Decline in oil prices will contribute to difficult year - Mexico

Decline in Oil Prices Will Contribute to Difficult Year

The Mexican economy will experience a difficult year in 1986, especially in light of the precipitous fall in world petroleum prices which began in December 1985. U.S. exporters to Mexico face an economy that is continuing to emphasize restructuring and trying to bring under control its large federal budget deficit, high inflation, and looming external debt.

U.S. exports 1985--$13,653 million

U.S. imports 1985--$19,392 million

Despite these limitations on Mexico's ability to import, demand should continue for certain categories of U.S. exports, such as capital goods, which contribute to Mexico's industrial development. In addition, Mexico's trade regime is generally more open now than it was a year ago. Prior import licensing requirements were replaced by higher import duties for many products during 1985, a move which reduces much of the uncertainty of exporting to Mexico. Mexico is also currently negotiating its possible accession to the General Agreement on Tariffs and Trade (GATT), the international body which establishes rules for international trade.

In 1986, the de la Madrid government's chief economic goals are to strengthen public finances and reduce inflation, thereby improving the possibilities for sustained economic growth in the future. Mexico's economy grew by about 4 percent during 1985, compared to a 3.7 percent rate the previous year. Growth in 1985 was spread over most sectors of the economy, including manufacturing, agriculture, and commerce. Gross domestic product growth is projected to fall to approximately 1 percent in 1986.

The steep decline in world oil prices will have wide ranging consequences on Mexico's economic performance in 1986. Sixty percent of Mexico's federal revenue comes from the state-controlled petroleum sector, as does 70 percent of its foreign exchange earnings. Mexico was selling its oil for $27/barrel in December 1985; by mid-February, the average official price had dropped to $16 per barrel. Reduced government revenues as a result of declining oil prices will put additional pressure on the federal budget deficit, which amounted to 10 percent of GDP in 1985. Public sector borrowing to meet the deficit will entail continued high interest rates and shortages in the amount of credit available for private sector expansion.

Continued fiscal imbalances during 1986 will make progress on inflation difficult. The inflation rate reached 64 percent in 1985, up from 59 percent in 1984. In August, the government instituted a "regulated float system' for its controlled exchange rate, which is now adjusted daily by the Bank of Mexico based upon "market conditions.' At year-end 1985, this exchange rate, which is used for most foreign trade transactions, stood at 372 pesos per dollar, about 25 percent below the free market exchange rate of 466 pesos per dollar.

Reconstruction efforts following the devastating earthquakes which struck Mexico City in September 1985 will be spread out over several years and are thus not expected to pose a major additional drain on Mexico's finances in 1986. The country's productive capacity sustained little damage from the quakes, since most of the destruction was concentrated in the non-industrial sections of the capital.

In spite of Mexico's economic hardships, U.S. trade statistics for 1985 demonstrate an improvement in exports to that country. Mexico maintained its status as the U.S.'s third largest trading partner. U.S. exports to Mexico for 1985 rose to $13.6 billion, up 14 percent over the 1984 level of $12 billion. Imports from Mexico were up 6 percent, from $18.3 billion in 1984 to $19.4 billion in 1985.

The Mexican market for capital goods is likely to remain stable during 1986. In addition to traditional top exports--automotive parts and construction machinery--prospects are strong for mining and oil exploration machinery, telecommunications equipment, computers and peripherals (including software), medical instruments, and agricultural implements. Opportunities should also be available in the environmental control, industrial port development, food processing, and home construction sectors.

During 1986, the government of Mexico will continue to approve limited amounts of foreign investment which promotes development in strategic industrial sectors. In most cases, foreign investment in Mexico is limited to 49 percent of capital ownership, and the government often stipulates that local content, export performance, or other requirements be met. In November, the government instituted a new set of regulations which simplify some of the administrative procedures governing existing foreign investment in Mexico.

Mexico's in-bond manufacturing sector maintained its rapid growth during 1985 and will remain a bright spot in Mexico's economy. These "maquiladora' assembly operations, mostly concentrated along the U.S.-Mexico border, generated $1.3 billion in value added for re-export in 1985, a gain of 13 percent over 1984 figures. The in-bond sector is second only to petroleum as a source of foreign exchange for Mexico, and maquiladoras employed approximately 215,000 Mexicans in 1985. Since Mexico allows 100 percent foreign ownership of most in-bond operations, this sector represents an attractive opportunity for U.S. investors.

The U.S. Trade Center in Mexico City is planning a full schedule of exhibitions to promote U.S. products and technology in 1986. These include: Computer and Peripheral Systems (April 15-18); Furniture Manufacturing Equipment (May 20-23); Telecommunications Equipment (June 24-27); Graphic Arts and Materials Equipment (July 15-18); High Technology Electronics (Aug. 5-8); and Medical Equipment (Sept. 9-11).

For further information on trade and investment opportunities in Mexico, contact the Commerce Department's Mexico Division at (202) 377-4464.

COPYRIGHT 1986 U.S. Government Printing Office
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