Coronavirus hits Mexico’s economy where it hurts most: Oil, tourism, remittances and trade – The Washington Post

Coronavirus hits Mexico’s economy where it hurts most: Oil, tourism, remittances and trade  The Washington Post

Economists here are now predicting an economic collapse worse than the “tequila crisis” of the 1990s, when inflation soared, poverty deepened and migration surged. One economic think tank warns of a downturn that could force 22 million Mexicans into poverty this year. The International Monetary Fund expects gross domestic product to contract by 6.6 percent, a decline second in Latin America only to that of collapsing Venezuela. Bank of America predicts an 8 percent contraction.

“Mexico is like someone who was about to fall down the stairs, and then coronavirus came and pushed him,” said Valeria Moy, an economist at the Instituto Tecnológico Autónomo de México. “He was going to fall anyway. But now he’s going to fall farther and faster.”

Downturns in the 1980s and ’90s coincided with greater violence in Mexico, and pushed more migration to the United States.

Still, Mexico’s government has done less than others in Latin America to stabilize the economy amid the unfolding crisis. President Andrés Manuel López Obrador, who is deeply concerned about increasing the national debt, has focused a modest recovery package on the country’s poorest citizens, while offering little to small and medium-size businesses. 

The limited scope of López Obrador’s stimulus plan — it includes expediting an existing small-business loan program worth about $10 billion — has raised concern among members of Mexico’s central bank.

 “To provide liquidity to firms, that’s a place the government could step in. But it seems this government isn’t willing to accept a fiscal deficit,” said Jonathan Heath, the deputy governor of the Bank of Mexico. “The president is talking about helping the poor and doesn’t leave much room to help out small and medium firms. It’s not very orthodox.”

Of all the countries in Latin America and the Caribbean, the IMF reports, only the Bahamas is spending less as a percentage of its GDP to support households and businesses during the crisis. 

More than half the people in Mexico’s workforce hold informal jobs — they’re housekeepers, vendors, day laborers and small-business owners who do not receive social security, are not entitled to sick leave and do not receive pensions. When they’re laid off, as many have been already, there’s no support system to save them from destitution. The size of the informal economy means there’s no useful estimate of the unemployment rate. 

Informal businesses are suffering. In the center of Monterrey, Mexico’s third-largest city, the Sastrería Garibaldi has for 30 years made mariachi outfits. Owners Otilio Cruz and his son, Eduardo, estimate they can survive another month without income before shutting down. They have received no assistance from the government.

“What does it matter if we survive covid-19 if afterward we die of hunger?” Otilio Cruz said.

López Obrador took office in 2018 promising to end institutionalized corruption and improve the lives of Mexico’s poorest people. He has indeed tried to do both. But in the process, the longtime leftist has made decisions that sent shock waves through the private sector, depressing both domestic and foreign investment.

In the most well-known example, López Obrador scrapped plans for a new airport after construction had begun. More problems followed: a dismantling of the country’s energy reform, an insistence on building a refinery against the advice of engineers and economists, the halting last month of a $1 billion brewery project.

“There’s just no trust between AMLO and the business community,” said Duncan Wood, director of the Mexico Institute at the Woodrow Wilson Center, referring to López Obrador by his initials. “We’ve seen the impact of that on investment.”

Mexico is now the United States’ largest trading partner. But economists say businesses have been reluctant to spend more money until López Obrador offers more certainty. If Mexico is slow to recover from its outbreak, many here worry that more trade could be lost to China.

“China is starting to open its economy, and the U.S. is a bit ahead of Mexico on the pandemic curve, so when they start looking for suppliers in Mexico, it could still be closed, and they’ll look to China,” Moy said. “Those production chains that took years to build are at risk of being destroyed.”

In northern Mexico, workers in factories run by major American companies have staged protests, refusing to work during the pandemic. Lear Corp., Regal Beloit and Honeywell International have all reported covid-19 deaths.

This week, for the first time in history, Mexico’s oil export price dipped into negative territory — yet another blow to one of the country’s most important industries. Last week, Moody’s downgraded the debt of the national oil company, Pemex, to junk status. Pemex is weighed down by more than $100 billion in debt. It will now shut newly finished oil wells that the government once saw as an engine for growth.

Tourism generates 17 percent of Mexico’s GDP — a larger percentage than in any emerging country other than Thailand. It was one pillar of the economy that was largely unaffected by economic uncertainty.

But as countries around the world have declared lockdowns, and flights and hotel reservations have been canceled, the industry has been hit harder than almost any other during the pandemic. Globally, the World Travel and Tourism Council warns that 75 million jobs could be lost. In Mexico’s tourist resort of Cancún, hotel room occupancy fell last week to 2.8 percent.

Mexico’s Tourism Ministry has begun to plan a new marketing campaign aimed at the United States, Europe and parts of Asia, to be rolled out as the virus ebbs. Tourism Secretary Miguel Torruco Marqués has outlined what the campaign will look like. One tag line: “Mexico needs you.”

Remittances — money sent back to Mexicans by relatives abroad — account for roughly 3 percent of Mexico’s GDP. But they’re an enormous boon to some of the country’s poorest communities, where wages have risen little in recent decades. In the state of Michoacán, for example, remittances contribute more than 11 percent to the economy. Nationwide, 1.65 million households in the country receive such transfers, mostly from migrants in the United States. The bank BBVA now says remittances could crash 20 percent from 2020 to 2021.

It’s unclear whether a shrinking economy would drive more migration to the United States. In 1995, the year after government devaluation of the peso against the dollar triggered the tequila crisis, migration surged. That also happened in 1982, after a previous peso devaluation.

 But a slow U.S. recovery from its own coronavirus shock could temper any exodus.

“In the mid-1990s, when Mexico’s economy collapsed, the U.S. economy was sizzling, so Mexicans came north in large numbers,” said Andrew Selee, president of the Migration Policy Institute in Washington. “But during the global recession in 2007 and 2008, Mexicans actually stayed home even though things were terrible, because there were no available jobs in the U.S.

“I think this crisis is likely to be like 2007-2008. Many Mexicans may want to go north because of how bad things get at home, but they won’t because their friends and relatives in the U.S. will be telling them that there aren’t any jobs.”

If the U.S. economy strengthens while the Mexican economy remains in recession, Selee and others say, migration flows from Mexico are likely to increase once again.

The economic crisis of the 1990s also coincided with a marked increase in crime. Already, drug cartels appear to be capitalizing on both the economic downturn and the government’s limited response to it. They’re handing out small aid packages to people in territory under their control. The daughter of former Sinaloa cartel chief Joaquín “El Chapo” Guzmán is distributing boxes of provisions with his face stenciled on top. With Mexico’s homicide rate already at an all-time high, growing cartel influence is a frightening prospect.

President Trump, in contrast, campaigned on promises to build a wall on the U.S.-Mexico border and to make Mexico pay for it. He has pressured López Obrador to crack down on migration via Mexico with tariff threats and border closures.

Analysts say Trump might be more reluctant than Clinton was to extend a lifeline.

“If we see renewed Mexican migration at the border, and Mexico is seen as having failed to respond to the pandemic,” Wood said, “we could see things moving in the opposite direction.”

Source: washingtonpost.com

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