Previous Quarterly Editions
Expropriation Risk: 53 54 55 61 Political Violence Risk: 76 76 78 79 Terrorism Risk: 65 65 65 65 Exchange Transfer and Trade Sanction Risk: 58 56 54 56 Sovereign Default Risk: 52 54 55 59
TREND ▲ OUTLOOK ▲
During the first quarter of 2020, Mexico was hit by a combination of crises that have challenged the capacity and competence of President Andres Manuel Lopez Obrador and his government. The president, popularly known as AMLO, concentrated on a range of new initiatives early in the year and was slow to accept the seriousness of the COVID-19 pandemic. He brought in a major change to the country’s health infrastructure in January 2020 which replaced the existing healthcare aspect of the Seguro Popular social insurance system for those without work with a new Health Institute for Welfare (INSABI). However, despite government assurances, access to the INSABI has not been free for users, and some medical services and medicines that were provided under Seguro Popular have become harder to access. Scarcity of some medicines has been a frequent issue with the public health system as a whole, as AMLO has claimed that the procurement system was riddled by corruption and cancelled many purchases but failed to develop a new system in its place. As a result, the country’s health system is badly placed to deal with a pandemic, which will have been a factor in AMLO’s early attempts to play down the risks. He was also aware that the economic consequences of the virus will prove disastrous in a country where at least 60% of jobs are in the informal sector, and so will not benefit from government support to businesses. Another complicating factor for Mexico is that AMLO is a fiscal conservative who dislikes fiscal deficits and the accumulation of public debt. Having made his political reputation by attacking a bailout of commercial banks in the late 1990s, he continues to expect large and medium-sized businesses to fend for themselves. His refusal to countenance borrowing to help the government help the economy may quickly become a liability in the short and medium term. In early April 2020, while still describing the situation as ‘transitory’, he announced new loans for housing and small businesses, as well as pension advances and extra support for parents, and a round of new public works programmes that are intended to provide two million new jobs this year. At the same time, he firmly rejected his own government’s projection showing an economic contraction of 3.9% this year. However, the combination of a deep recession in the United States, the collapse of domestic demand due to the lockdown, and falling international oil prices will undoubtedly trigger a sharp recession in Mexico, and the World Bank and IMF both expect a contraction of at least 6% this year. This would be the country’s worst economic performance since the 1930s. AMLO remains popular but criticism of the government’s virus response is growing.
AMLO has continued to show little regard for contracts. In March 2020, one of the ‘public consultations’ favoured by the president was held at short notice in the city of Mexicali on the US border on whether to approve the operation of a new brewery complex that would offer 750 jobs exporting popular brands to the US. The project, which is for a leading US beer company and worth 1.4 billion USD, had already been authorised by the government and was well advanced, with about 900 million USD already spent. Only about 5% of registered voters participated in the consultation, but a significant majority voted against it and AMLO used the result to effectively end the project. He has used this process several times already, most notably to scrap the well-advanced new airport for Mexico City when he was President-elect. Together with the reversal of his predecessor’s energy liberalisation policy, the impact on investor confidence has been significant. Although he has repeatedly promised that the new US Mexico Canada Agreement (USMCA), which replaces NAFTA, will bring a substantial wave of new investment, his actions are making that increasingly unlikely.
The immediate concern for the government is the unemployment associated with the belated lockdown, with the president’s promise of creating two million new jobs seen as extremely optimistic. The virus crisis also has implications for his policy towards criminal gangs and drug cartels, which he aims to tackle by reducing poverty rather than by tougher military intervention. The army and police forces have been ordered to avoid clashes with gangs and cartels in the hope of reaching an unofficial truce that would produce a drop in the country’s extraordinary levels of homicide. This approach has not been successful, and a new economic crisis will see a swift rise in crime and violence that the government will not be able to check.
TREND ► OUTLOOK ▲
Although Mexico has little experience of international terrorism, many drug cartels use terror tactics to intimidate local communities and businesses. They have also branched out into other criminal activities, including the dangerous practice of stealing petrol directly from pipelines in order to resell it. The selling of “security” to businesses has become a widespread problem in many cities and is having a significant and depressing impact on investment among small and medium-sized businesses. With the expected economic downturn, those suddenly without work will have a powerful incentive to join criminal groups, while drug cartels are likely to attack rival territories in an attempt to recoup revenues lost during the lockdown.
Washington is increasingly irritated by the Mexican government’s softer line towards the drug cartels and has begun to signal consequences that could impact bilateral trade. AMLO, who sees trade with the US as vital for the economy, has responded to trade-related threats in the past but may find it difficult to do so in this area. Despite early fears, AMLO has respected the independence of the central bank, which has been able to keep inflation down. He will continue to do so despite the impact on the exchange rate of lower oil prices and COVID-19, and there is no threat to the free-floating exchange rate regime. In March 2020, the central bank cut its benchmark interest rate by 50 basis points to 6.50%, continuing the loosening cycle that started in August 2020, and more cuts are expected.
The financial state of oil giant Pemex continues to be a major threat to the government’s economic stability. Losses of 35 billion USD in 2019, caused in part by government insistence on increasing oil production and refining despite falling prices, mean that a second ratings agency will soon downgrade its debt to junk. That move will unleash a massive selling of Pemex bonds and probably trigger a downgrade of the federal government’s debt. While an outright default remains improbable, the government may face significantly steeper costs when it borrows in the international capital markets.
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