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MEXICAN MARKET REPORT * May 30, 1997

   Information Provided by The Weston Group
   CAPITAL MARKETS SALES AND TRADING
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   John R. Liegey, Robert L. Rauch, Fernando Losada
   James Franz, Robert Schmieder, David Muccia
   Patricia Glass, Maggie Archibold, Daniel Hillis
                             
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The US Fed's decision to leave interest rates unchanged has spurred a
series of comments and speculation about the strength of the US
economy. The lack of action by the Fed could be interpreted as
evidence that the US economy is beginning to slow down by itself,
which in turn would hit corporate profits and make stocks less
attractive. Some analysts, however, believe that inflation risks do
exist but not in the immediate term, so the FOMC decided to wait a
little more before taking action. Therefore, the Committee - which
meets eight times a year at intervals of five to eight weeks - could
increase overnight rates in July or August. When the federal funds
rate reached 6 percent in early 1995, the Fed had engineered seven
consecutive upward adjustments. The impact of a further increase in
US interest rates on the Mexican economy would be two-fold: on the
one hand, it would represent a higher interest burden on the floating
rate portion of the country's external debt; on the other hand, it
would put pressure on Mexico's credit and foreign exchange markets,
via the change in interest rate differentials. We elaborate on this
issue below.

Finally, the Clinton administration decided to postpone until
September the introduction of a bill to obtain fast track negotiation
authority. White House spokesman Mike McCurry indicated that the
renewal of China's most-favored-nation status monopolized most of the
efforts and attention of US trade officials during the past months.
Now that the China issue has been solved, President Clinton is
committed to make another strong attempt to gain the special trade
negotiating authority from Congress. The flip side of the decision to
delay the presentation of the bill is that US authorities could lose
momentum and then face diminished chances of passing the legislation.

The principal differences between Democrats and Republicans remain in
the areas of labor and environmental standards. The bigger question,
however, is whether there is a real commitment in the US Congress to
expand Nafta and complete the long discussed Free Trade of the
Americas accord. In the absence of fast track authority, countries
would not have the incentive to sign deals with the US which could
eventually be revoked by Congress. Trade talks with Chile have been
postponed during the last two years for that reason. The bilateral
trade agreement signed between Chile and Canada last week should
serve as an indication that Latin American countries will not wait
for the US to advance in the strategy of regional integration. Peru,
in turn, will start negotiations next month to join Mercosur as an
associate member, along the lines of Chile and Bolivia.

Eugenio Clariond Reyes, chairman of Imsa and brother of the Governor
of Nuevo Len, sparked a new series of reactions from Mexican public
officials, including President Zedillo himself, after his harsh
criticism of Banxico's policies. Mr. Clariond said last Tuesday that
the central bank was inducing a real appreciation of the currency,
along the lines of that observed during 1993 and 1994. As we
mentioned in earlier editions of this Report, the Mexican peso has
been appreciating constantly since early 1996. Although the
accumulated real appreciation since January 1996 has been close to 18
percent, the purchasing power parity value of the peso is still 14
percent above the level of November 1994. All in all, we refuse to
compare real exchange rate levels as the sole measure of external
competitiveness, because differential productivity growth rates
across countries often explain movements in real parities,
particularly in the medium and long term. We think, however, that a
continuation of the current appreciation trend would be a reason for
concern. At present time, very low expected inflation and sustained
inflows of foreign funds are helping to keep the Mexican currency
strong. A reversal in capital flows, however, which could be induced
by changes in interest rate differentials between Mexico and the US,
would exert pressure on the foreign exchange market, giving rise to
undesirable sudden gyrations in relative prices.

[ graphic deleted, see http://www.bradynet.com/e45.html for 
  complete report w/ graphs. ]

On Monday, the Finance Ministry announced that the trade surplus
during April shrank to US$ 109 million from US$ 636 in March. The
figure was significantly lower than the forecast of analysts compiled
by Bloomberg, which came in at US$ 341 million. The final official
figure will be released on June 12. The trade surplus on a
year-to-date basis is now US$ 1.62 billion.

Following the jitters in the foreign exchange market observed early
in the week, Cetes yields increased across the board during this
Tuesday's auction. The average increase was 33 bps, with the 28-day
Cetes being sold to yield 18.31 percent. The Cetes yield curve
shifted upwards in a virtually parallel fashion. The cover ratio was
slightly higher than last week, at an average of 4.23. Udibonos were
also auctioned this week, with yields at 6.98 percent for the 3-year
instrument and 6.94 percent for the 5-year bonds.

Early in the week there were confrontations in the State of Guerrero
between Marxist guerrillas of the EPR and military forces. On
Tuesday, the military announced that Commander Hermenegildo had been
captured in the peasant town of Atoyac de Alvarez, 40 miles northwest
of Acapulco. The original media report was eventually denied by the
9th Military Region, which has jurisdiction over Guerrero. The EPR
had not been active this year until last weekend, when gunshots were
fired against an army patrol in Chilpancingo. So far, five soldiers
and four rebels have been confirmed as casualties during this week's
belligerent actions, but rumors indicate that dozens more were
wounded on both sides.

Last Sunday, the candidates for Mayor of Mexico City of the PRI and
the PRD, Alfredo del Mazo and Cuauhtemoc Crdenas, held a public
debate comparing the relative weaknesses and strengths of both
parties' political platforms, in anticipation of the July 6
elections. The debate did not generate major reactions, as the
candidates did not present concrete policy proposals. Local
newspapers, however, indicated that the PRD candidate extended the
lead over his contenders, according to polls completed after the
televised debate. Mr. Crdenas has been leading the polls
consistently since the announcement of his candidacy three months
ago. Carlos Castillo Peraza, the PAN candidate, was excluded from the
debate but appeared in a television interview afterwards.

In related news, Francisco Gonzlez, the candidate for the minority
Labor Party (PT), abandoned the race on Tuesday and joined the
campaign of Mr. Crdenas. Meanwhile, Humberto Roque Villanueva,
Secretary General of the PRI, accused the PRD of being associated
with violence and social risk. This is further evidence that negative
campaigning will increase as the elections draw near.

CORPORATE NEWS FOR THE WEEK ENDING MAY 30, 1997

Bufete Industrial announced it formed a consortium with Mitsubishi,
Mitsui, and Itochu of Japan to bid for the refurbishing and expansion
of Pemex's Cadereyta Refinery. This project, which includes the
construction of nine new units and the expansion of five existing
ones, has an estimated total cost of US$ 1.2 billion, more than half
of the government's total capital expense budget for refinery
improvements.

As we have commented in the past, banks in Mexico have still not
begun extensive lending within the country due to the tenuous nature
of their balance sheets and those of their potential clients.
However, in order to prepare for their eventual return to commercial
lending, most have attempted to increase their deposit base, in order
to secure a low-cost source of funding. Last week, we had mentioned
that Banco Internacional had been one of the more successful Mexican
banks in this area. Now, foreign financial institutions have entered
into the competition for deposits. According to information recently
published in El Economista, foreign banks have seen deposits grow to
nearly MP 62 billion at the end of the 1Q9, up 103 percent from the
same period last year . The largest increase was generated by
BBV-Probursa, which is controlled by Spain's Banco Bilbao Vizcaya.
Other foreign banks which are expected to compete heavily for
deposits are Citibank and Santander Mexicano. Santander Mexicano has
been particularly active in promoting its services through television
exposure.

Corporacin GEO, a builder of affordable housing in Mexico, placed
US$ 50 million in 5-year global medium term notes. The notes carried
a coupon of 10 percent, with a yield of 350 basis points above US
treasuries. Proceeds from the offering were to be used to retire debt
and for working capital needs. The deal, led by Santander Investment,
was more than four times oversubscribed. GEO's growth in the
marketplace, due to the shortage of affordable housing in the
country, is occurring at an exceptionally rapid pace, increasing its
need for working capital. The company has stated that it is likely to
do a secondary offering in order to raise an additional US$ 50 - US$
60 million before year end.

Grupo Mexicano de Desarollo's (GMD) financial woes continue.
According to media reports, GMD is being assailed by more than 250
creditors who are seeking payment of outstanding debts. The creditors
consist of construction materials manufacturers and suppliers who
have yet to be paid for deliveries made to various of the company's
projects throughout the country. The creditor group, according to
reports, is asking the Mexican government to block the company's
participation in the building of a section of the Mexico City subway
system, or the planned elevated train in the city until their bills
are paid. If successful, this would be quite a blow to GMD, as these
projects would provide much needed cash flow to this already
financially strapped company.

Last week Moody's assigned TFM's new senior debt issue a "B2" rating
and its bank debt facility a Ba3 rating. S&P rated the senior debt
"B+", while issuing a corporate credit rating of "BB-" for TFM. TFM
is the partnership between Transportacin Martima Mexicana (37.7
percent ownership), Kansas City Southern Industries (37.0 percent),
Grupo Servia (0.8 percent), and the Mexican Government (24.5
percent), which successfully bid for the concession to the North East
Rail Line in Mexico. The ratings are based on the potential for
growth at the North East railroad, which was purchased at the
exorbitant price of US$ 1.4 billion, nearly three times the
second-highest bid. Approximately US$ 560 million of the purchase
price was paid at year end 1996, and a similar amount is expected by
mid-July 1997. TFM is expected to place US$ 250 million in senior
discount debentures and an additional US$ 150 million senior notes.
The company will also have access to a bank facility, consisting of
both a revolving credit and term loan, of US$325 million. In
addition, under certain circumstances, there is a right to call upon
Grupo TFM to contribute an additional US$ 150 million in capital..

We would note that the TFM senior notes have received a rating
similar to that received by Vitro for its recent senior debt issuance
via its financial services subsidiary, VICAP. Vitro notes were rated
"B+" and "Ba3" by S&P and Moody's, respectively. Admittedly, Vitro
has yet to define its long-term expansion strategy. However, it is a
company successfully emerging from a restructuring process, whereas
the TFM venture has faced problems since it paid entirely too high a
price for its railroad concession, thus straining financial
flexibility from the start. Although we realize the rail line's
potential, we can not ignore the difficulties that lie ahead on the
operating side for TFM (see below), perhaps making this rating
somewhat optimistic for the company. We believe it possible future
spread performance of the VICAP "Ba3" senior notes will prove better
than that of TFM. VICAP notes were issued at spread of roughly
350-440 bps over treasuries. As of Thursday's close (May 29), VICAP
notes due 2002 were trading at 300 bps, while the 2007 notes were
trading a 388 bps over.

Regardless of the benefits TFM will derive from the government's
participation in the partnership, rail operations are expected to lag
during the first two or three years, without contributing to TMM's
income. We believe capital expenditures between US$ 650 million to
US$ 1.0 billion will be needed during the first five years of
operation to make the line as efficient as its counterparts in the
US. Although the rationale behind the purchase of this rail line by
TMM was that the freight business via rail was a good complement to
its maritime transport activities, more than 24 months may elapse
before we see any marked improvement due to TMM's multi-modal
transportation service.

Therefore, the only justification for the difference in valuations
for the rail line between TFM versus the other bidders revolves
around the impact of labor costs. Labor costs, which represent a
substantial percentage of operating expenses at a US railroad, are
considerably less in Mexico. Based solely on this price advantage,
TFM expects to reach operating ratios of 50 percent compared to an 87
percent average for the US (the operating ratio is the ratio of
operating expenses to revenues, a common measure of efficiency in the
railroad industry). However, even in our optimistic scenario, our
target value for the concession reaches US$1.4 billion only after
including all the capital expenditures needed to update the line,
which could be as high as US$ 1.0 billion. To arrive at a valuation
that is consistent with the price paid by TMM and KSU, one must
assume strong volume growth in rail line cargo, in addition to price
growth, and a stable capital structure for TFM.

Although one may try to reconcile the high price paid by TFM with the
poor situation of the rail roads in Mexico by assuming that the
volume transported by rail is going to increase dramatically if the
lines are modernized, it is uncertain that the second assumption
listed above, that of continued price increases for TFM services,
will necessarily be realized. Truckers and other industry players are
likely to fight to maintain market share, resulting in downward
pressure on tolls. Moreover, TFM will likely operate under a learning
curve for at least the first 12 months and, most probably, will also
incur unforeseen expenditures during the startup phase. With these
various sources of financing, we estimate TFM's balance sheet will
consist of approximately US$ 725 million in debt and approximately
US$ 800 million in equity. With estimated assets in the range of US$
400-600 million, this implies goodwill/intangibles in the range of
US$ 900 million to US$ 1.1 billion. This values TMM's and KSU's
participation at around US$ 300 million each.

	This document is for information purposes only. Under no
	circumstances should this document be used or considered
	as an offer to sell or a solicitation to buy the
	securities or other instruments mentioned in it. The
	information in this document has been obtained from
	sources believed reliable, but we do not represent that
	it is accurate or complete and it should not be relied
	upon as such. Opinions expressed herein are subject to
	change without notice. The products mentioned in this
	document may not be eligible for sale in some states or
	countries. Weston Financial Services Inc. and/or its
	affiliated companies may have positions or make a market
	in the securities mentioned in this document or in
	options, futures, or other derivative instruments based
	thereon and may also act in an investment banking
	capacity on behalf of any issuer mentioned in this
	document.

(c) 1997 Weston Financial Services Inc.
Weston Group Research




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