Oil prices mean hard times but market is more open - Mexico

Oil Prices Mean Hard Times But Market is More Open Mexico will face hard economic times in the immediate future, primarily because of the direct and indirect effects of depressed world oil prices. Nonetheless, Mexico's entrance into the General Agreement on Tariffs and Trade (GATT) and its efforts to restructure its domestic economy will mean that the Mexican market, currently the third largest for U.S. exports, will remain relatively strong. In spite of the present strained economic setting, U.S. exporters to Mexico face a market considerably more open than it was a year ago.

Even though the Mexican trade balance with the United States still favors Mexico, the currency generated from Mexican exports to the United States fell by approximately 3 percent compared to this time last year. The level of U.S. exports to Mexico dropped by almost 5 percent in the first six months of 1986. The Mexican trade balance with the United States is expected to further decline during the remainder of 1986; however, long-run trade improvements are expected.

During the past six months, the Mexican government has taken several significant steps toward opening the Mexican economy to increased amounts of international competition. Notably, Mexico has completed its accession to the GATT, the multilateral body made up of 92 members, which establishes rules for world trade and encourages the lowering of trade barriers.

U.S. exports to Mexico will see no sudden surge as a result of Mexico's accession to the GATT requires of Mexico (such as import licensing, customs valuation, tariffs and subsidies), will be phased in over a number of years. Nevertheless, GATT membership brings Mexico fully into the community of world traders, providing its trading partners with an assurance that Mexico will conform to international trade practices while allowing Mexico increased access to the markets of other GATT members.

Mexico has taken several unilateral actions to lower trade barriers. The government announced a plan to reduce tariffs on most imports over a 30-month period, beginning in April. Some tariff cuts already have occurred; by late 1988, the highest Mexican import duty is expected to be 30 percent, compared to rates as high as 100 percent before April 30. Futher market-opening steps include the continued elimination of import permit requirements and the phase-out of Mexico's system of "official prices" for customs valuation.

With the gradual liberalization of Mexico's trade regime, the principal limitation on increased market opportunities in coming months likely will be the weakness of the Mexican economy. Economic forecasts call for 1986 to be the most difficult year so far for the de la Madrid administration, with gross domestic product falling by as much as 5 percent. Policymakers are struggling to develop a new 1986 budget to reflect the shortfall in government revenues from the petroleum sector; oil has traditionally supplied 60 percent of Mexico's federal revenue. Difficulties with budgetary imbalances have in turn caused higher than expected inflation (64 percent in 1985 and a possible rise between 80 to 100 percent for this year), and a virtual drying-up of credit for public and private sector investment.

'Liquidity Gap'

Since oil revenues also provide Mexico with 70 percent of its foreign exchange earnings, the oil glut has put strains on Mexico's international liquidity position. Mexico's non-petroleum exports have improved by approximately 10 percent during the first six months of 1986, but this has not been adequate to compensate for the 50 percent drop in petroleum exports. Mexico ended 1985 with reserves of $5.8 billion; this balance has steadily dwindled during 1986. The government of Mexico estimates that external financing of between $6 and $12 billion depending on the price of oil will be needed to meet its 1986 "liquidity gap." On July 25, the Mexican government agreed to borrow approximately $3.6 billion from the IMF and the World Bank. It has intensified pressure on commercial banks to provide as much as $6 billion in new loans. Mexico has proposed a "sliding formula" to determine the exact amount of these loans based on the price of oil. Specifically, world creditors will increase the loans if the price of oil falls below current levels during the next 18 months.

Assuming that a satisfactory financing package is forthcoming, Mexico is expected to be able to meet interest and amortization payments on its $97 billion foreign debt and still maintain fairly stable levels of essential imports. Nonetheless, the realities of the current Mexican economy, especially the lack of credit and soaring inflation, will necessarily impede the ability of Mexican companies and individuals to import.

The Mexican government is taking several steps to restructure the country's economy to deal with the crisis. Mexico has stated its intention to welcome more foreign direct investment and to make its foreign investment restrictions more flexible. Furthermore, the Mexican government has announced that it plans to sell or liquidate a number of state-owned enterprises that have posed a significant drain on government resources.

Mexico's maquiladora industry is prospering. It consists of assembly operations for electronics, textiles, automotive parts, and other products mostly along the northern border; foreign components can enter Mexico duty-free. Assembled products containing American-made components can reenter the United States with U.S. duties assessed only on value added in Mexico. In 1985, the maquiladora industry surpassed tourism to become Mexico's second largest net foreign exchange earner after petroleum. About 225,000 were employed in the industry in 1985; it added $1.35 billion in value to re-exports. For the third straight year growth in the maquiladora industry greatly exceeded overall economic growth in Mexico. The industry's revenue is expected to improve by more than 20 percent in 1986 to $1.6 billion. The government permits 100 percent foreign ownership in this sector; experts agree that this industry will play an important role in Mexico's recovery.

Despite the country's economic problems, the Mexican market for capital goods remains strong. In general, those products that contribute to Mexico's economic development goals find a strong demand in Mexico. Besides automotive parts and construction machinery, industries such as telecommunications equipment, ining and oil exploration equipment, medical instruments, agricultural equipment, and computers and peripherals are strong prospects for export expansion.

Other opportunities include industrial port development, food processing and woodworking machinery.

COPYRIGHT 1986 U.S. Government Printing Office
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