These past months have been difficult and have transformed our daily routines and the structure of our societies and economies. Here at White & Case, we’ve been following these changes across Mexico and the United States and advising clients on what it means to them.
The world is in the midst of a public health crisis, sharp economic shocks, a collapse in trade, and a slowdown in people’s movement. These pressures are isolating people and countries and reinforcing and accelerating shifts toward isolationism. While many of these dynamics were in place prior to the pandemic, they’ll likely become more entrenched as we move toward a new normal.
In a departure from the role that the United States has played since World War II, the United States’ America First approach to foreign affairs and COVID-19 has left a leadership vacuum on the international stage. In the United States’ absence, there has been little or no coordinated global response, although we have seen some impressive regional leadership. The United States has also leveled criticisms or revoked funding from the organizations that generally step into this role, including the World Trade Organization and the World Health Organization.
These transformations have crossed into the private sector, with companies rethinking their global supply chains. For decades, supply chains spread around the world, as companies sought out countries’ competitive advantages. Yet this pandemic has revealed the risks to this approach. In response, we are already seeing a reckoning among companies and moves to create more resilient supply chains that are closer to home.
These changes could create opportunities within North America. As companies look to move essential products back home—particularly for medical supplies and food—our own region and its interlinked supply chains could benefit. To shape these decisions, the United States-Mexico-Canada Agreement (USMCA) will enter into force on July 1, 2020, and the region will have new rules for what will likely be a new economic reality.
On other fronts in Mexico, the pandemic seems to have sped up some of the country’s most concerning trends. In 2019, Mexico had some of the weakest growth rates among large markets globally. This sluggish growth carried over to 2020 and, when combined with the pandemic, led to a 1.6 percent economic contraction during the first quarter. This contraction will only worsen during the second quarter, as shuttered businesses and decreased consumption drag on the economy. For 2020, JP Morgan projects that Mexico’s economy will shrink by 8.4 percent.
Similarly, Mexico’s violence has also been surging around the country. While homicide numbers were high before the pandemic, they have recently jumped even higher. In March, Mexico recorded its second highest monthly homicide rate since 2006. While in April, the murder levels decreased only slightly, despite the virus spreading across the country and stay at home orders telling citizens to avoid going outside. Amid the worsening security situation, López Obrador ordered the National Guard back to the streets for the next four years.
Things have also been challenging on the energy front. On May 15th, Mexico’s Ministry of Energy published new electricity guidelines, which give the government more control over the sector. Notably, the guidelines include elements that go against the country’s 2014 energy reform, which had aimed to open Mexico’s energy sector to foreign investment. In response, the head of Conamer, a regulatory body, refused to back the guidelines and resigned, and Mexico’s private sector, Canada, and the European Union have all registered objections.
To further complicate the disheartening energy news, Pemex is also struggling amid the collapse in global oil prices and will require substantial government support to stay afloat. This all takes place as Moody’s and Fitch Ratings both downgraded Pemex’s credit rating into junk status. Fitch also recently cut its rating for Mexico’s sovereign debt and Moody’s gave it a negative outlook.
Yet in recent days, Mexico’s federal government has announced that the country has passed the worst of the virus and that it is time to move toward a gradual economic reopening. On Monday, the country lifted restrictions in areas without any reported COVID-19 cases, and construction, mining, and automotive manufacturing companies can begin applying for permission to reopen. Manufacturing was added to Mexico’s list of essential sectors after pressure from U.S. companies (and officials) given the region’s deeply interlinked supply chains.
On June 1, 2020, Mexico’s Ministry of Health will also implement a color-coded “traffic light” system to reopen social, educational and non-essential economic activities around the country.
However, Mexico’s COVID-19 information has been rife with conflicting numbers and a general lack of transparency. Currently, the only people included in the government’s case and death counts are individuals who tested positive for COVID-19. However, Mexico has one of the lowest testing rates in Latin America, which is far lower than in the United States.
This means that official numbers are an undercount of the current situation and it is difficult to determine the extent of the country’s outbreak. On May 14th, Mexico’s government noted that almost three fourths of Mexico’s City’s general care beds were full with coronavirus cases. While in Tijuana, the city’s morgue is now full.
There are undoubtedly many challenging days ahead of us, and you’ll likely have questions as to your interests or investments here in Mexico. If you do, please feel free to call on me and/or follow me on Twitter, LinkedIn, and Facebook.
I hope you are all staying safe and healthy.
Sincerely,
Antonio Garza