November 25, 2020

Mexico stands out and applies a dubious austerity recipe

Correspondent in Mexico



2020 will not be a good year for the Mexican economy either. The country, which had already registered a 0.1% drop in GDP in 2019, will foreseeably be the Latin American economy that suffers the deepest recession with a 9% contraction for this year, according to the latest IMF estimates. The collapse will be higher than the economic fall of 8.1% that the IMF projects for Latin America in 2020, a year marked by Covid-19, which is primed with the continent. Between Alaska and Patagonia, 18.4 million cases have been registered, 45% of the 39.2 million of the total infected on the planet.

Austerity. That has been the recipe with which Mexico has decided to respond to the economic effects of the pandemic. Creating an austere government has been part of the agenda of Mexican President Andrés Manuel López Obrador since he began his term in December 2018. And it does not seem that the spread of the virus is going to modify the plans of a leader obsessed with reducing the size of the State, in addition to being extremely reluctant to grant aid to companies or increase the size of the debt to boost growth based on skyrocketing public spending. “There cannot be a rich government with a poor people,” López Obrador constantly repeats in his press conferences.

The draft budget for 2021 establishes spending 0.3% lower than that approved for this year. The project does not include extraordinary measures or incentives to help troubled businesses. «We cannot afford these luxuries. We do not have those room for maneuver: neither social, nor fiscal, nor economic, ”said Arturo Herrera, the Minister of Finance, recently to justify the strategy. And it is that, in Mexico, 51.8% of the population works in the underground economy, which reduces the collection capacity.

The five engines of the Mexican economy are: exports to the US, oil revenues, tourism, remittances, and domestic consumption. The first four are the main sources of entry for dollars and, among these, only remittances have grown. Mexicans living in the US sent 22,821 million dollars between January and July, 4.3% more than in the same period of 2019. When it is converted into pesos, that amount increases drastically due to the deprecation of the Mexican currency. in 2020. So far this year, the peso has depreciated 13% against the dollar.

Meanwhile, the other currency inflows face a complex picture. Exports to the US have fallen by 15% from January to August when compared to the same period in 2019, as revealed by the US Census Bureau. The price of a barrel of oil has been greatly affected during the year, while the production of the state oil company Pemex was 1.66 million barrels per day (bpd) in August, slightly lower than the 1.73 million that extracted in January.

Tourism has also been hit hard, after receiving 62% fewer foreign visitors in August than the same month the previous year. Internally, consumption has been drastically reduced: it contracted by 23.5% in May, 19.6% in June and 15.3% in July compared to the same months in 2019. López Obrador has not given a sign of wanting to increase the debt to mitigate the economic blow. Due to the negative outlook looming over the country, Mexico could face a high cost of financing if it issues new debt. That is exactly what has happened to Pemex, last week it issued 1,500 million dollars in bonds at 7%, a historically high rate. Austerity is the only path that López Obrador’s finger points to in the face of the pandemic. A recipe that will avoid triggering the deficit but that can lengthen the way out of the crisis tunnel.

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