Editor’s Note: Today we go to Mexico, where there is disinvestment in the energy sector, oil production falls, and the international price increases. Horacio we recommend a company as well. I can send comments to: paola @ moneyweekes. com
Growth, Inflation and Energy: The Three Challenges of Mexico
Buenos Aries, Argentina
April 10, 2008
Continue the earthquake in the U.S. economy. Therefore, in circumstances how are you, the farther the epicenter may be one of the better. Unfortunately this is not the case of Mexico, which has a closeness to the U.S.. UU. both territorial linkage between economies. But is not the only problem facing the Mexican economy. There are two topics of concern to the government of Calderón.
That is why the relevant issues in Mexico today pass through three sources: the resolution of the energy problem with the depletion of oil reserves, the evolution of inflation and the degree of impact of the crisis in the U.S.. UU. that deepens every day.
The problems of the energy sector in Mexico can be analyzed from two fronts, though they have a common cause is the lack of investment in the Mexican oil sector. On the one hand, this lack of investment is affecting the main source of revenue for the country and, moreover, has led to the need to import 40% of the gasoline consumed in the country, as well as natural gas. Oil production has fallen 12% from its peak of 3.4 million barrels a day recorded in 2004, and just happening at the moment where the price of oil is reaching record highs (last chance, exceeded $ 112 a barrel for WTI).
That is why we are discussing in Mexico how to overcome the current situation, which has generated much controversy over the threat of a possible privatization of Pemex, although this alternative has already been rejected by Mexican President Felipe Calderon. These days it presented a bill intended to Pemex have more autonomy in managing the budget to reinvest their surpluses and give the company greater powers of administration, recruitment will enable greater access to technology and multiply your project implementation capacity and in order to increase the level of reserves and the ability of oil extraction and refining. Pemex needs to explore oil deposits in deeper waters, where preliminary seismic assessments indicate that there were about 30. 000 million barrels of oil.
The main oilfield, Cantarell, which was discovered in 1971 in the waters of the Gulf of Mexico, is currently in a worrying decline, which has generated great concern. According to Calderon: “We must act now because time and oil is running out.”
The problem of inflation remains dormant and remain concerned because the retail inflation data in March reached 0.72% (0.50% of the underlying). If the market kept a low illusion of a possible rate cut by the Central Bank of Mexico, then this information, and no longer a possibility. The truth is that this information hands and feet tied to the monetary authority to conduct an expansionary monetary policy if necessary if the effects of subprime crisis in the U.S.. UU. turned out to be higher than expected. For now, the value of the peso was relatively stable against the dollar, which is good news in terms of competitiveness of Mexican firms.
Speaking of economic growth for Merrill Lynch, the effect of subprime crisis on the Mexican economy this year will mean that it only reaches its GDP growth of around 2.2%, since Mexico is one of Latin America most affected by the crisis. For ECLAC, a little more generous, Mexico will grow by 2.7%
From my point of view, and as I stated earlier, I understand that Mexico’s domestic demand may help to partially offset the damage caused by the weakness of Mexico’s main trading partner, so that the fall in output growth should not be of the magnitude that provides Merrill Lynch (needless to say that it is wrong for your bet to the subprime market and it is likely that the April 17 when submitting their quarterly accounts, settling further depreciation of U.S. $ 6. 500 000 000 would add more than U.S. $ 24. 500 million already made. For this reason it would not be strange that mistake again, this time with the projections of Mexico). Moreover, the Mexican authorities that growth will slow sharply, as demonstrated by the 10 measures implemented several weeks ago to address the effects of the U.S. economic slowdown.
Speaking of Mexican companies, one of them has had a good performance during the first quarter of 2008 and is Wal-Mart de Mexico (BMV: WALMEXV), who on Tuesday presented its financial results.
To Eduardo Solorzano, President and Chief Executive Officer of Wal-Mart de Mexico: “The good results obtained during this quarter are given in an environment of low consumption. I emphasize that we continue to see a very positive trend in terms of growth in customer numbers, 6.6% in constant dollars, this reflects the level of loyalty and trust of our customers. I would likewise point out the performance overheads, which despite the additional costs associated with Wal-Mart Bank, grew 12% while sales did in 14% (8% in constant currency), allowing that both operating income and EBITDA (EBITDA) increased 17%. ”
The outlook for this year are good for Wal-mart in Mexico despite the possible impact of the subprime crisis in the U.S.. UU. In its plan for 2008 is planned to open 205 bank units and 33 modules, with an investment of about U.S. $ 1. 200 million also include the creation of 21. 000 jobs. With this investment decision, Wal-Mart de Mexico showed that sees the domestic market with great potential for growth in the coming years.
We will meet again tomorrow,
Horacio Pozzo
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