Mexico Economy

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MEXICO
Nominal GDP (2003 est.): $615 billion. (7,4 trillion pesos, 2004 Q2).
Per capita GDP (2003 est.): $5,945.
Annual real GDP growth 2003 (1.3%); 2002 (0.9%); 2001 (-0.3%); 2000 (6.6%) 1999 (3.7%).
Avg. real GDP growth (1999-2003): 2.1%.
Inflation rate: 2003 (4.0%); 2002 (5.0%); 2001 (6.4%); 2000 (9.5% ); 1999 (16.6%).
Natural resources: Petroleum, silver, copper, gold, lead, zinc, natural gas, timber.

Budget: Income .............. $117 Billion
Expenditure ... $123 Billion

Main Crops:
Corn, wheat, soybeans, rice, beans, cotton, coffee, fruit, tomatoes; beef, poultry, dairy products; wood products.

Natural Resources: Petroleum, silver, copper, gold, lead, zinc, natural gas, timber .

Major Industries:
Food and beverages, tobacco, chemicals, iron and steel, petroleum, mining, textiles, clothing, motor vehicles, consumer durables, tourism.

NATIONAL GNP
Mexico is highly dependent on exports to the U.S., which account for almost a quarter of the country’s GDP. The result is that the Mexican economy is strongly linked to the U.S. business cycle. As the U.S. economy has emerged from its downturn in 2001, so has the Mexican economy, growing at a 3.8% rate in the first half of 2004.

Mexican trade policy is among the most open in the world, with Free Trade Agreements with the U.S., Canada, the EU, and many other countries. Since the 1994 devaluation of the peso Mexican governments have improved the country’s macroeconomic fundamentals. Inflation and public sector deficits are both under control. As of September 2004, Moody’s, Standard & Poors, and Fitch Ratings have all issued investment-grade ratings for Mexico’s sovereign debt.

Trade
Mexico is one of the world’s most trade dependent countries, and it is particularly dependent on trade with the U.S, which buys approximately 88% of its exports. Top U.S. exports to Mexico include electronic equipment, motor vehicle parts, and chemicals. Top Mexican exports to the U.S. include petroleum, cars, and electronic equipment. There is considerable intra-company trade.

Mexico is an active and constructive participant in World Trade Organization (WTO) matters, including in the launching of the Doha trade round. Mexico hosted the WTO Ministerial Meeting in Cancun September 2003. The Mexican Government and many businesses support a Free Trade Area of the Americas.

Trade disputes between the U.S. and Mexico are generally settled in WTO or North American Free Trade Agreement (NAFTA) panels or through negotiations between the two countries. The most significant areas of friction involve agricultural products including sugar, high fructose corn syrup, apples, and rice.

Agriculture
Mexico's agrarian reform program began in 1917, when the government began distribution of land to farmers. Extended further in the 1930s, delivery of land to peasants continued into the 1960s and 1970s at varying rates. This cooperative agrarian reform, which guaranteed small farmers a means of subsistence livelihood, also caused land fragmentation and lack of capital investment, since commonly held land could not be used as collateral. Additionally, only 12% of Mexico’s land area is arable, of which less than 3% is irrigated, which coupled with a general lack of economic opportunity in rural areas, have made it difficult to raise the productivity and living standards of Mexico's subsistence farmers.

Agriculture accounted for 4% of GDP in 2002, yet agricultural employment accounted for over 20% of total employment. However, there are signs that Mexican farmers have already begun to transition away from agriculture to off-farm employment. The number of land owning farmers dropped 21% between 1991 and 2000 and Mexico’s smallest farmers now earn less than a third of their income from agriculture.

Poor availability of credit continues to plague agriculture. Agricultural loans were hard hit by the 1994 peso crisis and many private banks view agricultural lending, particularly to smaller producers, as too risky. Mexico has recently reformed its public lending system, creating Financiera Rural, a public bank with the objective of improving the supply of agricultural credit.

In an effort to raise rural productivity and living standards, Article 27 of the Mexican Constitution was amended in 1992 to allow for the transfer of communal land to the farmers cultivating it. They then could rent or sell the land, opening the way for larger farms and economies of scale. Actual sales of communal land have been few and limited primarily to suburban areas where land values are high. One reason for the lack of sales may be insufficient community support, as some in the community have a vested interest in maintaining the communal land system.

Mexico subsidizes agricultural production through the PROCAMPO program. Since the early 1990’s, the availability of program payments has shifted from primarily grains and legumes to all commodities, provided a farmer was producing during a certain base period. Total program funding is $1.3 billion and 2004 payments are $85 per hectare for producers with more than five hectares and $100 per hectare for producers with 1-5 hectares.

Manufacturing and Foreign Investment
Manufacturing accounts for about 20.3% of GDP and grew by 9.4% in 2000. Manufacturing probably fell or was stagnant in 2001 because exports to the U.S. probably fell. Construction grew by almost 7% in 2000 but was probably stagnant in 2001.

According to Mexico's Ministry of Economy, Foreign Direct Investment (FDI) in Mexico for 2003 was $10.38 billion, down 29% from the year before. The U.S. was once again the largest foreign investor in Mexico, with $5.75 billion in investments, or 55% of total FDI. The most recent numbers released by Mexico show FDI for January thru June 2004 at $9.57 billion. Although the amount is nearly equal to all of 2003, the total is inflated by an investment of over $4.0 billion by the Spanish bank BBVA.

Oil and Gas
In 2003 Mexico was the world’s fifth-largest oil producer, its 9th- largest oil exporter, and the third-largest supplier of oil to the United States. Oil and gas revenues provide about one-third of all Mexican Government revenues.

Mexico’s state-owned oil company, Pemex, holds a constitutionally established monopoly for the exploration, production, transportation, and marketing of the nation’s oil. Since 1995, private investment in natural gas transportation, distribution, and storage has been permitted, but Pemex remains in sole control of natural gas exploration and production. Despite substantial reserves, Mexico is a net natural gas importer.

Transportation and Communications
Mexico’s land transportation network is one of the most extensive in Latin America with 117,000 kilometers (kms) of paved roads, including more than 10,000 kilometers of four-lane paved roads. The 26,622 kilometers (16,268 mi.) of government-owned railroads in Mexico have been privatized through the sale of 50-year operating concessions.

Mexico’s ports have experienced a boom in investment and traffic following a 1993 law that privatized the port system. Mexico’s ports moved nearly 1.7 million containers in 2003. A number of international airlines serve Mexico, with direct or connecting flights from most major cities in the United States, Canada, Europe, Japan, and Latin America. Most Mexican regional capitals and resorts have direct air services to Mexico City or the United States. The government of Mexico continues to try to privatize the two main national airlines, Mexicana and Aeromexico, but with little success. Airports are semi-privatized with the government still the majority shareholder, but with each regional airport group maintaining operational autonomy.

The telecommunications sector is dominated by Telmex, the former state-owned monopoly. Several international companies compete in the sector with limited success. Mexico’s telecommunications regulator has failed to enforce dominant carrier regulations, with regulation largely provided through a series of private agreements among the three largest carriers. This has negative implications for U.S. investors in the sector, although there are no reported barriers to exports of U.S. telecommunications goods and services. The teledensity rate in Mexico (around 16%) is among the lowest in Latin America. Cellular penetration is much higher with over 33 million cellular customers in 2004. However, 31 million of these customers use pre-paid cards, and many use their phones to receive calls only. Mexico’s satellite service sector was opened to competition, including limited foreign direct investment, in 2001.