Building blocked: As if things weren't bad enough for the local construction sector, the unfolding recession is making it worse. (Special Report).
The sharp economic slowdown combined with government spending cuts caused construction--an umbrella term that includes activities ranging from road construction to house building to cement making--to contract 4.9% in the first seven months of 2001. Although many analysts had expected the Mexican economy to bounce back in the second half of the year, they now say the uncertainty created by the Sept. 11 terrorist attacks in the United States make any widespread recovery before spring 2002 unlikely.
The recession is a further blow to the nation's heavy construction firms that were crippled by Mexico's 1994-1995 economic crisis and a failed government program to involve them in the building and management of toll highways. We aren't likely to see many changes in this area either--the federal government slashed 10.1 billion pesos from its budget in May and June to keep the deficit under control, as rising unemployment reduced tax revenues.
Businessman Sergio Bolanos assumed the liabilities of once prestigious construction firm Bufete Industrial last June, in return for a symbolic 1,000 pesos. Bufete, formerly one of the largest engineering and construction firms in Latin America, was burdened with US$420 million in debt following the 1994-1995 crisis and defaulted on a US$100 million eurobond payment in 1999. And a succession of talks aimed at finding a buyer for Grupo Tribasa has ended in failure. The company owes nearly US$800 million and reported a net loss of some US$55 million in the six months ending June 30.
The only big construction and engineering company still living, say analysts, is Empresas ICA. It survives because "it has improved its financial position," says Carlos Hermosillo, an analyst with the Vector brokerage in Mexico City. ICA has reduced net debt by 21% since December 2000 to US$426 million.
What construction desperately needs, according to Mexican Construction Industry Chamber (CMIC) President Leandro Lopez Arceo, is a government-sponsored emergency investment program. Some 700 of the 8,500 companies affiliated with CMIC closed between January and August 2001 and those remaining are working at two-thirds capacity. In the same period, 184,000 workers directly involved in the construction sector lost their jobs, says Lopez.
Over the next few years, airport construction, road building in the center and south of Mexico and highway maintenance in the north should give construction a boost. Further in the future, the Puebla-Panama Plan, President Vicente Fox's grand plan to link up Mexico's southern states with Belize, Guatemala, El Salvador, Nicaragua, Honduras, Costa Rica and Panama, would imply massive public and private infrastructure spending.
Higher public spending, however, is unlikely while the government's controversial reform package, aimed at shoring up sagging revenues, remains stalled in Congress. The reform includes calls for a tax on previously exempt food and medicine items. Even if passed in its original form, infrastructure spending is unlikely to revive significantly in 2002. More probable in the interim is deregulation and reforms to make the tender process for public works more transparent, analysts say.
A shaky economy and fewer jobs mean less money for low-income housing loan funds, which are fed by compulsory deductions from workers' paychecks.
Corporacion Geo, the biggest low-income housing builder, makes 73% of its sales from the largest housing fund Infonavit and 27% from Fovi, the Central Bank's housing trust. Infonavit is expecting to hand out 205,000 loans in 2001, a fall of 18% compared to 250,000 last year, but grant a total 275,000 loans in 2002. Meanwhile, Fovi has said it will grant some 50,000 loans this year, a 7% increase over last year. The combination of weaker lending and the economic slowdown caused Geo's net sales and operating profit to fall 18% and 27% in the first six months of the year compared with the same period last year. Consorcio Hogar, a builder that receives 86% of its financing from Infonavit, saw net sales and operating profit fall 21.2% and 73.1% in the second quarter compared with April to June 2000.
Consorcio Ma has weathered the downturn better than other builders. It keeps operating costs low by building houses faster and collecting payment more rapidly than competitors, according to Vector's Hermosillo. Also, Ma's method of building individual houses means it is left with fewer homes held as inventory when demand falls.
Softening the blow for low-income builders is the expectation that sales will revive gradually in the second half of this year. This effect should partially offset a poor first half for Geo, says Grupo Financiero Banamex analyst Cecilia del Castillo, who expects the company's sales and EBITDA (earnings before interest, tax, depreciation and amortization) to finish the year down 2.9% and 3% compared with 2000.
Underlying demand for homes remains exceptionally strong. Estimates of Mexico's housing shortage range from 4 to 6 million units, and some economists say the nation needs to build 700,000 units a year for its 100 million population. Only about 350,000 new homes will be built in Mexico this year, according to Ernesto Severa, a consultant at the Economists Associates Group (GEA) in Mexico City.
Demand is especially acute in the north. So great is the shortage that Infonavit has set aside 5 billion pesos to offer 3,300 maquiladora workers housing loans to ease the pressure. Residents in the cities of Tijuana, Mexicali, Ciudad Juarez, Chihuahua, Saltillo, Monterrey, Reynosa and Matamoros stand to be the first to benefit. Participating workers must ascribe to six-month savings plans and put 15% of the cost of the house down. Their employers will be responsible for withholding the loan payments from their paychecks.
Prospective first-time homebuyer Sonia Guardado is learning first hand just how stiff the competition for loans is. She had been waiting three and a half-hours at the Mexico City offices of Infonavit to submit her third application in a year for a loan, when this BUSINESS MEXICO reporter asked her for an interview.
Guardado, 28, who works as a data input clerk at a pharmaceuticals firm, still lives with her parents. She desperately wants to marry her boyfriend, find a home and start a family. Although her part-time job only pays her US$262 a month, Guardado reckons this time she may have scored enough points with Infonavit toward a partial loan for a three-bedroom apartment in the Tasquena neighborhood of southern Mexico City.
Modest apartments of the kind she is looking for typically sell for US$35,000 but the most the fund will currently lend her is 134,930 pesos (US$14,173), so the couple will have to use savings or borrow from relatives to make up the short fall. Guardado has scored 98 points, higher than the 90-point minimum a worker needs to qualify for an Infonavit loan.
Her efforts might not be enough, however, because the fund offers loans subject to availability and gives preference to workers with higher scores. Applicants get higher points ratings if they are seniors, disabled, single parent families, have their own savings and according to the number of six-month periods they've been registered in Infonavit. The fund also looks at workers' daily income in determining their creditworthiness. Guardado says her boyfriend, who runs a small printing business and is outside the Infonavit system, will help with mortgage payments. Her name will appear in an Infonavit notice published in national newspapers on Oct. 31 if she's been successful.
President Vicente Fox has promised to make the search for a home easier for people like Sonia Guardado. His ambitious goal is to nearly double construction of new homes to 750,000 by 2006, at an annual cost of US$20 billion.
A key plank of the Fox reforms is to strengthen the anemic mortgage market, which is currently oriented to government-financed programs targeted at low-income homebuyers. Members of the middle class have been starved of bank mortgages since the December 1994 peso devaluation, which triggered an avalanche of debt defaults.
To boost building, the Fox administration has taken a major step toward creating a secondary market for mortgage debt. On Sept. 25, the Senate approved a bill to turn Fovi into a mortgage bank (Sociedad Hipotecaria Federal) along the lines of the U.S. Federal National Mortgage Association (Fannie Mae). The mortgage bank will buy housing debt from creditors and sell packages of loan-backed securities at interest yields, it is hoped, attractive to institutional investors. Money raised from the sale of this paper should deepen the pool of funds available to public and private home lenders.
Sociedad Hipotecaria Federal's most important role will be to act as guarantor to the paper, says Eugene Towle, managing partner with Softec S.C., a Mexico City real estate consulting firm. Although guarantees sold by the institution won't be direct obligations of the Mexican Treasury, they will be virtually default-free because it's highly improbable the government would allow the mortgage bank to fail.
One thing is clear. At their current level of funding government programs aren't capable of financing Fox's 750,000-home per year goal. And private banks are only now cautiously reentering the housing loans market after a six-year hiatus. Softec estimates the banks' mortgage portfolio totals US$11 billion, down from US$30 billion in 1994. This year banks are expected to generate just US$1.25 billion in new mortgages, enough for about 25,000 homes.
Nature abhors a vacuum, and a new species of finance company sprang up during that period to fill part of the space vacated by the banks. Limited object finance companies (known as Sofoles) came from nowhere to grab an 8.2% share of the US$50 billion pool of outstanding public and private mortgages.
As Sofoles aren't allowed to take in deposits, they take their primary funding from other sources such as the debt market or the government. Proceeds from the sale of bonds or money borrowed from Fovi are lent out by the Sofoles as mortgages or loans for the construction of houses.
The sector represents US$8.03 billion in assets, of which US$4.1 billion corresponds to home lenders, according to Carlos Obregon, president of the Mexican Association of Limited Object Finance Companies (AMSFOL).
Sofoles principally act as intermediaries between Infonavit/Fovi and builders and between Infonavit/Fovi and homebuyers. Last year they handled 95% of mortgages financed with Fovi resources, 65% of Infonavit housing finance, and over 80% of all mortgages including loans for residential properties.
Privately held Hipotecaria Nacional is the nation's fourth-largest home lender with a US$367.7-million loan portfolio as of September 2001. Its loan portfolio has grown 40% compared with the same month last year and expects a further 30% increase in 2002. The firm reported revenues of 622 million pesos and net profit of 243.7 million pesos (US$65.4 million and US$25.6 million) as of Dec. 31, 2000. Chief Executive Officer Victor Requejo told BUSINESS MEXICO the Sofol plans to float short-term securities backed by construction loans on the Mexican Bolsa this October. It hopes to sell longer-term mortgage backed securities in May 2002.
Looking ahead, AMSFOL expects the specialized lenders to grow their mortgage portfolio to nearly US$33 billion by the end of the Fox administration in 2006.
Bank lending will accelerate as evidence grows that mortgage bank guarantees and securitization are creating greater liquidity in the marketplace. While that happens the government should motivate sedentary Mexicans to change homes more often, says Eugene Towle. Mexican families move house an average of 1.5 times in their lifetimes; U.S. families do so about eight times.
"Once you start getting people to move up, what happens is you improve living conditions, improve the standard of housing. You don't have to improve income that much for there to be a very specific increase in well-being," he says.
Starting in the early 1960s, state-run housing programs helped jump-start home building and financed generations of first-time buyers. "The model worked very well in terms of getting an industry up and running. But it has run its course and we need to get to the next step."
The housing trusts must simultaneously increase their budgets and earmark a greater percentage of mortgages for existing homes. Only 10% of Fovi's total budget is dedicated to existing homes while the figure is 15% to 20% at Infonavit. Again, the solution is attracting institutions such as pension funds to invest in housing fund securities. Creating investor confidence in Infonavit paper, however, won't be easy, as delinquency rates at the institution run at 20%.
For benighted heavy construction, the only real succor is more public money. Mexico's population has grown 24% in 20 years but the nation is spending the same amount on infrastructure in real terms. Everyone knows the problem is lack of investment, no one has any quick solutions, short of massive deficit spending. As Sonia Guardado may tell you, it all boils down to financing in Mexico's housing and construction sector.
RELATED ARTICLE: Cement empire unshaken.
Although the terrorist attacks in the United States have created new doubts about when Mexico will emerge from its recession, of all the construction players, analysts say cement makers are the best able to recover quickly. With operations in 30 countries, market leader Cemex's (Cementos de Mexico) global reach acts as an insurance policy when domestic sales fall, while its information systems help control costs. The world's third-largest cement maker on Oct. 2 said it expected sales in Mexico, its largest market, to fall as much as 6% for the third quarter. But for Cemex the negative impact on revenues--the result of Mexico's economic slowdown--could be offset in part by cost-cutting measures already under way, Francisco Garza, president for North America and Trading at Cemex, has said.
The company has achieved savings of US$80 million through the use of information technology (IT), which partly compensates for the weaker sales, Garza said. Chief Executive Officer Lorenzo Zambrano has invested US$200 million in IT over the past 10 years to keep track of dozens of variables across Cemex's far-flung empire. Executives monitor everything from inventory to delivery schedules to oven temperatures at Cemex's operations in Spain, Venezuela, Colombia, Panama, the Philippines, Indonesia and the United States.
Global diversification gives Cemex sustained growth despite regional slowdowns. Operations in countries with high growth potential and higher risk are balanced by a presence in mature countries with stable growth. Over half the company's earnings before interest, tax, depreciation and amortization (EBITDA) are generated abroad.
Expansion in Asia, however, has hit a number of snags. Cemex's strategy in the difficult Japanese market consists of establishing a sales company and storage silos in Tokyo and Yokohama. Further capital investments are slated to be made in Nagoya and Osaka. But the company faces competition with 18 other cement producers in an environment of falling prices. Some analysts believe the venture could turn out to be an expensive disappointment.
Meanwhile, a US$300 million takeover bid for Thai cement firm TPI Polene (TPIP) could be scuppered by opposition from major creditors many of whom oppose the deal. They've been given more time to consider Cemex's offer for a 72.5% stake in TPIP. At the same time, Cemex agreed to the Indonesian government's request to delay until the end of year the exercise of a put option for 51% of PT Semen Gresik, which would give Cemex control of Gresik. The government has encountered political opposition to foreign involvement in the state-controlled company.
Analysts see the hold-ups as a mixed blessing for the cement giant. On the one hand Cemex can't realize its potential in the region if it is prevented from expanding. On the other, it can use some of the US$2.5 billion it planned for acquisitions in 2002 on paying down net debt of US$6.55 billion.
Despite a highly leveraged position, strong cash flow combined with consistent organic growth ensure Cemex remains a favorite of large investment funds that invest in companies with a high capitalization value and high liquidity, says Cecilia del Castillo of Grupo Financiero Banamex.
Lacking diversification outside Mexico that Cemex has achieved, No. 2 cement producer Apasco suffered in the first half as operating profit dropped 27%. Salomon Smith Barney analyst Carmen Slade has said a recovery in Mexican cement demand won't materialize in the third quarter but expects better results in the September to December period. Her research note, however, was issued before the Sept. 11 attacks in the United States. But as it is part owned by Swiss cement giant Holcim, Apasco is well placed to weather a downturn until the hitherto robust domestic market picks up. Demand for cement from so-called "do-it-yourself builders' who make up Mexico's informal construction sector, is expected to revive quickly whenever the economy bounces back.
France's Lafarge, the world's No. 1 cement producer, may take advantage of the temporarily weak market to consolidate its position in Mexico and prepare for an upturn. Last year Lafarge bought Cementos La Polar, a small white-cement plant located in the state of Hidalgo. Cemex is thought to be invulnerable to takeover because of its size. Cemex also holds a stake in the smallest producer Grupo Cementos de Chihuahua, making any acquisition of the latter unlikely, says Banamex's del Castillo. She also rules out a Lafarge buyout of Apasco or No.3 producer Cruz Azul. That leaves Cementos Moctezuma as a takeover candidate, a company with a 7% share of the domestic market.
Andrew Watson is a Mexico City-based freelance writer.
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|Article Type:||Brief Article|
|Date:||Nov 1, 2001|
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