SourceMex - Economic News & Analysis on Mexico
October 23, 1996
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L A T I N A M E R I C A D A T A B A S E
SourceMex - Economic News & Analysis on Mexico
ISSN 1054-8890 Volume 7, Number 40 October 23, 1996
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Copyright 1996, Latin America Data Base (LADB), Latin
American Institute, University of New Mexico
Director: Rebecca Reynolds Bannister
Managing editor: Kevin Robinson
Staff writers:
Patricia Hynds, Carlos Navarro, Robert Sandels
In This Issue:
AUTOMOBILE INDUSTRY WARNS CHANGES IN TAX STATUS FOR
AUTOMOBILES COULD HAVE DEVASTATING IMPACT ON INDUSTRY
EUROPEAN UNION & MEXICO FAIL TO REACH
TRADE AGREEMENT IN INITIAL TALKS
PRESIDENT ERNESTO ZEDILLO CANCELS FULL
PRIVATIZATION OF PETROCHEMICAL PLANTS
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Domestic & foreign private investment
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AUTOMOBILE INDUSTRY WARNS CHANGES IN TAX STATUS FOR
AUTOMOBILES COULD HAVE DEVASTATING IMPACT ON INDUSTRY
The automobile industry is waging a losing battle to
convince the federal government to extend the suspension of a
tax on purchases of new automobiles (Impuesto Sobre
Automobiles Nuevos, ISAN). The government suspended the ISAN
in 1995. According to the Finance Secretariat (SHCP),
starting next year, exemption from the ISAN will only apply to
the Volkswagen sedan and the General Motors Chevy model.
In early October, the SHCP issued a statement emphasizing
that the suspension of the ISAN was only a temporary measure
to help the auto industry get through the economic crisis that
exploded in Mexico as a result of the peso devaluation in late
1994.
Responding to criticism from the private sector, the SHCP
said the reinstatement of the tax is aimed at providing some
assistance to the country's financially strapped state
governments. The tax, which was once collected by the federal
government, will now be collected by state officials.
State governments will have the prerogative to determine
the amount of the tax. Still, SHCP officials acknowledged
that the federal government will have to play an intermediary
role to ensure that the ISAN is fairly uniform.
"If one state decides not to change the ISAN, this could
affect whether other states charge the same rate," said Alicia
Jara, economic studies director for the automobile
distributors association (Asociacion Mexicana de
Distribuidores de Automotores, AMDA).
She warned, however, that the tax will still severely
hamper sales of domestic passenger cars even if the rate that
states charge remains the same that the federal government had
imposed prior to 1995.
In addition to reinstating the ISAN, the government has
also decided to eliminate a hefty tax deduction that it began
granting in 1995 to all businesses that purchase new cars. If
the government carries out both these measures, sales of
automobiles in 1997 would, at best, be expected to match the
level of sales for 1996, although industry analysts say sales
may well drop below the 1996 level.
Jara said the economic crisis continues to affect
domestic sales, which will fall short of AMDA's target of
310,000 units this year. Through August, sales had reached
183,000 units. She predicted sales will total 290,000 units
by year-end.
Still, according to the monthly report released by the
automobile industry association (Asociacion Mexicana de la
Industria Automotriz, AMIA), Mexican auto sales more than
doubled in August compared with the same period in 1995,
representing the seventh monthly increase recorded so far this
year.
Sales of domestic and imported cars, light trucks, and
industrial trucks amounted to 20,067 units in August, compared
with 9,400 units in August of last year.
The report showed exports of Mexican-made vehicles rose
49% in August to 83,900 from 56,200 in August 1995.
AMIA director Fausto Cuevas said the end of the ISAN
suspension could create very difficult conditions for the
Mexican motor-vehicle industry next year, since the global
market for motor vehicles is also expected to contract.
In a press conference in October, AMDA president Eduardo
Solana and Cesar Flores, director of the bus and truck
manufacturers association (Asociacion Nacional de Productores
de Autobuses, Camiones y Tractocamiones, ANPACT), said the tax
suspension allowed domestic sales of motor vehicles to
increase significantly between November of 1995 and September
of this year, despite an increase of about 20% in the price of
vehicles.
But despite the stronger sales, they noted that the motor
vehicle industry has not yet recovered. Sales for the 11-
month period from November of last year to September of this
year have averaged about 23,000 units per month, compared with
13,000 sold monthly between April 1995 and November 1995. In
contrast, sales averaged 54,000 units per month in 1994 and
57,000 in 1992.
Industry officials suggest the return of the ISAN might
reduce potential sales by about 90,000 units, which could
affect at least 25,000 jobs in the motor-vehicle industry,
both in actual job losses and in jobs that will not be
created. The value of production is expected to drop by about
18.8 million pesos (US$2.42 million).
For his part, Alejandro Garza, president of the Ford
distributors association (Asociacion Mexicana de
Distribuidores Ford), urged the Zedillo administration to
enact some sort of permanent tax break for purchases of
automobiles. According to Garza, many automobile distributors
fall in the category of small or medium-sized businesses, a
sector of the economy that continues to face a crisis.
According to some AMDA estimates, a lack of growth in
domestic automobile sales next year could force almost one-
third of the dealers in Mexico out of business.
The motor-vehicle industry, perhaps resigned to the
probability that the government will reinstate the ISAN, has
developed an alternate lobbying strategy. Motor-vehicle
industry officials have joined forces with major business
organizations to influence state governments.
Cuevas said AMDA is attempting to avoid a situation where
one state imposes the tax and another does not, which could
create a sales war.
To this end, AMDA is lobbying the business coordinating
council (Consejo Coordinador Empresarial, CCE) and national
chambers of commerce (Confederacion de Camaras Nacionales de
Comercio, CONCANACO), which will attempt to ensure that the
ISAN is charged at a uniform rate around the country. [Note:
Peso-dollar conversions in this article are based on the
Interbank rate in effect on Oct. 21, reported at 7.74 pesos
per US$1.00] (Sources: Excelsior, 09/23/96; The News,
09/24/96; El Universal, 09/23/96, 09/26/96, 09/27/96,
09/30/96, 10/08/96, 10/16/96; El Economista, 10/08/96,
10/16/96, 10/17/96)
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Foreign trade
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EUROPEAN UNION & MEXICO FAIL TO REACH
TRADE AGREEMENT IN INITIAL TALKS
In mid-October, representatives from Mexico and the
European Union (EU) met in Brussels for the latest round of
negotiations on a new commercial and economic accord, but the
two sides reported very little progress.
According to sources close to the talks, the two sides
remain far apart on the time frame to complete negotiations on
an accord. The talks, which had been scheduled for two days
on Oct. 14-15, were suspended after one day because of the
differences in their positions.
The Mexican delegation, led by Trade Secretariat (SECOFI)
representative Fernando de Mateo, was insisting that the two
sides set target dates and determine specific goals to
implement market-opening measures.
On the other hand, EU officials--led by the EU's Latin
America affairs director, Miguel Anacoreta--maintained the
position that the two sides negotiate a general framework
agreement before dealing with specific aspects of an accord.
Once the framework negotiations are concluded, EU members are
pushing for the agreement to slowly incorporate negotiations
on specific sectors, rather than tackle a broad, all-inclusive
accord.
According to EU spokesman Josep Koll i Carbo, the 15
members of the bloc are seeking a "reciprocal and progressive
liberalization agreement" that is compatible with the rules of
the World Trade Organization (WTO).
In particular, France has argued against a broad opening
of the EU market to imports of agricultural products from
Mexico. French officials are concerned that any concessions
made to Mexico would have to be offered to other countries,
which they claim could throw the EU's agricultural policy into
disarray.
EU spokesman Koll i Carbo acknowledged that wide
differences between the two sides caused the talks to break
down, but he also raised the possibility that negotiations
could resume in the near future.
"The results of the talks probably cannot be considered
favorable," said Koll i Carbo. "If the Mexican delegation
wants to proceed with the negotiations, we can start
immediately."
Koll i Carbo said a resumption of negotiations before the
end of the year would be beneficial. During 1997, the EU is
expected to begin trade and economic consultations with
central and eastern European countries, which could sidetrack
an EU-Mexico agreement.
The EU spokesman said an agreement with Mexico could
provide several benefits for the EU, such as opening
opportunities for member countries to participate in public-
works projects in Mexico. In addition, the two sides could
strengthen their cooperation in such areas as fisheries and
the fight against drug trafficking and money laundering.
Still, Mexican officials said the EU's position falls
short of the declaration signed in May of 1995. In that
document, the EU and Mexico pledged to negotiate an ambitious
agreement that included the relatively free flow of goods and
services between Mexico and the 15 EU member countries.
Speaking to reporters two days before the start of
negotiations, Mexico's EU ambassador Manuel Armendariz said
President Ernesto Zedillo's administration had hoped to use
the agreement both to expand exports to the EU and to attract
new investments from the European bloc's member nations.
"An agreement with specific dates would send clear
signals to potential investors," Armendariz said.
Using the North American Free Trade Agreement (NAFTA) as
an example, Armendariz said the fact that Mexican, US, and
Canadian negotiators had set a target of Jan. 1, 1994, for the
agreement to go into place had helped attract a surge of
foreign investment into Mexico in 1993.
Furthermore, members of the Mexican delegation
acknowledged that the administration is expected to continue
to push for an expansion and diversification of exports as one
of the strategies to help the Mexican economy recover. In
1995, almost 85% of Mexico's total exports were destined for
the US and Canada, in large part because of NAFTA.
According to statistics released by Mexico's foreign-
trade bank (Banco Nacional de Comercio Exterior, BANCOMEXT),
US-Mexico trade totaled US$10 billion in 1995, including
US$3.4 billion in Mexican exports to EU member countries. In
fact, Mexican exports to the EU have been increasing gradually
since 1993, when the total reached US$2.8 billion.
The largest EU market for Mexican products last year was
Spain, which accounted for 23% of purchases. Germany,
Britain, France, the Netherlands, and Italy were also
important destinations for Mexican products.
Mexico's principal exports to the EU include crude oil,
engines, copper, beer, honey, and petrochemicals. Bancomext
said an agreement with the EU could help Mexico increase
exports of such products as pineapple, citrus, electrical
components, tropical plants, garlic, and rugs.
According to Mexican diplomatic sources, the EU insisted
that political considerations be included in the agreement.
During earlier negotiations, EU representatives said Mexico
would have to enact political reforms before the two sides
conclude an agreement. EU officials justified their position
by pointing out that the EU only negotiates with "democratic
governments."
EU officials are pursuing this position further by
insisting that any accord reached with Mexico contain a clause
in which both sides pledge to follow democratic principles and
respect human rights.
Publicly, representatives of Mexico's negotiating team
have made little mention of this EU demand other than to point
out that the Zedillo administration is actively pushing for
electoral and political reforms.
"There should be no doubt about our commitment to
democratic reforms," one official said..
According to the weekly news magazine Proceso, the EU's
stance was influenced by the human rights organizations
Amnesty International and Human Rights Watch. In fact, on
Oct. 14, the first scheduled day of EU-Mexico talks, Amnesty
International held a press conference to release a list of
"severe violations" of human rights in Mexico at the end of
September and the beginning of October.
The two human rights organizations said the Zedillo
administration has looked the other way while members of the
federal army and paramilitary groups engage in torture and
other abuses in places like Guerrero state.
Amnesty International's Latin American specialist, Morris
Tidball, told Proceso that his organization has distributed a
record 60 urgent-action alerts regarding abuses in Mexico thus
far this year.
"We are particularly worried that many of the abuses and
threats are being carried out against people who defend human
rights," he said. (Sources: Agence France-Presse, 10/14/96;
El Universal, 10/11/96, 10/15/96; 10/16/96; Excelsior,
10/16/96 10/17/96; Proceso, 10/20/96; The News, 10/16/96,
10/21/96; El Economista, 10/17/96, 10/18/96, 10/21/96)
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Oil & other extractive industries
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PRESIDENT ERNESTO ZEDILLO CANCELS FULL
PRIVATIZATION OF PETROCHEMICAL PLANTS
In mid-October, President Ernesto Zedillo's
administration abandoned plans to transfer full control of the
country's 61 petrochemical plants to the private sector and
instead announced a more limited privatization.
Under the plan advanced by Zedillo, the government would
group several petrochemical plants into different companies
that would be managed by a government-private sector
partnership. In all cases, the government would retain a 51%
majority stake in the companies.
A key element of the changes announced by Zedillo, which
must still be ratified by the Chamber of Deputies and the
Senate, is to change the designation of nine petrochemical
products to comply with the Mexican Constitution. Article 27
of the Constitution states that natural resources such as oil
belong to the Mexican people, and therefore cannot be owned or
controlled by any private individual.
Under a previous definition, the nine petrochemicals were
considered processed hydrocarbons, and therefore labeled as
secondary products. Zedillo has proposed an amendment to
Article 27, which would specify that these particular products
are a primary natural resource, and not a secondary byproduct.
The nine petrochemicals include ethane, propane, butane,
pentane, hexane, heptane, naftas, methane, and the raw
material used to produce lampblack (which is used as a
pigment).
In an official statement, the Energy Secretariat (SE)
said the president's bill "limits, with precision, the
products that are basic chemicals," and is designed to
"provide full legal security for the harmonic presence of
public and private investments in the industry."
Later, in a meeting with members of the Chamber of
Deputies, Energy Secretary Jesus Reyes Heroles explained that
the plan will still be able to attract foreign investment into
the petrochemical sector. He said the petrochemical sector
requires between US$400 million and US$500 million in private
resources to expand and modernize the country's 61
petrochemical facilities.
Still, according to an estimate released by Casa de Bolsa
Value, the Mexican government would have received a total of
US$6.3 billion if private investors were allowed to
participate fully in the privatization of the petrochemical
industry. This total includes US$1.5 billion for the actual
cost of the plants, plus another US$4.8 billion in new
investments.
Within political circles, the Zedillo plan appears to
have appeased most of the members of the governing
Institutional Revolutionary Party (PRI). In fact, the
administration's decision to limit the scope of privatization
was, in large part, the result of strong pressure from the
PRI. At their recent convention in Mexico City, PRI members
voted overwhelmingly to oppose privatization of the country's
petrochemical plants (see SourceMex, 10/02/96).
In a show of unanimity, all 19 PRI members of the energy
commission (Comision de Energeticos) voted to support the
Zedillo initiative. The measure, which is expected to reach
the full Chamber of Deputies by the end of October, is
expected to receive overwhelming support from PRI members.
"This bill will be approved quickly and cleanly,"
predicted PRI Deputy Rosario Guerra, who said the measure both
allows Mexico to retain sovereignty over its resources while
also creating a mechanism to attract private resources to the
industry.
Members of the opposition Democratic Revolution Party
(PRD) and National Action Party (PAN) were divided on the
Zedillo plan.
In the PRD, the plan is supported by many members in the
Chamber of Deputies, especially Francisco Curi Fernandez, who
chairs the energy committee.
On the other hand, many PRD senators and some influential
party leaders, such as Cuauhtemoc Cardenas and Manuel Lopez
Obrador, have called the agreement "limited" and are pushing
for the directive to be expanded to include other
petrochemicals such as ammonia and ethylene.
In the Senate, PRD members criticized the privatization
plan as "hasty and dangerous," and urged the government to
reconsider the decision. PRD Sen. Hector Sanchez raised
objections to the Zedillo administration's efforts to seek any
foreign investment in the petrochemical sector.
"If petrochemicals are our strongest business, then why
are we in such a hurry to pass them on to foreign investors?"
said Sen. Sanchez.
Similarly, there are some divisions within the PAN. For
example, Sen. Rosendo Villarreal Davila--who introduced an
initiative that would guarantee Mexico a 51% control over the
petrochemical plants--said many members of his party were
satisfied with the Zedillo plan, since it still leaves open
opportunities for foreign participation.
"The sector needs to be modernized to remain competitive
with foreign companies," said Sen. Villarreal.
Nevertheless, PAN Sen. Jose Angel Conchello expressed
strong opposition to a clause in the Zedillo plan, which
allows foreign investors to own 100% control over any
new petrochemical plants constructed in Mexico. He said this
clause could potentially threaten Mexico's autonomy.
"In reality, the government is practically authorizing
the sale of the entire company," he said.
Outside legislative circles, opinions were mixed on the
Zedillo proposal. Within the business community, the plan
initially received support from Hector Larios Santillan,
president of the business coordinating council (Consejo
Coordinador Empresarial, CCE). Larios said the plan
represents a good compromise, since the privatization had been
stuck because of strong opposition from key members of the
PRI.
Representatives from Mexican chemical companies--such as
Alfa, Celanese, and Girsa--said the main impact of the Zedillo
plan is to provide clear rules and regulations for private
participation in the petrochemical industry. Alfa director
Jose Luis San Jose said the plan specifies which products
remain the exclusive right of the state, thus allowing his
company to engage in long-term planning.
Some of the chemical company representatives suggested
that once the Zedillo plan is in place, the Mexican
petrochemical industry will be able to proceed with many
projects, some of which are as much as 10 years behind.
On the other hand, representatives from the industrial
chambers confederation (Confederacion de Camaras Industriales,
CONCAMIN) and the employers confederation (Confederacion
Patronal de la Republica Mexicana, COPARMEX) expressed strong
reservations about the plan.
"This plan will attract foreign investment at a much
slower pace," said COPARMEX president Carlos Abascal.
For his part, CONCAMIN vice president Jorge Marin
Santillan pointed out that countries such as Brazil and
Venezuela, which are privatizing their petrochemical
industries, could end up attracting capital that would have
otherwise been pumped into the Mexican industry.
Some newspaper columnists also referred to this
ambiguity.
"The government's plan to privatize the secondary
petrochemical industry does not seem to satisfy anyone," said
columnist Laura del Alizal of the daily newspaper Excelsior.
Del Alizal said many opponents view the Zedillo plan as
a smoke screen to sell the petrochemical sector through other
means. She said there is special concern about the clause
allowing foreigners to own 100% of all new petrochemical
facilities built in the country.
"Many Mexican and foreign business executives see the
plan as a step backward," said Del Alizal.
The strongest negative reaction could be seen on the
financial markets. On Oct. 14, the day after the plan was
announced, the peso plunged to its lowest level for the year,
reaching 7.85 pesos per US$1.00 on the free market.
Similarly, the main index (Indice de Precios y Cotizaciones,
IPC) at the Mexican Stock Exchange (BMV) fell almost 48
points.
"Investors are pulling out and waiting for things to
stabilize," said Enrique Ramirez, an analyst with Santander
Brokerage.
The peso recovered the next day to 7.73 pesos per
US$1.00, in part because of the intervention by the Banco de
Mexico (central bank), which bought about 20 million pesos in
exchange for dollars. The Mexican currency remained at 7.74
pesos per US$1.00 on Oct. 21, but declined again to 7.79 on
Oct. 22, giving credence to forecasts that the exchange rate
could reach 8.00 pesos per US$1.00 by the end of the year.
"The volatility of the Mexican financial markets
reflected the poor manner in which the Zedillo administration
has handled the petrochemical privatization question," said
Excelsior columnist Jose de Jesus Garcia. "The delays in
reaching a final decision have been accompanied by timid and
contradictory statements."
For his part, Zedillo's chief economic spokesperson
Alejandro Valenzuela acknowledged that the changes in the
petrochemical privatization were a factor in the market's
behavior.
"Nevertheless, the markets have retained a relative
stability throughout the year," he said. "So no one should be
surprised if there are periods of volatility."
Valenzuela denied that the peso is in a free fall, and
pointed out that Mexican financial authorities have turned to
a float system.
"The peso is adjusting to the level the market dictates,"
he said. "When it's cheap, investors buy it, and when it's
expensive, they sell it."
Valenzuela also noted that strength in the Dow Jones
Industrial Average at the New York Stock Exchange prompted
many investors to "turn away from the peso and toward the
dollar." (Sources: Agence France-Presse, 10/13/96; El
Financiero International, Reuter, 10/14/96; New York Times,
10/14/96, 10/17/96; El Financiero, 10/15/96, 10/18/96; El
Universal, 10/15/96, 10/17/96, 10/18/96; Proceso, 10/20/96;
Excelsior,10/15/96, 10/16/96, 10/18/96, 10/19/96, 10/22/96
El Economista, 10/15/96, 10/16/96, 10/17/96, 10/21/96,
10/23/96;La Jornada, 10/16/96, 10/17/96, 10/18/96, 10/23/96
Novedades, 10/16/96, 10/18/96, 10/22/96, 10/23/96; The News,
10/17/96, 10/18/96, 10/23/96)
