Mexico’s Water and Wastewater Market
Economic/ Political/ Financial Issues
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Economic/ Political/ Financial Issues:
The Mexican economy achieved the highest economic growth of any Latin American country during the year 2000 reaching 6.9% growth amidst a continued downward trend in inflation, which closed the year at 8.96%. The economic outlook for the year 2001 remains positive albeit growth rate forecasts have been trending lower as result of the continued deceleration of the U.S. economy. Interrelation between the two economies continues to strengthen as pundits now indicate that the observed lower growth in Mexico is the result of the synchronization of the economic cycles in both economies. T  he Mexican economy grew at a rate of 1.9% during the first trimester and is expected to close the year with 1.1% growth. Inflation is expected to close the year at under 7%, while country risk has declined to about 300 basis points in the last semester, this contrasts with the country risks for Argentina and Brazil which continue growing. Inflation during the first semester reached 2.11%, which was lower than that of the U.S. during the same period. On a positive note, the continued decline of the inflation rate and country risk premium have a positive impact on the internal rate of return for long term infrastructure projects like is the case for those in the water sector. Mexico’s economy continues to present strong fundamentals that offer a positive outlook for long-term investments. Foreign exchange reserves are at a historic high of US$ 38.8 billion, with the exchange rate continuing to appreciate against the dollar in real terms supported by stable oil prices and continued inflows of foreign direct investment. FDI is expected to reach US$ 17.6 billion during 2001 and US$ 14.7 billion in 2002. As for the exchange rate, it is expected to close the year at $ 9.46 pesos per dollar. GDP growth is expected to reach 4.6% during 2002. 
Macro-economic stability remains as one of the principal goals of the current administration. It is expected that a tax reform bill will pass through congress by the end of 2001. If this legislation is enacted it will allow for eliminating the public sector deficit which is currently estimated at 0.7% of GDP and will possibly allow Mexico to reach investment grade status. This will be another positive factor that will reduce the cost of financing projects in Mexico. Increased economic stability will boost investment on infrastructure projects in Mexico, which have in the past been affected by economic imbalances. Among the principal factors that will support the development of this projects are: exchange rate stability, dramatic reductions on internal interest rates and most importantly, the population’s income is growing in real terms. The Mexican government currently spends about $ 1.4 billion pesos per year on water sector infrastructure, but only a small fraction of between 22 to 27% of this expenditures are destined for the construction of new infrastructure. The vast majority of these resources are used for the most basic maintenance as it is estimated that an adequate maintenance of the existing infrastructure requires over $1.6 billion pesos per year. If the Mexican government were to increase the sector’s service coverage to its desired levels it will require expenditures of $ 2.4 billion pesos per year for the following 10 years. Water availability in Mexico is becoming a major problem throughout the country, the government has emphasized that finding a solution to this issue is a key priority and has proposed plans incorporating a growing participation of the private sector on these investments. It is likely that because of the urgent nature of these projects, the Federal and local authorities will move forward to increase water rates and improve upon fee collection; these are the two fundamental steps for demonstrating the government’s commitment for fostering these investments. Current economic stability plays well into the possibility for creating strong interest among private investors. But it is important to separate the underlying factors creating these investment opportunities. The economy’s strong growth seen in 2000 has been stalling and is expected to be much smaller this year, but infrastructure projects are driven by specific demand, which is strong in Mexico for water projects and more importantly by the long term prospect of economic stability that allows for the structuring of long term – affordable – financing for these projects. Short-term growth prospects for the Mexican economy are almost independent issues to the development of water infrastructure. These projects are not dependent upon the country’s growth rates but upon its economic stability and the government’s commitment to support these investments. These projects are not conceived for satisfying potential future demand but for bringing the country up to date on the infrastructure it already needs for satisfying the needs of its 98 million inhabitants. The major economic crisis of 1994 and its dramatic aftermath were caused by a series of factors that are not currently present with the exception of one: the real appreciation of the Peso against the US dollar. Government officials indicate that the current value of the exchange rate is determined by market forces and not by the central bank’s intervention. Because of this, the strength of the local currency is explained by the positive inflows of foreign direct investment and stable oil prices, which are a principal source of revenue for the Mexican government. There is strong debate on whether the government should devalue its currency, but it has been clearly stated that the exchange rate is determined by market forces and because of this, we expect it will remain very stable for the following years. Pressures on the exchange rate from the trade balance are limited as Mexico’s trade deficit remains manageable and is expected to reach US$ 12.4 billion by the close of 2001, an amount easily financed by FDI flows. The growth rates of both imports and exports have declined from last year’s levels and are currently estimated at 6% for exports and 6.7% for imports. Export elasticity of the Mexican economy is much more dependent upon economic growth in the U.S. than on marginal exchange rate fluctuations. 
Basic Macroeconomic Forecasts of Major Banks and Credit Rating Agencies.
Source: El Financiero, August 2001
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