The Covid-19 Pandemic Threatens Mexico’s Economy

June 17, 2020

The Covid-19 pandemic hit Mexico while it was already standing in a feeble place. Although the country has made important structural changes, attracted global investment, is a major manufacturing hub, and is an active participant in the North American market, its GDP per capita has seen a meager 1 percent increase on average since the North American Free Trade Agreement (NAFTA) was ratified more than 25 years ago. Half of its population still works in the informal economy, without any social or health benefits. More than 11,000 people were murdered in the first four months of 2020, as many as the Covid-19 virus, impunity has reached 93 percent, and inequality is rampant.

President Andrés Manuel López Obrador’s (AMLO) 2018 landslide victory has made him the most powerful president in Mexico’s democratic history. More than 30 million Mexicans voted for him either as a rejection to the “establishment” or in hope for a better future. He and his coalition Juntos Haremos Historia have a congressional majority and could change the Mexican Constitution. His party Morena also has legislative majorities in 23 of 31 state congresses, holds seven governorships, and controls the unions and the military. AMLO is more motivated by ideology than by economics and has systematically reversed the important reforms implemented by the last six presidents, without opposition. The traditional parties, such as the Partido Acción Nacional (PAN) and the Partido Revolucionario Institucional (PRI), are struggling to survive.

In 2019, while the United States, Mexico’s largest trading partner, grew 2.3 percent rate, for the first time in a decade, the Mexican economy contracted by 1.6 percent. This was mainly due to a series of government decisions that were unfriendly to investment and fiscal policies that took the private sector by surprise (i.e., the cancellation of a $13 billion airport project in Mexico City), thus impacting confidence and depressing both domestic and foreign investment. As of February 2020, private investment had fallen for 13 consecutive months.

Thus far, the Mexican government’s response has been underwhelming. The government has not modified its spending priorities (for example, the infrastructure projects like the Dos Bocas Refinery, the Maya Train, and the Santa Lucia Airport have not been canceled or postponed), nor have they been willing to extend a lifeline to households or businesses. While the government provided a modest recovery package for some of the country’s poorest, it has not provided relief to many Mexicans who have had to shut down their livelihoods because of the pandemic. This is a significant difference from other countries in Latin America and the Caribbean: according to the International Monetary Fund (IMF), Mexico's economic response to the Covid-19 pandemic is among the world's most frugal, when relief spending is measured as a percentage of GDP.

Unfortunately, the economic outlook in Mexico shows no signs of improvement in either the short or long term. Banco de Mexico estimates that the economy could contract by more than 8 percent in 2020, which will also exert significant pressure on public finances. In addition, international financial institutions such as JP Morgan estimate a potential downgrade by the main rating agencies unless the government’s agenda shifts. Mexico is no longer the darling of emerging markets. In fact, economists fear this marks the beginning of an “L” shaped period of depression with very high unemployment.

Past economic downturns like the Tequila Crisis in 1994 have triggered an increase of migration to the United States, mainly due to the “push and pull” dynamics of supply and demand. The predicted economic contraction in Mexico due to the Covid-19 pandemic is expected to be greater and longer than any previous economic crises. However, during this crisis the United States is unlikely to become Mexico’s “migration escape valve,” as it has in the past, regardless of who wins the 2020 presidential election in the United States. Already, 36 million Americans have asked for unemployment benefits, and the U.S. economy is expected to contract by 6 percent this year.

In addition, crime is at an all-time high in Mexico while the effects of economic inequality exacerbate the public health crisis. The convergence of high crime rates, with the government’s inability to prepare or respond to the pandemic, and the ensuing economic pains could very well trigger unrest in Mexico. The conditions that motivate people to go to the streets in cities all over Mexico are many and they are growing, together with what many see as AMLO’s broken promises to care for the country’s most vulnerable.

Unless the Mexican government changes course quickly and can provide certainty to attract investment, the worst is yet to come. Actions like the cancellation of the Mexico City airport, the biggest infrastructure project in Latin America, the threats to change gas distribution contracts, the illegal referendum against Constellations Brands’ plant in Mexicali, and the fiscal extortions against big companies, all point in the opposite direction.

Mariana Campero is a senior associate (non-resident) with the Americas Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. She is the former CEO of the Mexican Council on Foreign Relations (COMEXI). Linnea Sandin is the associate director and associate fellow for the CSIS Americas Program.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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