ICIS View: Coronavirus effects to ripple in Mexico

Author: Claudia Espinosa

2020/03/18

Mexico’s president should act clearly on looming economic, health crises

Treasury Secretary acting decisively, separately

Private sector commits to maintain supplies of basic goods

HOUSTON (ICIS)--Mexico’s economy has perhaps never been more exposed to the global supply chains and commodity markets hit by the shocks of the coronavirus and the oil price war, but its president is losing time engaging in denial and political pandering. These will not help his party’s 2021 election prospects if the country’s economic performance falls further as its currency takes a beating amid capital flight.

The director general of the World Health Organization (WHO) Tedros Ghebreyesus on 16 March gave health recommendations for Mexico, which has a large population of diabetics who would be at higher risk from Covid-19, saying that one of the most important things is commitment at the highest political level and called leadership from a head of state “crucial” for effective efforts from the rest of an administration and other sectors.

Ghebreyesus’ remarks made during a press conference seem to allude to an attitude of denial from Mexican President Andres Manuel Lopez Obrador (AMLO), who was questioned by a reporter during a separate 16 March press conference for ignoring social distancing measures during his public activities. 
AMLO’s health minister, in the same conference, seemed to deem AMLO an exception to social distancing measures because of his popularity, although he also encouraged standard health practices among the public to minimise the spread of Covid-19. He also emphasised Mexico was still in an earlier stage of the outbreak than other countries and was preparing a coordinated response.

The conference also included a presentation on the progress of the controversial Dos Bocas refinery and evasive comments from AMLO regarding the state of the economy. AMLO was equally vague in his 18 March press conference, saying his administration believed the global economy would stabilise because of the decisive actions being taken by the US, Mexico’s largest trading partner.

CONFLICT

These public messages seemed to conflict with measures announced by Mexico’s Treasury Secretary Arturo Herrera on 13 March to assist in purchasing pandemic medical supplies, in addition to coordinating with central bank Banxico to “bring certainty” to financial markets.

Herrera also said his ministry had activated access to various funds and mechanisms that would mitigate the impact of the pandemic’s spread on the economy, given a worsening outlook amid the global oil price war and AMLO’s disjointed governance.

AMLO does not seem to have fully grasped the current and future economic impacts of the public health crisis unfolding. WHO director general Ghebreyesus said in his 16 March press conference the entity has globally “not seen an urgent enough escalation in testing, isolation and contact tracing, which is the backbone of the response.”

Gonzalo Monroy, managing director of GMEC consultancy and a former senior official at energy ministry SENER, said the administration’s “siege mentality” and resource nationalism are inadequate strategies for Mexico’s current situation and fragile position in the energy markets. On 17 March Mexico’s Maya crude oil export price fell below $20/bbl amid global oversupply of oil.

Monroy could recommend the administration attempt to seek debt in capital markets to help minimise economic shocks, although he said that would be politically unacceptable given AMLO’s campaign promises.

Opportunities

Paul Alejandro Sanchez, director of Mexico-based consulting group Ombudsman Energia, sees the current moment as an opportunity for the administration to reflect and reposition its stance on expensive infrastructure projects like the Dos Bocas refinery.

Sanchez said the administration is not responsible for the current crisis but that it should have done more prudent planning for this type of situation.

Mexico’s main business coordinating council CCE said in a 12 March statement the country is facing serious global risks and called for leadership and forward-planning over “false escapes into accusations and ideological extremism.”

Sanchez said private sector response efforts like those organised by CCE are tricky because the private sector is hampered by its need to maintain cordial relations with the administration, likely to keep lines of negotiation and communication open, amid a variety of unresolved energy sector conflicts regarding clean energy certificates (CELs) and self supply among others.

CCE called in its release for the government to promote private investment to stimulate the economy. In a 16 March press release, they stated a commitment to supply basic goods to the Mexican market through the crisis to “maintain as much normalcy as possible in economic and social activity” in coming weeks.

Day of reckoning

It does not appear the administration is currently connected to these efforts or attempting to take advantage of the opportunity to collaborate with the private sector to minimise the looming health and economic crises.

This type of denial behavior is not unprecedented. US President Trump has been criticised for his slow response to Covid-19, although his rhetoric and preparation activities shifted completely in recent weeks.

A similar shift in thinking may be possible for AMLO after he likely interacted with an infected Banxico employee at a banking convention late last week. Mexico’s central bank confirmed the infection and quarantining of the individual in a 17 March press release. They also said high-ranking members of the central bank are not currently experiencing symptoms.

AMLO’s personal day of reckoning could not come soon enough for many market participants afraid of a potential further downgrade of Pemex, potentially coupled with Mexico’s sovereign credit ratings even after the head of credit ratings agency Moody’s sovereign credit risk group issued reassuring remarks .

Sanchez said he thinks credit ratings agencies are holding off on downgrades at present not because they are being merciful toward Mexico but because they know it would have a domino effect throughout the region.

“It’s a tough decision,” he said.