MEXICO

1. GENERAL ECONOMIC SITUATION - 2002

The performance of Mexico's economy in 2002 has been conditioned by a number of factors: the deceleration of industrial production in the United States and growing concern over its future economic activity; the volatility of international stock markets; an increased aversion to risk and a bleaker perception of country risk for emerging markets as a result of the prolonged crisis in Argentina and the intensification of Brazil's financial problems; the complex geo-political situation; and pessimism over progress regarding Mexico's structural reform.

The central picture for the remainder of 2002 and 2003 suggests average national economic growth for the period under consideration of 1.4 percent, which is substantially below potential, accompanied by very limited job creation. The main reason for low national economic growth is the sluggishness of the global economy. However, external influences need to be countered by bolstering internal sources of growth, which can be done by putting pending structural reforms into effect. This will help increase input productivity and make domestic markets more flexible.

The following external risks need to be highlighted:

• Economic growth in the United States will be lower than expected and that, in an extreme case, there will be a new recession;

• There will be a further reduction in capital flows to the economies of Latin America because of increasing financial difficulties.

The occurrence of either of these scenarios would clearly hamper economic growth in Mexico. However, the impact on inflation would be ambiguous. While slower economic growth would ease inflationary pressures, the unfavourable impact of the first scenario on exports and on Mexico's economic activity could increase its external deficits. Also, both scenarios would mean weaker demand for domestic assets. These factors could prompt a depreciation of the exchange rate and thus fuel inflationary pressures.

The main domestic risks associated with the basic economic scenario are:

• the lack of progress in structural reform could depress expectations of medium- and long-term growth of the Mexican economy;

• the current low growth of the Mexican economy and the lack of comprehensive fiscal reform could undermine the perceived soundness of public finances;

• exchange rate movements will be increasingly influenced by domestic prices;

• the combination of low growth and fiscal vulnerability could possibly erode the financial solidity of the Mexican economy and expose it to speculative pressures.

Finally, the above scenarios suggest the following main macroeconomic variables for 2002:

• estimated economic growth of approximately 1.2%;

• expected current account deficit of 3%;

• inflation of 5.1%.

2. PERFORMANCE OF THE PAPER AND WOOD INDUSTRY - 2002

In 2002, the pulp and paper industry has continued to suffer the recessionary impact of the world economy and especially the US economy, adding further concern over future economic performance.

There are also high-risk factors that the national industry needs to deal with:

• high cost of inputs (electricity, gas, fuel and water);

• import prices at below-market or dumping levels;

• import of inferior quality paper, not meeting market-of-origin standards, at prices far below those of Mexico's domestic market.

All this presents a most unfavourable situation vis-à-vis external competitors, with a loss of competitiveness and a loss of share of the domestic and international markets.

The following estimates for 2002, given by the pulp and paper industry, could change according to national and international circumstances.

Pulp production in 2002* (`000 tonnes)

Type of Pulp	2002	2001	% Variation
Bleached long fibre	65.2	65.6	-0.6
Short fibre	82.6	46.1	79.1
Unbleached long fibre	46.0	26.8	71.6
Bagasse	129.3	174.4	-25.9
Thermo-mechanical	23.4	42.2	-44.6
Chemical thermo-mechanical	30.5	29.8	2.5
TOTAL	377.0	384.9	-2.1

* Estimated

Paper production by grade in 2002* (`000 tonnes)

	2002	2001	% Variation
Newsprint	241.5	238.7	1.2
Writing and printing	663.3	658.4	0.7
Sacks, bags and wrapping	210.9	207.8	1.5
Containerboard	1 648.6	1 642.8	0.4
Folding boxboard	345.1	342.7	0.7
Sanitary and facial	694.0	688.7	0.8
Specialty	30.7	31.3	-1.9
TOTAL	3 834.1	3 810.4	0.6

* Estimated

Predicted total paper imports for 2002* (`000 tonnes)

	2002	2001	% Variation
Newsprint	199.0	190.3	4.6
Writing and printing	392.7	373.7	5.1
Sacks, bags and wrapping	73.5	70.4	4.4
Containerboard	611.4	583.3	4.8
Folding boxboard	55.6	66.9	-16.9
Bleached kraft boxboard	84.3	66.2	27.3
Sanitary and facial	93.2	88.5	5.3
Specialty	288.3	269.4	5.2
TOTAL	1 793.0	1 708.7	4.9

* Estimated

Estimated paper production for 2002 will therefore be only 0.6 percent higher than 2001, which in absolute terms represents just 23.7 thousand tonnes.

Paper exports for 2002* (`000 tonnes)

	2002	2001	% Variation
Newsprint	18.2	21.0	-13.3
Writing and printing	11.6	13.4	-13.4
Sacks, bags and wrapping	6.9	8.0	-13.8
Containerboard	16.0	18.6	-14.0
Folding boxboard	33.8	39.4	-14.2
Sanitary and facial	89.9	104.5	-14.0
Specialty	1.6	1.9	-15.8
TOTAL	178.0	206.8	-13.9

* Estimated

Finally, total apparent consumption of paper is estimated to be up 2.6% from last year. A breakdown by paper grade gives us newsprint up 3.5 percent; writing and printing paper up 2.5 percent; paper for sacks, bags and wrapping up 2.7 percent; containerboard up 2.6 percent; sanitary and facial up 3.7 percent and specialty paper up 4.5 percent. In contrast, folding boxboard is down -1.0 percent and bleached kraft boxboard is down -2.0 percent.

3. ISSUES OF PARTICULAR INTEREST

a. Environmental aspects

With regard to the environment, in addition to a number of provisions for the control of greenhouse gas emissions, discharge of water into receptacle bodies and impoundment, a national inventory of emissions is being established in accordance with the Kyoto Protocol as applied to the non-highly industrialized group of nations. Corresponding values are to be quantified in terms of material, energy and financial inventories.

Mexico, in particular, has annual certification of operation and a register of emissions and transfer of contaminants.

b. Progress in sustainable forest management and certification

Mexico has an assortment of forest-related regulations that are defined in draft legislation on sustainable forest development that is expected to be enacted in December 2002. This legislation lays down rules for the sustainable management of forest resources.

Current legislation covers the following regulatory instruments:

• Logging permits;

• Forest management programmes;

• Regulated transport of raw forest materials.