By Roberto Mattus
Director of Matamoros Maquiladoras Association

In the last few months we witnessed a slim growth in Maquiladora Industry employment throughout Mexico. The factors that had been affecting employment performance, such as the economic recession in the USA, the Mexican Peso strength and the emergence of China as a dreadful competitor, the enforcement of the second stage of Article 303 of NAFTA in 2001 and the juridical uncertainty started to slowly revert. US economy grew 4% and 5% in the last two quarters of 2003, which triggered the long expected and much needed recovery of Export Maquiladora Industry.

The Mexican Peso lost some ground before the US Dollar, which provided an escape valve to competitiveness problems. China´s image has started to lose appeal, because many companies that immigrated to said country looking for lower salaries were rather disappointed when they discovered some hidden restrictions. Among other things, when living there they realized the real distance between
the Asian Giant and the final market. Article 303 of NAFTA has slowly adapted to sector programs created by the Ministry of the Economy, reducing impact on taxes and tariffs, bringing them to zero in many cases, which allowed maquiladoras to reduce costs and stay competitive to a certain degree.

Juridical uncertainty was slightly solved; especially as far as permanent establishment is concerned, which was successfully sorted out by CNIME. But it is still a problem for Maquiladora Industry and for businessmen all over the country. However, as it has been the case in the last 3 years, whenever a light is seen at the end of the tunnel, external factors make their appearance again, hindering employment growth and blocking potential investments, especially at our Brownsville-Matamoros region. Even if it is true that there are many prospects interested in coming to this region, in the last 4 weeks we have seen a significant decrease in Export Maquiladora Industry´s labor market, which I think is due to the following reasons:

1.- The raise of oil prices to stratospheric levels has created a turmoil in markets.
Political instability and some potential supply problems at Iraq, Russia, Venezuela and Nigeria are some of the reasons for said turbulence. The consequence is a lack of trust by the consumer that prefers to save his money and avoids expending. The economy, hence, starts suffering from a lack of consumption once again. When consumers do not buy, specially at the USA, because oil prices makes sub-products
prices raise, orders from maquiladoras customers decrease, affecting operations directly, because production volumes are reduced and companies are forced to drastically adjust their payroll.

2.- Another factor to be considered is the election of the American President which was especially distinctive and closed, bringing a hard fight between President Bush and Senator Kerry. The consequence of this also has a direct influence on the Market, especially on capitals market that will undoubtedly be halted for the following 3-4 months, stalling flow of capitals towards businesses and causing therefore a mini-recession in the processing activities, especially maquiladora activities.

3.- In addition to this, there are inflation problems in the USA also as a consequence of oil prices which, if the trend continues, could push upwards long term interest rates.

4.- Slow employment growth in the USA is also a threat that directly hits consumer trust and is currently hindering sales in said country because unemployment rate has not been reduced as expected and jobs at processing sector are still further away due to globalization that is taking said jobs out of America.

5.- Very high deficits in the USA trade balance are taking the economy to a complex turning-point, that could lead in the short term to a devaluation of US Dollar, which is already weak before Euro that has been winning ground.

All of these factors have a direct and quick influence on the maquiladora industry because of its dependence on the North American market. However, events in Mexico are to be considered too. There is the violence there has been in the last few days at Tamaulipas´ border, particularly Nuevo Laredo and Reynosa. Said violence is a red light stopping foreign investors, who feel threatened by the possibility to be involved in assaults, robbery, kidnapping and murder. Needless to say, this is a significant obstacle to both cities´ economic growth.

There is also a rarefied political environment in Mexico, arising from an incipient democracy that rather looks like anarchy. Potential foreign investors are having second thoughts about bringing their money, because of the anxiety and uncertainty lived in Mexico, which nowadays does not seem to have a route, a bearing; there is not a professional, visionary congress; and worst of all there are no honest leaders committed to the country´s development.

Last, and arising from item above, the lack of reforms - State, Labor, energy and fiscal reforms - is still a highly significant and deciding factor when making the decision to invest in Mexico because, once again, juridical uncertainty is perceived in a country that neither opens to the world nor decides for an industrial policy that opens the door to real development, by building a modern technological platform.

I do not mean to be pessimistic by giving my point of view on what is currently happening and its consequences on Matamoros´ industry, but I think these are times to be cautious and avoid joyful announcements of well-seasoned figures, because the trend ´as we speak´ is falling and the first effects of the Market´s reality are starting to be felt in the City.

In the last few weeks around 1100 jobs have been lost in the maquiladora industry and in the last 2 months of the years the trend will keep on declining, because once again the electronic sector is starting to suffer and even automotive sector forecasts have been adjusted downwards. For the above-mentioned reasons, I do not expect a recovery in maquiladoras´ employment before the second half of 2005.

Ladies and gentleman, let´s get ready for a stern and difficult year-end; as the title reads, the forecast is cloudy, with high possibilities of rain and scattered storms.

Roberto Mattus
Director of Matamoros Maquiladoras Association and has written several articles about Maquiladora Industry performance in Mexico.