SourceMex - Economic News & Analysis on Mexico
October 29, 1997
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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 8, Number 39 October 29, 1997
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Copyright 1997, 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
LADB ARCHIVES: Back issues are referenced to provide
historical background relevant to the articles in this
newsletter. These can be accessed with a subscription to the
LADB searchable on-line archives at http://ladb.unm.edu/ by
clicking on Search Archive. For subscription information,
e-mail info@ladb.unm.edu or call 1-800-472-0888.
In This Issue:
TELECOMMUNICATIONS REGULATING AGENCY OPENS
LOCAL TELEPHONE SERVICE TO COMPETITION
* More than 40 companies seeking to offer service
TRADE NEWS IN BRIEF
* Mexican tequila distillers facing South Africa
competition
* SECOFI imposes duties on imports of Chinese chemical
* Mexican growers to begin limited avocado exports to US
PRESIDENT NOMINATES CHIEF OF STAFF
LUIS TELLEZ AS NEXT ENERGY SECRETARY
* Tellez to oversee resumption of petrochemical
privatization
* Legislators to propose alternate privatization plan
DROUGHT & STORMS CAUSE SIGNIFICANT DAMAGE
TO MEXICAN CORN, BEAN & COFFEE CROPS
* Drought decimates most of bean crop in Zacatecas state
* Hurricane Pauline damages Oaxaca coffee plantations
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Public sector finance & planning
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TELECOMMUNICATIONS REGULATING AGENCY OPENS
LOCAL TELEPHONE SERVICE TO COMPETITION
In late October, the telecommunications regulating agency
Comision Federal de Telecomunicaciones (COFETEL) formally
opened competition for local telephone service, thus ending
the longstanding monopoly held by Telefonos de Mexico
(TELMEX).
In an announcement in the federal register (Diario
Oficial de la Federacion), COFETEL said the market opening is
intended to create access to telephone service for more
citizens and to reduce rates. According to statistics
released by the Secretaria de Comunicaciones y Transportes
(SCT), the federal government's target is to install telephone
service in 10,000 rural communities by year-end 1997. This
means a total of 2 million persons in Mexico would gain access
to telephone service.
COFETEL said the increased competition would also "create
more opportunities for economic development" in Mexico.
More than 40 companies seeking to offer service
At least 40 companies have registered with the government
to participate in the privatization of local telephone
service. Raul Lucido de la Parra, planning director for
wireless telephone company Ericsson, said initial investment
in local telephone service is expected to total US$6 billion,
or twice the amount spent by long-distance providers.
The opening of the local market follows increased
competition in the long-distance market, which went into
effect on Jan. 1 of this year (see SourceMex, 01/15/97).
Coincidentally, the opening of the local telephone market to
competition was announced only days after TELMEX released its
quarterly financial report, which showed reduced earnings
because of competition in the long-distance market. TELMEX
profits were down 22% in the July-September quarter and 27%
for the first nine months of the year.
TELMEX was able to offset the impact of those losses
because of strong earnings in the local telephone market.
However, the opening of the local market could cut into future
profits. (Sources: Reuter, The News, 10/22/97; Novedades,
07/08/97, 10/23/97; El Economista, 08/05/97, 10/22/97,
10/23/97; El Universal, 10/22/97, 10/23/97; El Financiero
International, 10/27/97; El Nacional, 10/28/97)
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Foreign trade
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TRADE NEWS IN BRIEF
Mexican tequila distillers facing South Africa competition
The Mexican tequila industry, facing possible competition
from South Africa, is pushing for a global recognition of
tequila and mezcal as uniquely Mexican products.
According to the Consejo Regulador del Tequila (CRT), the
15-nation European Union (EU) has agreed to recognize the
property rights of Mexican tequila manufacturers, but other
major consumer nations, such as Taiwan and Japan, have yet to
take the same step.
The EU offered the designation earlier this year in
exchange for a Mexican agreement to accept the same
recognition for other European spirits (see SourceMex,
02/12/97). The EU designation in effect eliminated
competition from "tequila vasco," a spirit distilled in Spain.
The EU is the only major tequila-consuming region that
has offered strong protection for Mexican tequila. According
to the CRT, lack of protection elsewhere could allow countries
such as South Africa to begin a "tequila war" with Mexico.
The CRT said South Africa, with climactic conditions that
are similar to Mexico, has vast reserves of the blue agave
plant used to produce tequila. According to some estimates,
South Africa has a 39-year supply of the plant, known there as
garingboom.
In contrast, Mexico is expected to face a shortage of
agave in the coming years, which could have a major impact on
small and medium-sized tequila distillers in Mexico. The
shortage is caused by overexploitation of agave plants, which
has resulted in excess production of tequila.
"We see the possibility that supplies normally available
to small companies will tighten by 20% to 30%," said CRT
director Ramon Gonzalez.
According to Gonzalez, the period of tight agave supplies
could last about three years, or until the next generation of
plants is ready for use.
Meanwhile, the South African company Tequila and Mezcal
Distillers Ltd. has already announced plans to construct an
agave distillery in the Graaff-Reinet district near the Cape
of Good Hope. Company sources said the plant--which is
scheduled to begin production in the year 2000--will
manufacture 240,000 liters of alcohol per month. However,
most of the production will be an industrial byproduct, with
one-tenth of the output devoted to tequila.
Mexico, facing the possibility of losing global market
sales of tequila to South Africa, has announced plans to
challenge the South African venture before the proper trade
authorities in Johannesburg and Geneva. David Ivarra, a
spokesperson for the Mexican Embassy in Johannesburg, said the
first step in the process is for President Ernesto Zedillo's
administration to appeal to the South African government to
recognize its responsibilities under global trade rules.
"Under rules of the World Trade Organization, it would be
illegal to produce a beverage in South Africa and call it
tequila," Ivarra told the Reuter news service.
SECOFI imposes duties on imports of Chinese chemical
During October, the Secretaria de Comercio y Fomento
Industrial (SECOFI) formalized countervailing duties of 117%
on imports from Chine of the chemical antibiotic furazolidone.
This chemical is mixed with livestock and poultry feed to
control diseases such as salmonellosis and shigellosis.
The decision to impose the duties is based on an
investigation conducted in 1995. In a ruling published in the
federal register (Diario Oficial) in late October, SECOFI said
imports of the product from China increased by 515% in 1995 at
a time when domestic demand was down about 22% because of the
economic crisis that followed the 1994 peso devaluation.
According to SECOFI, the surge in imports allowed China
to increase its share of the Mexican furazolidone market to
44% during 1995, which not only reduced the market share for
Mexican manufacturers but also depressed domestic prices.
Because of the reduced market share, Quimica Ecosistemas--the
principal manufacturer of furazolidone in Mexico--was
utilizing only 19% of its installed production capacity.
Meanwhile, Mexican bicycle manufacturers have also asked
SECOFI to investigate whether China is engaging in unfair
trade practices through its exports of bicycles to Mexico.
Jesus Fares Kuri, president of the Asociacion Nacional de
Fabricantes de Bicicletas, said SECOFI and Mexican customs
officials have been unable to stop illegal imports of Chinese
bicycles, which frequently enter the country as imports from
Pakistan, South Korea, Taiwan, and the US. According to Fares
Kuri, Chinese bicycles are sold at much lower prices than
Mexican bicycles but also are of much lower quality.
A SECOFI report published in May of this year indicated
that almost one of every five complaints of unfair trade
practices involves products from China.
Mexican growers to begin limited avocado exports to US
For the first time in 80 years, Mexican agricultural
producers will be allowed to export avocados to the US under
an agreement brokered by US President Bill Clinton and Mexican
President Ernesto Zedillo.
The US had maintained an embargo on Mexican avocados
since 1914, arguing that the restrictions were necessary to
ensure that harmful pests were not introduced to California
and other avocado-growing states. The Mexican government,
arguing that the pests had been eradicated, threatened to take
the matter to the World Trade Organization (WTO).
Rather than have international trade authorities issue a
ruling on the dispute, the two governments negotiated a
compromise. Under a plan announced in late October 1996, the
US agreed to allow annual shipments of Mexican avocados to 19
states in the eastern US for a four-month period between
November and February (see SourceMex, 10/16/96). Even though
the plan was finalized in October 1996, the agreement was not
scheduled to take effect until November of this year.
According to Enrique Bautista, former president of the
Comision del Aguacate del Estado de Michoacan, avocado exports
to the US could total 8,000 to 10,000 metric tons this year,
which is about 1% of Mexico's total production. Bautista said
the Mexican government will seek to expand avocado exports to
other zones beyond the 19 states covered by the agreement.
"The US market is very promising if we succeed in
expanding sales to other regions," said Bautista, who is also
chair of the agriculture committee (Comision de Agricultura)
in the Chamber of Deputies.
Michoacan--which accounts for more than 80% of Mexico's
total avocado production--earns about 750 million pesos
(US$96.74 million) in revenue from avocado production and
marketing annually. However, any effort to expand avocado
sales in the US will almost certainly meet strong opposition
from producers in California.
According to the California growers, US Department of
Agriculture (USDA) studies do not show conclusive evidence
that Mexican avocado producers have fully eradicated all
harmful pests (see SourceMex, 02/05/97). [Note: Peso-dollar
conversions in this article are based on the Interbank rate in
effect on Oct. 20, reported at 7.75 pesos per US$1.00]
(Sources: La Jornada, 05/07/97; Reuter, 10/07/97; The News,
10/03/97, 10/08/97; Notimex, 10/12/97; El Economista,
10/13/97, 10/15/97, 10/24/97; El Nacional, 10/24/97; El
Universal, 10/21/97; Proceso, 10/26/97)
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Oil & other extractive industries
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PRESIDENT NOMINATES CHIEF OF STAFF
LUIS TELLEZ AS NEXT ENERGY SECRETARY
In late October, President Ernesto Zedillo nominated his
chief of staff, Luis Tellez Kuenzler, to replace Jesus Reyes
Heroles as head of the Secretaria de Energia (SE). Reyes
Heroles was nominated as Mexican ambassador to Washington
earlier in the month.
According to a source close to the president, Zedillo
selected Tellez to coordinate the difficult privatization of
the secondary petrochemical industry, which has been stalled
for several months.
"The president has relied on Tellez to perform some tough
jobs," the source told the Houston Chronicle newspaper.
Tellez formerly held high posts in the Secretaria de
Hacienda y Credito Publico (SHCP) and the Secretaria de
Agricultura y Ganaderia y Desarrollo Rural (SAGAR).
The Zedillo administration suspended the privatization of
the country's 10 petrochemical complexes in October 1996
because of strong opposition from legislators of the governing
Partido Revolucionario Institucional (PRI) and the center-left
Partido de la Revolucion Democratica (PRD).
According to opponents of the privatization, the sale of
the plants violates Article 27 of the Mexican Constitution,
which recognizes oil and its derivatives as the patrimony of
all Mexicans. To appease opponents, Zedillo modified the
original privatization plan to restrict private investment in
the petrochemical facilities to 49% (see SourceMex, 10/23/96).
Last April, the Zedillo administration temporarily
suspended the process. However, despite promises to restart
the process in August, privatization of petrochemical plants
remained stalled as of late October. The postponement was
seen as a political move by the president to prevent
privatization from becoming an issue in the July 1996
elections for the Senate and Chamber of Deputies (see
SourceMex, 04/23/97).
Tellez to oversee resumption of petrochemical privatization
According to political observers, the nomination of
Tellez to the post of energy secretary is expected to add new
vigor to the administration's privatization efforts.
"I have been instructed to continue the structural
changes in the petrochemical sector with a long-term vision,"
said Tellez at a press conference following his appointment.
However, Tellez emphasized that the administration will
hold to the modified plan, which would require the state to
retain a 51% share of the petrochemical facilities.
"We will continue to allow private investments only in
those areas permitted by law," Tellez said.
Similarly, Reyes Heroles described the privatization of
the petrochemical plants as a "deeply Mexican process," which
means that the government is not planning to pursue any more
changes to Article 27 of the Mexican Constitution.
"There are no plans to allow any further private
participation, much less foreign intervention, in our
country's basic petroleum activities," Reyes Heroles said at
his confirmation hearing for ambassador to the US.
Still, the Zedillo administration insists that its
current scheme of limited participation in the petrochemical
sector is needed to attract fresh capital to an obsolete
industry.
"The government lacks the resources to invest in the
petrochemical complexes, particularly if we want to devote
more financial resources to basic needs such as education,
health, the fight against poverty, and development of
infrastructure," said Trade Secretary Herminio Blanco in
testimony before the energy committee (Comision de Energia) of
the Chamber of Deputies.
The administration has modified the privatization plan
since the process was suspended, but the changes may not be
sufficient to counter legislative opposition.
Legislators to propose alternate privatization plan
In fact, the PRD and some members of the PRI are working
with the center-right Partido Accion Nacional (PAN) to draft
an alternative privatization proposal. The impetus has gained
particular strength in the Senate, where a 16-member faction
of the PRI--known as Grupo Galileo--expressed strong
reservations about the Zedillo administration's overall
privatization schemes.
However, to develop a successful alternative to the
administration's plan, Grupo Galileo and the PRD must
reconcile their opposition to any privatization with the PAN's
scheme to fully sell off the petrochemical facilities while
ensuring that Mexican nationals control 51% of all ventures.
The requirement for Mexican majority ownership would
apply both to facilities acquired from PEMEX and to new
complexes constructed by the private sector. The plan offered
by the Zedillo administration would allow private investors to
own 100% of any new petrochemical facilities they construct in
Mexico. According to PAN Sen. Francisco Salazar Saenz, the
opposition parties must work out a viable alternative because
the plan proposed by the Zedillo administration relies too
heavily on PEMEX control of the petrochemical sector.
"PEMEX has shown that its main interest is in oil
extraction," said Sen. Salazar. "The state-run company has
shown very little inclination toward such basic functions as
investment in petrochemicals, development of new technologies,
improvement of plant maintenance, protection of the
environment, and worker safety."
The Asociacion Nacional de la Industria Quimica (ANIQ)
has offered similar criticisms of PEMEX's policies regarding
secondary petrochemicals. At a recent industry conference,
ANIQ president Nicolas Gutierrez said the PEMEX-managed
petrochemical plants are not producing sufficient secondary
chemicals to meet the needs of Mexican industry.
"The lack of domestic production has in turn encouraged
an increase in chemical imports," said Gutierrez. "Our
country is not living up to its potential to become a major
competitor in global petrochemical markets."
Gutierrez said the Zedillo administration's constant
delays in proceeding with the petrochemical privatization has
led potential foreign investors to take their capital
elsewhere. In fact, two major multinational companies that
had strongly considered investments in the petrochemical
sector announced in late October that they would instead
invest in other countries.
US-based Mobil Oil Co. recently decided to construct a
new US$2 billion plant in Venezuela instead of Mexico.
Similarly, the British-Dutch conglomerate Royal Dutch Shell
announced that US$500 million in capital originally allocated
for projects in Mexico will instead be invested in other
countries. (Sources: Associated Press, 10/01/97, 10/22/97;
Reuter, Houston Chronicle, 10/22/97; El Economista, 10/02/97,
10/21/97, 10/22/97, 10/23/97; El Universal, Novedades,
10/22/97, 10/23/97; La Jornada, 10/23/97; The News, 10/23/97,
10/24/97; El Financiero International, 10/27/97; Excelsior,
10/23/97, 10/29/97)
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Agriculture, livestock & fisheries
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DROUGHT & STORMS CAUSE SIGNIFICANT DAMAGE
TO MEXICAN CORN, BEAN & COFFEE CROPS
According to the Secretaria de Agricultura, Ganaderia y
Desarrollo Rural (SAGAR) and the Confederacion Nacional de
Productores Rurales (CNPR), production of basic crops will be
smaller than expected this year because of the combined impact
of drought in northern and central states and damage from
Hurricanes Pauline and Olaf in the southeast.
In separate reports released in October, SAGAR and the
CNPR said the drought and the storms together resulted in crop
losses on about 1.65 million ha of land. According to the
CNPR report, the impact of drought was particularly evident in
the states of Zacatecas, Tlaxcala, Guanajuato, and Queretaro
in central Mexico and in the northern states of Durango,
Chihuahua, and Coahuila. Drought also reduced production in
the southern states of Guerrero, Oaxaca, and Chiapas.
Drought decimates most of bean crop in Zacatecas state
In Zacatecas, which is Mexico's largest bean-producing
state, farmers probably lost 90% of their bean crop to this
year's drought. At the beginning of the year, the government
had forecast bean production in Zacatecas at about 440,000 MT.
Nationally, the CNPR said the drought decimated half the
production of beans, which is now forecast at only 600,000 MT.
Because of the heavy losses in bean production, Mexico will
probably be forced to import beans to ensure an adequate
domestic supply.
The reports said the dry conditions in central and
northern Mexico probably reduced corn production by between
2.5 million MT and 3 million MT from previous estimates. Corn
production is now forecast at 14.5 million MT, compared with
previous estimates as high as 17.5 million MT.
However, despite the drought-related losses in corn and
bean production, SAGAR said Mexico's total production of
grains and oilseeds could reach a record 32 million MT.
According to SAGAR, the estimate could be reduced slightly
once damage from Hurricanes Pauline and Olaf is assessed.
Unofficial estimates indicate the two storms caused the
most severe damage to fields in Guerrero, Oaxaca, Michoacan,
and Chiapas states, where about 2.5 MT of corn, beans, and
sorghum may have been lost.
Hurricane Pauline damages Oaxaca coffee plantations
The storms also caused significant losses to coffee
plantations, particularly in Oaxaca, and to a lesser extent in
Chiapas. According to Abel Castellanos of the Confederacion
Nacional de Productores Rurales (CNPR), damage to coffee
plantations in the two states was so severe that some trees
may take three or four years to recover normal production.
Unofficial government estimates indicate the storms
decimated coffee production on 15,000 ha in Oaxaca.
The Coordinadora Nacional de Organizaciones Cafetaleras
(CNOC) estimates the storm damage could translate to the loss
of 400,000 100-pound bags (quintals) of coffee, worth US$75
million. According to some estimates, as much as half
Oaxaca's total coffee crop could be lost because of damage
from Pauline. Oaxaca accounts for roughly 19% of Mexico's
total coffee production.
The Consejo Mexicano del Cafe (CMC) said, however, that
the full damage to coffee plantations in Oaxaca is still being
assessed.
"We do not want to fall into the trap of exaggerating
losses, we want to give an accurate account," said CMC
director Ruben Castillo.
According to Francisco Zavaleta, director of the coffee-
exporting company Exportadora Pluma Azteca, dry and warm
conditions returned to the Oaxaca coffee areas after Hurricane
Pauline dissipated.
"This has helped with the ripening process in the trees
that were left standing," said Zavaleta. "We expect a return
to normal harvest by mid-November."
The damage from Hurricane Pauline was in stark contrast
to the effects of Tropical Storm Olaf earlier in the month.
According to coffee producers in the two states, this storm
brought beneficial rain to plantations, which had been dry for
much of the season. (Sources: The News, 10/09/97; Reuter,
10/01/97, 10/23/97; El Nacional, La Jornada, Novedades,
10/24/97; El Universal, 10/24/97, 
