Mexico resists triple whammy of risks

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By:
Jeremy Weltman
Published on:

Analysts still see a sanctuary through the mist, despite Mexico experiencing little growth, confronting a debt overhang at Pemex and bracing for a supply shock as the coronavirus disease spreads.

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President Andrés Manuel López Obrador (Amlo), the leftist who took over at the end of 2018 and whose first year was marked with an economy declining for the first time since 2009, continues to face formidable problems.

Latest figures show GDP fell slightly in the fourth quarter on a real-terms, seasonally adjusted basis, contrasting with the president’s pledge to foster growth of 4%, as tight monetary policy, weaker employment growth and uncertainty over global prospects stamped on domestic demand and exports.

However, the bad news had been expected, with Mexico’s country risk score bombing in Euromoney’s crowd-sourcing survey of experts last year.

Although exaggerated by a one-off change to the risk-scoring methodology, analysts reacted predictably to the weak economy well before Covid-19 piled on more misery.

Having said that, Mexico has the fifth strongest country risk score in Latin America, making it safer than Brazil.

Risk experts also envisage some improvement, upgrading their scores for a range of variables, though gradually.

After a process of rescoring this week, Mexico’s global risk ranking appears to be in little danger of slipping from 56th (out of 174 countries), reflecting the fact that other countries will be similarly hit with coronavirus, and possibly even more severely.

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Positive factors

Ratification of the new trade agreement with Canada and the US, and the easing of frictions encapsulated within the phase-one trade deal between China and the US have raised hopes for some improvement on the economic front this year.

The current account, moreover, is proving less troublesome and inflation is under control. This allowed Banco de México (Banxico), the central bank, to start easing monetary policy in August, lowering its key policy interest rate from 8.25% to 7% after the last cut in February, which in turn will provide the economy with a lift.

Politically, there is less uncertainty, with a general election not due for years.

Amlo’s party, the National Regeneration Movement (Morena), leads a coalition with a majority. It is not targeting the wealthy to tackle inequality and is looking to make spending cuts, so naturally the political stability and policymaking scores have improved.

The president has also made some headway in the battle against corruption, with the arrest of Emilio Lozoya – the former head of Pemex, the state-owned oil company – who is accused of involvement in alleged fraud involving the Coahuila-based steelmaker Altos Hornos de México bribing the Brazilian conglomerate Odebrecht.

The ECR corruption indicator score has also improved as a result.

Managing risk

Minimum wage hikes nudged consumer price inflation above the 3% target, to 3.2%, in January, and with the peso struggling lately due to coronavirus woes, it will only fuel the fires as import prices rise.

High real interest rates, austerity and weak confidence have been undermining investment, and because of coronavirus, Banxico has been forced to downgrade its real GDP growth forecast from 0.8%-1.8% to 0.5%-1.5% for 2020.

However, all is not lost.

There may be a temporary supply shock, but the economy is likely to emerge from its torpor on the back of improving construction and stabilizing oil output.

A bigger economic rebound is expected later in the year if the coronavirus episode fades, helping not least to improve the bottom line at Pemex, which racked up a loss of $9 billion in Q4 on the back of lower crude exports.

Banxico can also continue to loosen monetary policy this year to address the problem of high real interest rates putting off investment.

To calm market nerves, moreover, finance minister Arturo Herrera has committed to a stricter management of public sector debt in the wake of Fitch downgrading Mexico’s sovereign borrower rating from BBB+ to BBB in June, signalling the country will remain cautious over its borrowing plans.

This came as Moody’s placed its A3 rating on negative watch, preceded by S&P altering its BBB+ rating to negative last March.

One risk analyst, who asked not to be named, stated there are clearly downside risks, given the fact no one knows how much Covid-19 will spread and how long it will last, but overall the picture is brightening on several fronts, not least because loosening monetary policy and some targeted fiscal spending – on the investment side – will spur domestic demand.

If you look beyond the disturbances the disease is causing, he said, Mexico risk is already starting to ease.