War Premium On Oil Puts Mexico's Trade Balance In Black

Wednesday March 26, 5:29 AM

By Anthony Harrup Of DOW JONES NEWSWIRES

MEXICO CITY (Dow Jones)--High oil prices and crude export volumes not seen in more than four years gave Mexico a trade surplus in February, its first since mid-1997.

But not all was rosy in the trade numbers, which also pointed to a drag on investment and continued weakness in the economy.

The Finance Ministry reported Monday that the country registered a trade surplus of $65 million in February, aided by a 110% year-on-year jump in petroleum exports to $1.66 billion.

That included $1.47 billion from crude oil exports, slightly below the $1.55 billion earned in January, which had more days.

Oil prices soared in the lead-up to the war on Iraq, aided also by a strike earlier this year in Venezuela that reduced the South American country's output to a trickle.

As a result, Mexico earned nearly $28 a barrel for its mostly heavy crude in the first two month of the year, while ratching up export volume to 1.79 million barrels a day in January and 1.88 million b/d in February.

State oil monopoly Petroleos Mexicanos (E.PEM), or Pemex, has had its taps on full as Mexico takes advantage of the virtual suspension in the global supply agreements it helped to implement in April 1998, along with the Organization of Petroleum Exporting Countries and other independent producers.

February marked the first time since late 1998 that Pemex's exports exceeded 1.8 million b/d, and it was the highest monthly average since March of that year, when exports averaged 1.93 million b/d.

Cashing In On Commodities

Higher oil prices, though, could represent a double-edged sword for Mexico and some of its southern neighbors.

"Latin America usually does well during periods of global conflict," wrote Walter Molano of Connecticut-based BCP Securities in a a report Tuesday.

"Of course, higher commodity prices mean better export earnings for the region. There is one caveat. A very prolonged war, with serious disruptions in oil production could have an adverse impact on Latin America," Molano added.

Bank of Mexico Governor Guillermo Ortiz and Finance Minister Francisco Gil noted the flip side to higher oil prices when they gave a news conference last week at the start of the war.

Destruction of oilfields in the Middle East or other supply disruptions could push the price too high, choking economic recovery with a corresponding negative effect on the Mexican economy, Gil said.

In the meantime, the extra oil income will allow the federal government to keep states happy with additional budget transfers, without threatening the fiscal deficit target of 0.5% of GDP.

Silver Lining Has A Cloud

While notable because of the surplus, February's trade numbers weren't all good news. They suggested that economic activity remains weak, and that little has been gained from a depreciating peso, which at MXN10.94 to the dollar in February was 17% weaker than in the year-ago month.

The decline in exports from the export-focused maquiladora manufacturing sector points to continued weakness in the U.S. economy, said Mario Correa, an economist at Scotiabank Inverlat. The U.S. absorbed 89% of Mexico's $161 billion in exports last year.

At the same time, the 14.5% drop in capital goods imports suggests weak investment, or even a contraction, Correa added.

And with consumer imports up 11.5% in February, "I don't see any important effect of the exchange rate on trade," Correa added.

Mexico's external accounts remain in good shape, given that the current account deficit was a modest 2.2% of gross domestic product in 2002 and the government projects only a slight increase, to 2.8% of GDP, for this year.

Still, the message behind the recent trade numbers is one of weak investment and a sluggish U.S. economy, said Correa.

-By Anthony Harrup, Dow Jones Newswires; (5255) 5080-3450, anthony.harrup@dowjones.com