hopes to achieve.
While in the throws of its economic crisis two year ago, Government reviewed its budgetary laws to allow private enterprise to take on much of the financial commitments in public works and infrastructural development programs, thereby freeing government funds for other purposes.
"This will give us the opportunity handle several projects
at once, instead of just taking one, with the same funds,"
says Valenzuela.
Previously, Government had to register the cost of every single
project on its budget, putting constraints on its ability to boost
investment since it had to fund the projects in advance.
From this year, Government's new budgetary laws removed those
limitations, giving it more leeway on how to fund and account
for those projects.
"What we are doing is actually getting more flexibility with the use of our funds, by adopting techniques commonly used by the private sector to cost and manage cash flow," said Valenzuela. We are "taking part of the cost of the project every year, so that at the end of the day we have the full cost of the program covered, but on any given single year we just assume a part of the cost of the program, plus a margin. In the long run more projects get completed."
The mechanism isn't unique to Mexico. Other members of the
Organization for Economic Cooperation and Development, or OECD,
have similar funding policies for public works, said Valenzuela.
Under the new funding device, the government plans to pay for
the projects with the revenue the projects generate.
"We are going to lease, so to speak, the projects, so they're going to have a flow of cash payments and by the end of the time when these projects are actually done or accomplished, the government will fully own them," said Valenzuela.
Government is also betting that consumer demand, which has
so far lagged behind the financial and manufacturing sectors,
will pick up steam this year as companies continue to rehire and
wages rise faster than the rate of inflation.
Moreover, the Mexican authorities believes that its restructured
debt-relief program will provide consumers with more disposable
income next year.
To meet its target of 0.5 percent of GDP for 1997, Valenzuela said Government hopes to receive 10 percent more in tax revenue by closely monitoring the tax system and boosting its yield without introducing new taxes.
The finance chief's optimism was boosted by a Government report on economic performance in the third quarter of 1996 which saw growth surge by 7.4 percent. This is about two percentage points higher than the rate most economists had predicted.
The report "confirms that the recovery is going on and
it doesn't leave any room for doubt," says economist Sergio
Martin at ING-Barings in Mexico City.
Measured quarter to quarter and without seasonal adjustments,
the Mexican economy fell 2.9 percent in the third quarter from
the previous three-month period, while for the first nine months
of this year, it rose 4.4 percent compared with the year-ago period.
The report bolstered economists' predictions that Mexico's economy
will grow more this year than the government's 3.7 percent estimate.
On average, economists expect Mexico's gross domestic product
to grow 4.3 percent in 1996 compared to 1995.
If that happens it will be a significant turnaround from last year's recession. The 1994 devaluation of the peso, which caused interest rates to skyrocket and consumer demand to collapse, plunged the country into its deepest contraction since 1932.
In 1995, Mexico's GDP fell 6.2 percent after registering a
drop of 5.8 percent in the fourth quarter, 8.1 percent in the
third, 9.8 percent in the second and 1 percent in the first. Mexico
measures quarterly fluctuations in GDP year-to-year.
Since early 1996 signs of a pickup began to emerge after the pace
of decline slowed to 1 percent in the first quarter of this year.
The key to the third-quarter expansion was a surge in industrial
output, which grew at a 14.6 percent rate. That was the third
straight quarterly increase.
Construction also ballooned in the July-September period, rising
24.9 percent. It was the second quarterly increase in that category
since late 1994. On a quarter-to-quarter basis, construction grew
20.4 percent.
The manufacturing industry, which is also a division of industrial output, also registered a high growth rate, climbing 13.9 percent. It rose 1.3 percent in the July-September period, compared to the April-June quarter.
Next year, Mexico will witness key electoral races in the northern
states of Sonora and Nuevo Leon. They will also renew the House
of Representatives and will elect for the first time Mexico City's
governor, who until now had been appointed by the President.
Stock market investors fear than under such a heavy electoral calendar, Government might have to deviate from its strict fiscal and monetary policy to lend support to ruling-party candidates, who have suffered major electoral defeats in past elections.
Government officials have dismissed those concerns, saying
politics won't interfere with their economic program.
The mining industry also showed signs of expansion in the third
quarter, jumping 5.7 percent. The government attributed the increase
to higher extraction of oil, natural gas, iron and non-metal minerals.
Power generation, gas and water production climbed 5.6 percent
in the third quarter from a year ago and it rose 6.7 percent from
the second quarter.
The only industry that registered a decline in the third quarter
compared with a year earlier was agricultural activities, which
fell 4.8 percent. From the second quarter, agricultural production
fell 13.5 percent.
Later impact
For some economist Mexico's economic expansion, while positive,
could translate into trouble later.
"What we need to wait and see is how is this recovery going to impact internal demand and what repercussions it could have on inflation and exports and imports," said Diego Prado, at AB Asesores Moneda.
In general, when consumer demand picks up and manufacturing plants are working at full capacity, retailers boost their prices. That fuels inflation, which in return hurts workers' purchasing power.
Also, some manufacturers might want to shift production from foreign to local markets if domestic demand picks up. They often do it because they can increase their profits by selling at home, where competition is less fierce, than abroad, where their margins are smaller.
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