Mexico issues controversial plan to weather coronavirus crisis

Author: Angeles Rodriguez

2020/04/08

Most proposals from private sector groups left unattended

Some large energy users allowed to continue operations

Energy sector concerned about longer-term impact of crisis

MEXICO CITY (ICIS)— The Mexican industrial sector, which accounts for almost 32% of national energy consumption, was largely excluded from the initial economic plan president Andres Manuel Lopez Obrador (AMLO) unveiled, perplexing some in the sector.

The plan focuses on expanding social programs for populations largely employed in the vulnerable informal sector, while tightening public sector austerity.

The government is opting for increasing public investment instead of contracting debt and implementing counter-cyclical economic measures, AMLO said in his 5 April announcement. His plan is, however, expected to redirect to national coffers savings currently controlled at the state level and could tap into a national emergency savings fund.

The country’s main business groups deemed his strategy “incomplete.” Prior to the announcement, the groups submitted proposals ranging from tax deferrals to loans from the development banking sector. Expediting VAT returns for eligible business and taxpayers was the only one of the groups’ proposals that made it into the plan.

Most companies in the industrial sector halted their activities due to a health emergency declaration scheduled to last through 30 April that bans non-essential activities.

Missing opportunities

The current economic situation presented the opportunity for the government to reassess its energy paradigm, according to Ana Lilia Moreno, an economist and researcher at local think tank Mexico Evalua.

“Mexico could be taking advantage of current low oil prices and import inexpensive gasoline instead of investing $8bn in a new oil refinery,” Moreno said referring to the administration’s continued commitment to the controversial Dos Bocas refinery.

AMLO’s initial plan also included a $2.6bn royalty cut for state-owned producer Pemex for the remainder of 2020. The measure would not be enough to prevent Pemex from increasing debt this year, according to a 7 April statement from Moody’s Investor Services.

“Boosting the renewable energy industry could have also served to create jobs and compensate the losses expected from other sectors,” according to Moreno of Mexico Evalua.

Something that the government fails to understand, according to Moreno, is that medium-sized companies also need support to prevent them from bankruptcy after weeks of inactivity. “Specific measures to support them were needed.”

Moreno said that in the face of an unexpected shock like coronavirus, coupled with the economic contraction Mexico was already experiencing, acquiring public debt could be effective if accompanied by a solid strategy to create wealth and jobs.

Reactions

Energy demand is expected to decrease through the health emergency, but companies are more concerned about longer-term effects and the overall economic crisis, according to a Mexico City-based energy consultant.

If the economic recovery plan ends up being insufficient to prevent GDP from falling, the effects will not only hit energy users but energy companies, the consultant said.

Projects could remain unused or underutilised once completed as due to reduced demand, with developers taking much longer to recover investments.

Mexico, which is highly-connected to slowed international supply chain activity, is already facing an uphill battle to prevent GDP decreases. April forecasts from the United Nations’ Economic Commission for Latin America and the Caribbean indicate Mexico could see a 7.4% drop in the value of its 2020 exports, key to its economy, as a direct result of coronavirus.

Some companies were already bracing for the emergency’s impact. Cement maker CEMEX -a key industrial energy user- said in a 6 April statement it had already identified measures to reduce costs ahead of plans to halt operations.

Later that day, the health ministry published a follow up notice to the emergency declaration enabling steel, cement and glass-producing companies to maintain limited operations. Companies within these industries as well as from the coal mining holding “essential” contracts with state-run CFE and Pemex, or with the federal government for its flagship infrastructure projects were also authorised to continue.

CEMEX announced 7 April it would resume operations accordingly.

Mexico’s business coordinating council, CCE in Spanish, reacted to the government’s plan with its own strategies to support small and medium-sized businesses during the emergency, while continuing “knocking on [the government’s] doors.”

Angeles Rodriguez and Claudia Espinosa