By Jose Ivan Rodriguez-Sanchez, Ph.D.
Postdoctoral Research Fellow in International Trade
Center for the United States and Mexico
The Covid-19 crisis has wreaked havoc on most economies around the world, as authorities have ordered social distancing measures and this in turn has slowed down nearly all economic activity. Although the number of cases in Mexico is still relatively low, the country is not likely to be absent from the economic effects of the world’s response to the Covid-19 crisis.
President Andrés Manuel López Obrador announced his economic and fiscal response to the coronavirus crisis, but it was largely disappointing to businesses, international investors and other economic actors. He insisted in a rescue package for the troubled oil company, Pemex; his favored infrastructure projects, which most people consider financially unviable; and cash handouts to the poorest in lieu of a rescue plan for small- and medium-size businesses. In the meantime, capital continues to flow out of the country, the peso continues to plummet, and investment continues to decelerate — even as the pandemic is expected to begin cresting in the country over the next month.
Most experts agree that Mexico is not ready for the pandemic. The troubled condition of the public health system is well-known. The supply of drugs, ventilators and personal protective equipment (PPE) is too low; the public medical infrastructure is shabby or missing; the Seguro Popular, an insurance arrangement mainly for people in the informal sector has been disbanded and the rollout of its replacement, the national Institute for Health and Wellbeing (INSABI), has been mismanaged. The government has drastically cut spending on health care—even though the country’s spending on health care was already low, at less than 3% of GDP. At the end of the day, the public health outcome in Mexico could be catastrophic. But the economic result could be even worse.
Most experts predict that Mexico’s economic performance — which was already underperforming, with a -0.1 percent contraction in 2019 — will be much worse in 2020. The Mexican government itself has acknowledged a 2020 contraction of 3.9%. Others put that figure at 7% or even 8 to 10% — numbers not seen since the early 1930s.
How far Mexico’s economy drops will not be exactly known for several months, but some key indicators point to a dramatic contraction. Manufacturing production is slowing already. The car manufacturing sector, which contributes around 4% of Mexico’s GDP, had to suspend or slow down production. Its outlook is not encouraging, since there will be a sharp drop in car sales in Mexico (around 16%) and the U.S. (around 15%) in 2020. Service workers are being let go, as social distancing hits businesses where people congregate. Tourism, which accounts for 8.7% of GDP and 6% of all jobs in Mexico, has been dramatically curtailed. Oil income has faded, and the government is subsidizing Pemex instead. Although trade has yet not slowed, some analysts speculate that it is existing inventory that’s moving, not new production. And, as noted earlier, the president’s rescue package was deemed deeply unresponsive, and even disheartening. Given López Obrador’s response, economic uncertainty adds to growing anxiety about the path of the pandemic in the coming weeks.
Another problem is the impact of the pandemic on the poor who work in Mexico’s notoriously widespread informal sector. Many Mexicans who work informally (approximately 60%) are highly vulnerable to the pandemic and the economy’s performance. But these workers have no choice but to go out and work. They have no other income or savings and do not have insurance. Their mobility, however, may only make the pandemic worse and cause recovery to take longer.
Of course, remittances coming from the U.S. have been a major source of support for the Mexican economy and poor households. Approximately 1.7 million households in Mexico depend on them. Remittances reached a record level last year (around $36 billion). Mexican workers in the U.S., however, are losing their jobs. They may have to stop sending money or send less money to Mexico, further affecting the country’s revenue and the income of millions of Mexicans. Remittances are expected to contract by 17% in 2020.
The result of these factors is that the unemployment rate, rising before the Covid-19 outbreak, will continue to increase. It reached 3.7% in February (the highest level in the last three years) and under these circumstances, can only go higher. The peso exchange rate against the dollar has depreciated more than 25% — the highest in years. The Mexican Central Bank has lowered interest rates, but the measure does not appear to have had the intended impact. And López Obrador’s own mixed messaging on the pandemic and the country’s fiscal health has created a higher level of uncertainty. A consequence is that Mexico’s credit ratings have deteriorated, driving investments away from the country and making borrowing in the future much more expensive.
Finally, this economic crisis will reach into the government’s own revenues, impeding its ability to carry out its social programs, especially as López Obrador has said he will not borrow and will not raise taxes — two promises he may not be able to keep.
Of course, the federal government must be prepared to help vulnerable people, small- and medium-size businesses, as well as large firms and workers face this pandemic. But there is not much room to maneuver. While many countries are injecting money in their markets (on average, 20% of their GDP), Mexico refuses to do so. This may lead to an economic contraction much larger than necessary. But to add resources in circulation, the federal government would have to stop its spending on three major infrastructure projects (Santa Lucía Airport, the Mayan Train, and the Dos Bocas Refinery). López Obrador has said construction of these projects will not stop.
The outlook for Mexico’s economy is bleak for the coming months. The pandemic has compounded existing economic troubles , and exposed López Obrador’s ineffectiveness in developing a fiscal policy that could help soften the blow. In the end, López Obrador’s chosen route to deal with the current economic straits may make Mexico’s recovery that much more difficult.