Current Monetary Conditions

Inflation Rates:	Period	Rate
Annual inflation	Feb 07 - Feb 08	3.72%
Annual "core" inflation	Feb 07 - Feb 08	4.14%
Monthly inflation	Feb 2008	0.30%
Monthly "core" inflation	Feb 2008	0.47%
*Mexico's annual target inflation rate is 3.00%
Interest Rates	Period	Rate
28 day TIIE	Jan 07 - Dec 07	7.925%
28 day TIIE	Feb 2008	7.935%
Annual Bank Funding Rate	Feb 07 - Feb 08	7.57%
Monthly Bank Funding Rate	Feb 2008	7.51%
Annual Gov't Funding Rate	Jan 07 - Dec 07	7.58%
Monthly Gov't Funding Rate	Feb 2008	7.44%
*Mexico's interest rate target for overnight
funding operations between banks is 7.50%

Balance of Payments 2001-2005

Capital Account Items

International reserve net has been negative for years 2001-2005, so Mexico is importing securities from other countries. There is a net capital inflow because the rest of the world is investing more in Mexico, than Mexico is investing abroad. Mexico borrows from other countries, more so long term than short term, in the form of foreign direct investment from abroad. Mexico has been investing abroad as a FDI but it has been considerably less than capital inflow.

Major Exports and Imports

Trade

Mexico is an export oriented economy. It is an important trade power as measured by the value of merchandise traded, and the country with the greatest number of free trade agreements. Mexico is highly dependent on exports to the U.S., which account for almost a quarter of the country’s GDP. The weak point of the Mexican economy is its heavy dependence on the US exports: 80% of Mexican foreign trade is carried out with the US.

Mexico is one of the world’s most trade dependent countries. The share of foreign trade in countries GDP is nearly 60%. Mexico is a member of the NAFTA- free trade agreement unifying the United States, Mexico and Canada since 1994. The country signed a free trade agreement with the European Union in 2000 and the commercial agreement signed with Japan came into force on April 2005. USA buys 80% of its exports. The top three export partners are: the USA, Canada and Spain.

In the year 2000, the U.S. accounted for 73% of Mexico's imports and 89% of exports. Thus, the overview of the imports and exports between the U.S. and Mexico is a valid way to depict Mexico's top Import/Export categories.

Resources and Competitive Advantage

Mexico’s natural resources are: petroleum, silver, copper, gold, lead, zinc, natural gas, timber.

Mexico ranks among the world's largest producers of coffee, sugar, corn and oranges. Therefore, some of Mexico’s primary exports include fruits, coffee and cotton. Mexico exports sugar; however, that is often brought up as a trade dispute between the U.S. and Mexico generally settled in WTO or NAFTA panels or through negotiations between the two countries. Mexico is among the world's leading producers of many minerals, including silver, fluorite, zinc, and mercury, and its oil & gas reserves are one of its most valuable assets. Mexico is the fifth largest producer of oil the world, with 3.8 million barrels per day. Therefore, oil is the second most valued export of Mexico which is primarily exported to the U.S.

The building & construction sector is doing well, fuelled by boom in housing finance. Livestock raising and fishing are also significant economic activities. The services sector contributes nearly 70% to the GDP.

Technology and Manufacturing:

Maquiladoras:

Mexico has free economic zones dedicated to US exports called ‘Maquiladoras’, which were early driving the economy. Since the 1960s, maquiladoras have received supplies and parts from companies in the United States for assembly in Mexico. The finished goods are then exported back to the United States. This is a primary reason for Mexico’s top imports like metalworking machines and steel mill products.

In 1994, the implementation of NAFTA removed tariffs on equipment, machinery, supplies, and raw materials exported temporarily into Mexico. This further decreased the costs of manufacturing in the maquiladoras and encouraged growth. In the interim, electrical machinery and road vehicles became two of the largest U.S. exports to Mexico, while also representing two of the largest imports from Mexico.

The maquiladoras are now going through crisis because of the competition from low cost Asian & East European countries. As a result manufacturing sector has dramatically slowed down in recent years and now contributes around 15% to the country’s GDP.

Labor:

The Maquiladoras has helped labor in Mexico. The system was predicated on Mexico's proximity to the U.S. market and low-cost labor advantage. In recent years, the maquiladora industry has suffered from the effects of a slumping U.S. economy. In the period from 2000 to 2004, the industry lost approximately 290,000 jobs representing a 21 percent decline in employment.

The maquiladoras have recently lead firms to tap lower labor costs in the interior of Mexico, while transportation and logistics costs have been decreasing as well. In order to retain its position within the supply chain, Mexico must prepare its workers to be skilled managers and engineers.

Capital:

Mexico requires investments in education, energy, and legal reform in order to raise the skill levels of Mexican workers while decreasing the costs associated with operating in Mexico. Currently, Mexico's energy costs are, on average, 10 percent higher than energy costs in the United States and considerably higher than costs in China. Mexico also has a corporate income-tax rate of 34 percent, approximately twice as high as China's prevailing rate. Integration and increased foreign direct investment will also require further Mexican government investment in transportation infrastructure to improve roads and railways and lower the cost of operating in Mexico.