Previous Quarterly Editions
Expropriation Risk: 64 64 64 65 Political Violence Risk: 58 58 59 60 Terrorism Risk: 65 65 65 65 Exchange Transfer and Trade Sanction Risk: 55 55 55 55 Sovereign Default Risk: 37 37 37 37
TREND ►
Mexico continues to suffer with COVID-19 while President Andres Manuel Lopez Obrador (AMLO)’s government steers economic policy into a more radical statist direction, while clashing with domestic and foreign investors. Vaccination efforts seem partly aimed at boosting AMLO’s popularity ahead of the June mid-term election. In the election, the whole of the Chamber of Deputies will be renewed, as will a number of state governorships and city governments.
The election has also become a referendum on AMLO’s government after nearly two and a half years in office. If opposition parties win a majority in the Chamber of Deputies and forge a solid coalition impregnable to government attempts to undermine it (both difficult to achieve), they would arrest AMLO’s legislative agenda and, particularly, block any attempts at constitutional modification.
AMLO’s popularity has been dented in recent months but remains elevated. This is despite below-par management of COVID-19, including providing sufficient tests to follow the pandemic’s evolution and prevent contagions, to expanding health infrastructure. The scarcity of some medicines continued to be an issue after AMLO declared the medical procurement system to be riddled by corruption and cancelled many purchases but failed to develop a new replacement system. However, after a slow start, vaccination efforts accelerated from April 2021.
By early May 2021, Mexico’s official number of COVID-19 cases stood at 2.4 million and the death toll at 218,000. However, both numbers are likely significantly underestimated. The government has steadfastly refused to provide any significant help to businesses to avoid job losses given the fiscal cost, arguing that it would help the well-off rather than workers.
Economic activity has been heavily affected by see-sawing actions, either allowing greater economic activity or pressing lockdowns, depending on COVID-19’s evolution. The economy contracted by 8.5% in 2020. Given the stop-go measures, during the first quarter of 2021 the contraction continued, with gross domestic product (GDP) falling by 3.8% compared with the previous year. Growth during 2021 overall is expected to be around 5%, partly because of the positive impact of US growth on Mexican exports. The International Monetary Fund, released in early April 2021, estimates that the level of GDP per capita of 2018 should be regained by 2026.
TREND ▲
The government is seeking to strengthen the role that state-owned companies play in the energy sector. Initially, AMLO’s administration had sought to do this by using regulation changes and administrative actions to limit the role that private firms played in the oil and electricity sectors, including cancelling projects that were to be tendered. However, these moves have been challenged in domestic and international courts by the firms affected, so the Mexican government has shifted to using laws to achieve the same end.
The Electric Industry Law (enacted in March 2021) aims to side-line renewable energy while prioritising energy generated by the government’s Federal Electricity Commission, the government argues that renewables cannot offer a reliable continuous power source and that private firms have benefitted from hidden government subsidies. A new Hydrocarbons Law (enacted in early May 2021) allows the government temporarily to occupy private installations or even suspend existing permits in the event of vaguely defined emergencies. Given the pushback experienced while administrations seek to enact their reforms, protracted and costly legal battles are likely.
This year, the economy will not recapture the terrain lost in 2020. When all lockdown measures are eased, probably during the second half of 2021, unemployment will remain high. Fresh waves of crime and violence will probably erupt in many urban areas. Moreover, renewed activities by drug cartels and other criminal groups may cause added Mexico-US tensions, with trust already damaged due to the US arrest of General Salvador Cienfuegos, a former defence secretary. He was arrested in November 2020 in Los Angeles and accused of protecting drug cartels but allowed to return to Mexico after AMLO administration pressure and was quickly exonerated. The fracas will likely reduce bilateral cooperation in the fight against criminal groups.
Although Mexico has little experience of international terrorism, many drug cartels use terrorist tactics to intimidate local communities and businesses. They have also branched out into other criminal activities including stealing petrol from pipelines for resale. After an attempt to stop such activity in early 2019, causing weeks-long disruption to gasoline supplies, the government apparently opted to turn a blind eye, proclaiming the problem resolved.
The selling of ‘security’ to businesses has become a widespread problem in many cities and has depressed investment among small and medium-sized firms. With the economic downturn, some of those suddenly without work will have a powerful incentive to join criminal groups, while drug cartels are likely to attack rival territories, attempting to recoup revenues lost during the lockdowns.
While AMLO has shown some preference for a strong peso, he has not attempted to alter exchange rate policy (that can be modified by the finance ministry) nor curtail the Bank of Mexico (Banxico)’s independence. An attempt by some legislators to change Banxico’s governing law and force it to acquire surplus US dollars from commercial banks was rejected by the central bank and sparked a public outcry in late 2020.
This year, AMLO will have the right to appoint a new Banxico governor, or to reappoint the current one, for a six-year term. He will probably do the former, but those individuals he has appointed as deputy governors are respected and have done a creditable job. Therefore, no deviation from monetary orthodoxy is anticipated.
State oil firm Pemex is the world’s most indebted oil company. The administration’s insistence in increasing oil production and refining has caused the firm’s financial losses to skyrocket, reaching 481 billion Mexican pesos (USD22bn) in 2020, an increase of 38.2% on the previous year. The company has needed significant capital injections by the government, which has also agreed to cover part of Pemex’s debt service in 2021.
Two of the three main rating agencies classify Pemex’s bonds as junk. Unusually, the company announced in early March 2021 that it would not renew its contract with Fitch, and the rating agency announced it would continue to evaluate the company’s debt regardless. The most significant danger for the government is that its own debt may be downgraded, due to the need to rescue Pemex.
Return to contents Next Chapter
