CEO’s Executive Summary

The business climate has declined in Mexico in 2020, due to government actions, the implications of the coronavirus pandemic, and persistent insecurity. In an era increasingly characterized by nearshoring, however, the July 1 start of the United States-Mexico-Canada Agreement (USMCA) combined with a surprisingly close and cooperative relationship between U.S. President Donald Trump and Mexican President Andrés Manuel López Obrador (AMLO) reminds us that there are still significant investment opportunities in Mexico.

Prior to the outbreak of COVID-19 in Mexico, it was becoming increasingly evident that AMLO’s once seemingly invincible poll numbers were on the decline. In this context, AMLO has doubled-down on his entire governing project. In March, this included allowing a controversial plebiscite to go forward, which terminated a $1.4 billion brewery project nearing completion and raised further questions about respect for contracts and the rule of law in Mexico. At about the same time, however, the Canadian parliament ratified the USMCA, clearing the way for its July 1 initiation and continuation of the NAFTA-era protections for investors.

Then came COVID-19, whose health, economic, and political implications are apt to be profound. Mexico’s slow response and inconsistent implementation and messaging have undercut its capacity to flatten the infection rate curve. When combined with a weak healthcare system, Mexico is expected to face a healthcare crisis when the pandemic reaches its height, currently expected in mid-to-late May.

The economic impact of COVID-19 will be severe. The 2020 economic contraction is estimated to be between 7% and 12%, magnified by Mexico’s reliance on the U.S. economy and on oil and its tanking price, leading to the long anticipated downgrade of Pemex bonds to junk. Exacerbating the external issues has been the government’s ineffective economic policy response.

In an April 5 speech, AMLO outlined his strategy for dealing with the coming economic crisis: make no policy changes. He promised to continue all of his social and infrastructure projects and doubled-down on his promise not to take on additional government debt. To pay for his projects and for three small lending programs for individuals and small firms, AMLO called for massive cuts throughout the budget. But he offered no government help for the vast majority of the private sector. Instead, businesses will be required to retain their employees at full wages during the crisis, and they face increasing rhetorical attacks from the president. AMLO also took this opportunity to further centralize power by demanding Congress pass legislation that will give him full authority over the budget during emergencies.

In response, Moody’s downgraded Mexico’s sovereign debt rating, and an appalled business elite took matters into its own hands by initiating private programs to help their small and mid-sized counterparts. Finally, in the midst of the pandemic and oil price collapse, the United States collaborated closely with Mexico to help it weather these storms, including offering its support in the OPEC+ production cut negotiations, and AMLO floated the prospect of a meeting with Trump in the United States in June or July.

Full Newsletter: Monarch News – March/April 2020

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