Mexico Expands IMF Credit Line, Growth Slowing

| Dec. 17, 2010 |

Published by Minyanville and Yahoo! Finance

Wikileaks’ revelations on relations between the US and Mexican governments were not as scathing as many analysts had expected. They revealed, to no major surprise, that the US was not particularly impressed with President Felipe Calderon’s war on drugs. US ambassador Carlos Pascual rather poetically expressed to the LA Times that the cables should be viewed as “impressionistic snapshots of a moment in time. But like some snapshots, they can be out of focus or unflattering.”

So the markets were unhurt by Wikileaks’ news. However, the drug wars are thought to be having an impact on investment in Northern Mexico. Foreign investment in six northern states dropped 78% in the first nine months of 2009 compared to the same period in 2008.

The major news out of Mexico this week was the government's request to the International Monetary Fund to renew and enlarge its precautionary credit line from $47 billion over one year to $73 billion over two years.

The country's GDP contracted 6.5% in 2009 when the deal was first sought but third quarter results indicate 5.3% GDP growth in 2010. The United Nations expects Mexico's economic growth to slow to 3.5% in 2011 as exports falter while domestic demand fails to increase as hoped. The Inter-American Development Bank expects that 2010 figures will show Mexican exports up 33.7% on 2009.

This was reflected in Walmart de Mexico's (WMT) lower-than-forecast sales results released this week which caused shares to drop, although they had rebounded by the end of the week. Sales at stores rose 0.5% in November from the previous year to $2.32 billion, marking the slowest growth rate since April.

The company opened a whopping 58 stores in Mexico and another 10 in Central America in November alone, with another 15 opening in Mexico and two in Central America in the first week of December.

Christmas sales are expected to follow suit in Mexico with sales expected to grow, though at a slower pace than in 2009. The National Association of Supermarkets and Department Stores estimates total sales to grow 9% this season, following an 11.5% rise in December 2009.

In a bid to secure a major source of government income, Finance Minister Ernesto Cordero announced the purchase of put options to hedge 2011 oil exports at an average of $63 a barrel. The government paid £812 million for the options to sell 222 million barrels of crude oil at a minimum price, less than the $1.172 billion paid in 2010 to hedge much of its oil exports at $57 a barrel for 230 million barrels.

The deal was first made in 2009 after the financial crisis caused oil prices to plummet to as low as $28.40 a barrel.

Meanwhile, state owned oil monopoly Pemex cut its January discount for crude oil deliveries to the US. December’s $4-a-barrel discount narrowed to $3.60 for Maya heavy crude oil. Cargo heading to Europe will see a discount of $1.0 from $2. Maya heavy crude accounts for 55% of the 2.57 million barrels a day that Pemex produced in October.

Cement manufacturer Cemex (CX) will face European Union proceedings for alleged cartel activity along with seven other companies in ten European countries, including the UK, France, Germany and Spain. The company is also in trouble domestically as a Mexico City judge overturned a court injunction allowing an antitrust case against Cemex to continue.

In other industry news, the automobile manufacturing sector saw growth in November rising 18% in volume against the same month in 2009, to 207,560 cars and light trucks. Vehicles tend to cross the northern border into the US where Mexican-made vehicles have more than 11% market share. However economic weakness in the US and UK are expected to threaten growth, according to the Automobile Industry Association of Mexico.

Mexico’s IPC index maintained its high this month closing at 37,676.55 points on Wednesday, just short of last week’s record high of 37,880.13. Mining giant Grupo Mexico (GMBXF) rose slightly this week to $3.83 while many large companies have seen losses, including Carlos Slim’s America Movil (AMX) which dropped further to $56.37

Mexican officials are “comfortable” with the level of the peso, according to Finance Minister Cordero. The currency gained last week as retail sales rose in the US to $12.43 on Thursday. US retail sales rose 0.8% in November, according to the Commerce Department.

The Cancun Climate summit saw better-than-expected progress last week as an agreement was made for the world’s major economies to reduce emissions with a fund potentially worth $100 billion a year. They failed however, to agree to keep global temperature rises to a maximum of 2 degrees Celsius.