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Aug 30, 2007 | 19:30 GMT

11 mins read

Global Market Brief: Mexico Sees a Decline in Remittances

Numerous factors are contributing to a stagnation or slowdown in the growth rate of remittances Mexican migrant workers send back to Mexico from the United States. These remittances will not suddenly evaporate, but the Mexican government cannot count on the continuation of what has until now been a substantial source of income for the Mexican people. The government will therefore need to look inward and consider domestic reforms to begin preparing for the decline in funds from migrants in the United States. Because remittances provide a safety net for many of Mexico's poor communities, the poor states and communities in central and southern Mexico will be much more affected by any decline in remittances than will the wealthier states in the North. Whether Mexico implements reforms that will begin to reduce the need for massive migrations to the United States depends largely on the will of the Mexican government. However, the current dip in remittances is on the government's radar and could give Mexican President Felipe Calderon ammunition as he takes his case for further economic reforms to the public. The expected decline in remittances could serve as an impetus to make fundamental changes to Mexico's economy that might set all parts of the country on an economic trajectory of job growth. In 2006, a record-setting $26.1 billion in remittances — up 20 percent from $18 billion in 2005 — represented 2.7 percent of Mexico's gross domestic product and was the country's third-largest source of foreign exchange after oil revenues and industrial exports. However, a recent study conducted by the Inter-American Development Bank found that during the first half of 2007, remittances remained relatively flat, at $11.5 billion, compared to $11.4 billion during the same period in 2006; this does not even exceed a 1 percent increase.The study also found that in the first half of 2007, 64 percent of Mexicans residing in the United States regularly made remittances — down from 71 percent in 2006. If these trends continue, Mexico could have a serious problem on its hands. Why are the remittance payments stagnating and the number of remittance payers decreasing? In the short term, there are several reasons. There is the sluggish growth in the U.S. housing sector, which employs roughly 40 percent of all Mexican migrant workers. Then, there are the U.S. government's attempts to clamp down on businesses hiring illegal immigrants, the economic uncertainty surrounding the subprime meltdown and other factors contributing to a general sense of financial insecurity among the migrant population in the United States. This uncertainty is leading to an increased savings rate and fewer remittances sent back home. One trend that is both independent of short-term fluctuations in economic growth and most telling of the situation to come is the changing demographic of Mexican migrants staying in the United States. Mexican migrants are staying in the United States longer, and as the number of families reuniting on U.S. soil increases, the need to send money back home decreases. As more migrants give birth to children in the United States, they devote more money to domestic needs, such as education for their children and investments in housing. Furthermore, it seems that fewer Mexican workers are entering the United States, likely daunted by the declining job prospects brought about by strengthened immigration laws and increasing border security. U.S. authorities apprehended 24 percent fewer migrants crossing the border in early 2007 than in the same period in 2006, despite increased monitoring — a fact that suggests a decrease in border crossings. For Mexico, all of these factors add up to the potential for a continuing decline in remittances. This does not spell economic disaster for Mexico, but it is a warning to the government that it needs to implement economic reforms to compensate for the expected remittance decline in order to avoid uprisings in regions that depend heavily on the payments. The reduction in remittances will be felt more regionally than nationally and is particularly relevant for Mexico's central and southern states, which receive the majority of remittances. Economic growth in Mexico's North has averaged between 4 percent and 5 percent since 1995, compared to growth of between 1 percent and 2 percent in southern states. This trend is continuing and is largely due to the northern regions' industrial economies that are based on maquiladora exports to the United States. In contrast, the central-southern state of Michoacan, one of Mexico's least-developed, receives more than 10 percent of Mexico's remittances — about $615 per person, with approximately one out of 10 households receiving payments. Remittances keep many families in Mexico's less-developed regions afloat. If Calderon does not create jobs for these communities, slowing migration and fewer remittances will tighten family budgets while increasing the number of unemployed, mostly younger males who would otherwise have migrated to the United States. While tightened budgets and rising unemployment might not spur a large social uprising, they could lead to increases in crime and general discontent, not only in poorer states but also in larger cities that might experience population increases if migration to the United States slows. Calderon recently proposed a sweeping investment and tax reform policy that, if passed, should make some progress toward boosting economic growth and job creation in Mexico. However, to set Mexico on a path toward long-term economic growth, Calderon must encourage economic growth in his country's poorer regions. Simply increasing tax revenues and investments in pre-existing firms, such as Mexican state oil giant Petroleos Mexicanos, and then subsidizing poorer areas will not translate into long-term structural changes; it will just help to replace losses in remittances in the short term. Outstanding structural problems in the southern areas include onerous legal and business transaction structures (especially for land sales and purchases) and the lack of a developed financial services sector. For the southern regions to grow in the long term, these issues will need to be addressed. This short-term dip in remittances and prospects of a likely long-term decline are gaining Mexico City's attention and will help spur reforms. However, the strength of Calderon's ambitions to build up the South — and, therefore, Mexico overall — remains to be seen. IRAQ: Iraq's draft oil law should pass easily when the National Assembly meets to discuss it in September, Iraqi Vice President Adel Abdel Mahdi, the highest-ranking Shiite official in Iraq, said Aug. 28. Speaking to Reuters before an Iraqi investment conference in Dubai, United Arab Emirates, Abdel Mahdi said Iraq's Cabinet has completed and approved the draft law, and that this version will be presented to Iraq's parliament. The draft will, in fact, pass once it reaches the National Assembly, since all the problems with the document will have been ironed out before it goes to the parliament. However, the de-bugging process is a Herculean task, given that the oil law is a function of the broader power-sharing deal among Iraq's three main communal groups: Shia, Sunnis and Kurds. Now more than ever, the success of such a deal seems unlikely, given the breakdown of the U.S.-Iranian negotiations over Iraq. Therefore, the bill probably is not ready to go to the legislature as quickly as Abdel Mahdi has suggested. If an oil law does indeed go to parliament for approval soon, it will be a watered-down version that is not ready for implementation because the details are not sorted out, and the fighting over it will continue. FRANCE: French President Nicolas Sarkozy will decide by the end of September whether he supports the proposed merger of state-controlled natural gas firm Gaz de France (GdF) and electricity firm Suez, a Cabinet spokesman said Aug. 29. The previous conservative government, led by Prime Minister Dominique de Villepin, arranged the deal, thinking it could create a French powerhouse in the energy business. In 2006, the two French companies agreed to the controversial $39 billion merger, and soon thereafter EU regulators approved the merger despite accusations that it abandons free-market principles and is part of an illegal plan to fend off a hostile takeover bid for Suez by Italian energy firm ENI. Before the merger can go through, Sarkozy will have to privatize GdF — something he promised not to do while serving as finance minister in 2004. Nevertheless, if approved, the merger would create Europe's second-largest utility firm — serving an estimated 214 million consumers worldwide. RUSSIA: Russian state-controlled natural gas monopoly Gazprom has said it will extend an offer to shareholders in Moscow-based electricity company Mosenergo to purchase a 50.1 percent stake — 19,914,977,081 shares — in the company, RosBusinessConsulting reported Aug. 28. Gazprom is looking to control electricity production in Russia in order to monopolize the energy sector. Electricity is particularly important for Gazprom because much generation currently relies on natural gas, and legally mandated rock-bottom prices in the domestic market are causing Gazprom to hemorrhage money. Gazprom and the Kremlin are pushing to diversify Russia's electricity generation by including a larger contribution from both coal and nuclear power sources, reserving natural gas for fulfilling Russia's export contracts. CHINA: China's top legislature Aug. 30 announced a number of changes inside the country's Finance, State Security, Supervision, Personnel and Defense ministries. Most significant was the resignation of Finance Minister Jin Renqing, who will be replaced by Xie Xuren, the former director of the State Administration of Taxation. Although Jin, 63, would have been due for retirement in the next two years anyway, his links to a corruption case in one of China's largest energy companies appear to be the real reason he is stepping down. His resignation coincides with the start of an anti-corruption cleanup that typically takes place just before a Communist Party Congress — set to begin Oct. 15. The personnel change also was likely delayed for fear of upsetting the establishment of China's new foreign reserve investment company, which is due to begin business operations in September. COLOMBIA: Colombian state oil company Empresa Colombiana Petroleos (Ecopetrol), Colombia's largest company, began selling shares to workers, retirees, Colombian pensions, mutual funds and citizens for 65 cents each Aug. 27. Those purchasing shares with cash receive a 5 percent discount. This public pre-sale, which is expected to make at least 200,000 Colombians company shareholders, will continue until Sept. 25. Beginning Nov. 19, international investors will be able to purchase Ecopetrol shares. By selling 10 percent of its shares to Colombians, Ecopetrol is expected to raise $2.7 billion. The international market will have access to an additional 10 percent of the firm, making the final offering 20 percent of the company for approximately $5 billion. The sale is intended to spur economic growth and promote Colombia's domestic stock market. The revenues will be used to breathe new life into Ecopetrol in a bid to increase oil production and maintain Colombia's status as an oil exporter in the face of recent declines in reserves. NIGERIA: The Nigerian government said Aug. 29 it will restructure the country's energy sector. Nigerian Minister of State for Petroleum Odein Ajumogobia said the federal government will create a National Council on Energy to divide the Nigerian National Petroleum Corp. (NNPC) into several new organizations, including a national oil company, a petroleum products distribution company and an oil and natural gas assets holding company. The move is aimed at improving the country's energy sector and overcoming problems of corruption and lack of transparency that have plagued NNPC operations. INDIA: Protests of corporate retail expansion picked up steam in India on Aug. 18-19, when retail stores owned by energy giant Reliance Industries were vandalized in the northern state of Uttar Pradesh — leading the state government to order an indefinite closure of all corporate retail outlets. The following week, Reliance Fresh outlets came under attack in the state of West Bengal, spurring Reliance to slow the rollout of its retail ventures in West Bengal, Kerala, Jharkhand and Uttar Pradesh. Reliance already is under pressure to rapidly expand in the Indian retail market before foreign competition there increases — mainly from Wal-Mart's wholesale retail joint venture with Bharti Enterprises. The attacks against Reliance Fresh stores likely were orchestrated by leftists and opposition parties in order to gain popular support for taking a strong stance against retail monopolies that threaten local farmers. Indian authorities said Aug. 30 they will file criminal charges against protesters who attack these Western-style grocery stores, but this is only a taste of what corporate retailers should expect when entering India's protected retail market.

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