- Blog Post
- Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.
Covid-19 has come to Mexico. Factories are shut, planes grounded, beaches empty. Some 2,000 are now infected and dozens dead; cases have been doubling every few days. For weeks, President Andres Manuel Lopez Obrador blithely ignored the lessons coming out of Italy, Spain and elsewhere. He held rallies, hugged supporters, kissed children and made fun of safety recommendations.
When the federal government did finally announce social distancing measures to begin on March 23, the president wasn’t the one who faced the nation. Instead he sent a Health Ministry undersecretary to urge citizens to stay home. Later the Foreign Minister, not the president, declared a national emergency.
Only now, two weeks later, has the president finally addressed the nation. His speech revealed his limits as a leader, and leaves Mexico unprepared to face the pandemic, rescue the economy or bring the nation together. This failure threatens not just his once sky-high approval ratings, but also the viability of his ambitious economic and political project.
Lopez Obrador’s so-called Fourth Transformation aspires to bring back a paternalistic state even while cutting its size and assuring supporters that austerity will end corruption. Economically, its focus on energy and small farmer is a throw-back, as is its mission to cultivate a clientelistic political coalition based on cash handouts for the young and old, rural and urban.
Unfortunately, as Lopez Obrador has sought to effect that transformation, his policy choices have made Mexico more vulnerable to the pandemic. Mexico was already one of the countries in the OECD least equipped for such a contingency, with just 1.4 hospital beds per 1,000 people, fewer than 10,000 ventilators for its 130 million citizens, and one of the lowest per capita levels of health care spending.
But under his administration, austerity measures have cut millions out of health budgets, and weakened the pandemic rapid response system set up in 2009 in the wake of H1N1 flu outbreak. The recent revamp of the public health system for some 50 million Mexicans has gone poorly. Its hospitals and clinics already struggle to treat diabetes, heart disease, or even keep basic medicines in stock. With tens of thousands more people ill, the system may crumble.
Coronavirus is hitting Mexico’s economy hard as well. Manufacturing (outside of medical equipment) has been brought to a standstill. Factories have been shut to stop the disease’s spread. Orders have disappeared as global consumption plummets. The closing of the U.S. border to non-essential traffic makes sales all the harder.
Tourism has all but ended, staunching the flow of tens of millions of yearly travelers and their more than $200 billion in spending. Remittances are falling, as Mexicans in the U.S. and elsewhere face precarious economic circumstances. The Mexican Treasury predicts the economy could shrink up to 3.9 percent in 2020. International banks are more pessimistic, estimating declines of up to 8 percent.
Public finances are taking a hit. Mexico has never been particularly effective in collecting revenues. Now, as plants and storefronts shutter, revenue from value-added taxes and those on income will diminish even further. With international oil prices in freefall, the state-owned energy company Pemex is near collapse. Last year the finance ministry had to inject $5 billion to keep it afloat. The additional $2.5 billion in tax breaks the president announced won’t be close to enough, as Pemex’s barrels of oil now cost more to extract than they are worth. And this is all before Pemex lays out billions of dollars to build an unprofitable refinery the president refuses to put on hold.
Economists worldwide, from the left and the right, agree that austerity isn’t the answer to the coronavirus shock. Fiscal hawks in nation after nation are on board with extra spending to limit the pandemic’s domestic and global economic damage. Other Latin American nations have announced vast rescue plans, pouring tens of billions of dollars into tax breaks, company loans and grants, social programs, and public works. And Mexico has the added benefit of debt-to-GDP levels of less than 50 percent, giving the government space to borrow.
Lopez Obrador instead seems to believe that the government can save its way out of crisis. There are little to no outlays for the private sector in terms of tax relief, wage payments, loans, grants or other supports to help companies stay afloat. His plan to rescue “the people of Mexico” mostly rehashes social spending already baked into the 2020 budget. Promised early payments to pensioners, students and others look to be funded in large part by transferring earmarked government spending (known as fideicomisos), making it a financial wash in the economy. The public salary cuts and government belt-tightening will pull money out of the economy when it desperately needs more inflows.
Even before the president’s speech, Standard and Poor’s lowered Mexico’s sovereign bond ratings to a notch above junk status, with a negative outlook. Global investors had begun pulling out their assets, first quarter withdrawals nearing $6 billion and helping push the peso down more than 30 percent.
The situation will only get worse. With no strategic plan or economic outlays, the shutdown will last longer. More Mexicans will get sick and lose their lives. More jobs will disappear, and more companies close. International investors will go elsewhere. And Lopez Obrador’s big political and economic project, the Fourth Transformation, will founder. He will have only himself to blame for its demise.