Previous Quarterly Editions
Expropriation Risk: 54 55 61 62 Political Violence Risk: 76 78 79 80 Terrorism Risk: 65 65 65 65 Exchange Transfer and Trade Sanction Risk: 56 54 56 56 Sovereign Default Risk: 54 55 59 60
TREND ▲ OUTLOOK ▲
Mexico now faces a combination of crises that is challenging the capacity of President Andres Manuel Lopez Obrador (AMLO) and his government. The president never fully accepted the seriousness of the COVID-19 pandemic, instead minimising its impact, but by mid-July 2020 Mexico had overtaken the UK with 350,000 cases. Official figures showed that these had resulted in 39,000 fatalities, but both numbers are considered to be significantly underestimated. There are no signs that the health infrastructure was expanded in any significant way before or after COVID-19 fully hit Mexico. As a result, the health system was badly placed to deal with a pandemic, which will have been a factor in AMLO’s early attempts to play down the risks. Moreover, the scarcity of some medicines continued to be a frequent issue after the president declared the medical procurement system to be riddled by corruption and cancelled many purchases but failed to develop a new system in its place. Most crucially, the government remained reluctant to implement a stringent lockdown because of the economic consequences in a country where more than 60% of jobs are in the informal sector. The tourism sector, which accounts for almost 9% of GDP and 11 million jobs, has been all but shut down. It is significant that AMLO is a fiscal conservative who opposes fiscal deficits and the accumulation of public debt; he made his political reputation attacking a bailout of commercial banks in the late 1990s. At the start of the crisis in April 2020, he was prepared to offer new loans for housing and small businesses, and a round of new public works programmes intended to provide two million new jobs this year. But the growing fiscal deficit is likely to strengthen his opposition to stimulus measures. The combination of a deep recession in the United States, the collapse of domestic demand due to the partial lockdown, and the fall in oil prices will undoubtedly trigger a sharp contraction. In what would amount to an economic depression, the IMF now expects this to be in double figures this year. This would be the country’s worst economic performance since the 1930s. AMLO’s popularity, previously at unassailably high levels, is taking a severe hit from the health and economic crises, with a widespread perception that he has mishandled both. His conciliatory statements, fromduring a brief trip to Washington in July 2020 to sign the replacement for NAFTA with President Trump, have further damaged his standing at home.
In recent months, the government has taken a series of administrative actions and made regulatory changes that hinder private electricity companies looking to develop renewable energy while strengthening the state-owned Federal Electricity Commission, which is linked to state-owned oil company Pemex. In doing so, it has shown little regard for the potential long-term consequences for electricity supplies or the need to respect contracts, and this has been noted by domestic and foreign investors. Meanwhile, the president continues to employ ‘public consultations’ that involve quickly held, low-turnout referendums to advance or thwart particular investment projects. The most recent example involved a new brewery complex on the US border that had local approval and on which almost a billion USD had been spent. ALMO called a public consultation on whether it should be allowed to operate and then used the negative outcome of a poll in which only about 5% of registered voters participated to effectively end the project. In June 2020, Spanish energy firm Iberdrola suspended work on a new power plant in Veracruz after AMLO denounced Spanish companies that “view Mexico as a land to be conquered and abused" and accused Iberdrola of graft. While AMLO has repeatedly promised that the new US Mexico Canada Agreement (USMCA), which replaced NAFTA on July 1 2020, will bring a substantial wave of new investment- his actions are making this increasingly unlikely.
On June 26 2020, a team of at least 28 people with sophisticated weaponry attempted to assassinate the police chief of Mexico City in the heart of the capital, injuring him and killing two bodyguards. It was a daring attack, apparently by the New Generation Jalisco cartel. AMLO began his presidency by ordering the army and police 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 but a presidential decree in May 2020 which extends the military's role in public security does suggest that change is coming. However, with his plan to create two million new jobs this year unlikely to happen, and with doing little to counter the COVID-19-related rise in unemployment, the country is bracing itself for a new wave of crime and violence that the government will not be able to stop.
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 has had a significant and depressing impact on investment among small and medium-sized businesses. With the 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.
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, as despite the impact on the exchange rate of lower oil prices and the impacts of COVID-19, there is no threat to the free-floating exchange rate regime. The central bank cut its benchmark interest rate by 50 basis points in May and again in June, reducing it to 5.0%. This continued the loosening cycle that started in August 2019 and more cuts are expected.
Pemex, already the world’s most indebted oil company, lost a further 23.6 billion USD in the first quarter of 2020. This follows on from an annual loss of 35 billion USD in 2019 caused in part by government insistence on increasing oil production and refining capacity- despite falling prices. Two of the three main rating agencies have now downgraded its debt to junk. The credit rating of the federal government’s debt is also in jeopardy because the company will require massive capital injections in the near future, just as the economy is struggling to cope with the COVID-19 pandemic. The government is likely to face significantly steeper costs when it borrows on the international capital markets.
Return to contents Next Chapter