Mexico, like most countries, has taken an economic beating this year from the COVID-19 pandemic. Restrictions on business activities began relatively late here — in April — but were severe for the first three to four months, and since the summer the severity of shutdown has varied across states and municipalities around the country. As the year comes to a close, contagion remains fairly high overall and Mexico City has reverted to red, the highest level on the epidemiological traffic light used to set restrictions on business and mobility. Whatever the color though, a lot of people are catching the COVID, as it’s called here, and hospitals are at or close to capacity in the capital.
We knew from the start that the economic impact was going to be harsh, particularly when most major industries were shut down completely for April and May, and began reopening only partially in June and July. Tourism, one of the country’s largest industries and major foreign currency earners, has been savaged the entire year, with large numbers of small enterprises exiting the economy permanently. What we didn’t know was when the recovery would begin, and how quickly business and employment would bounce back. We still don’t know exactly what course the recovery will take, but at the threshold of 2021, the outlook appears to be improving moderately despite an overall dire short-term panorama.
Throughout the year, financial institutions have been issuing apocalyptic projections of 2020 economic growth, but we note that over the last two months these have begun to improve, relative of course to how awful they were in June and July. GDP growth estimates in the range of -10% to -12% over the summer crept down into the -9% range by November, which in comparison is looking pretty attractive right now. More recently, central bank Banco de México (Banxico) projected -9.3% growth for the year at the end of November, with BlackRock and ECLAC projecting -9.0% and others in the low to mid -9% range. One might even feel chuffed about our prospects of achieving the hotly desired “v-shaped recovery,” if it were not for a couple of policy quirks of President Andrés Manuel López Obrador (AMLO)’s highly personalized administration, commonly referred to as the Cuarta Transformación (Fourth Transformation), or 4T. The first is that amidst the pandemic the 4T has largely shunned economic stimulus or business support programs, in order to avoid taking on greater public debt. The second is the ongoing offensive against private investment in infrastructure, exemplified by the cancellation of the partially-constructed Mexico City airport, the forced renegotiation of the Sur de Texas-Tuxpan gas pipeline and the unending series of ham-fisted regulatory edicts meant to disadvantage privately-financed renewable electricity generation in favor of dodgy state enterprises. No stimulus means the economy is on its own during a devastating pandemic at the same time the government is waging a scorched-earth campaign to increase tax collection. And at a time when we desperately need investment to stimulate economic activity, ignoring the obligations to private companies taken on under the previous administration sends a fulminating sign of danger to potential investors, particularly in the energy industry.
Right now we are heading into the last week of the year and the prospects for a quick turnaround in the economic environment appear to be bleak. Last weekend the local government here in the capital returned the city to red on the epidemiological traffic light, signifying the highest level of restrictions on business and movement, and the curtains of most businesses are drawn. City officials have called on residents to avoid shopping and the holding of holiday soirées, which is particularly bummer-inducing considering that the next two weeks are normally the most active and family-focused holiday season of the year, not to mention an important boost to stores, bars, restaurants and other businesses.
Thinking about how we will eventually pull ourselves out of this quicksand, we might look to a couple somewhat comparable periods of brutal economic downturn we have endured in recent decades. In December 1994, after a very strange year full of scary high-profile crimes and an election campaign interrupted by the assassination of the leading candidate, Mexico suffered a precipitous currency devaluation which halved the value of the peso and drove inflation above 50%. The repercussions of the peso collapse included a lost year in 1995 that saw the economy contract over 6%. At the ground level, we remember well how quiet the streets became, with fewer people out in the cantinas and luncheonettes and many businesses shuttered, unable to stay afloat. By 1996 though, the home folks were ready to hit the taco stands again, central bank Banxico increased the transparency of financial data and the economy bounced back strongly.
A little over a decade later, we went through another of these nuclear winters when rampant monkey business in the financial services industry unraveled, tossing the financial equivalent of a phosphorus bomb into the global economy. The Mexican economy contracted by 5.3% in 2009 and the paint was really chipping here at the Mexico Business Blog Global Campus for a couple years there, but things turned around again and within a couple years the economy was heating up. We don’t want to think that we’re jinxed or anything but we took a further beating here in town when a 7.1 magnitude earthquake hit southern Mexico in 2017 and savaged central Mexico City. It felt like we were getting used to cyclical economic devastation by that point and we mused in this space about how long it might be before local business recovered. As it turned out, they did recover to a fairly healthy degree over the following two years, and then wouldn’t you know it, you think that apartment you bought at the height of the market might finally recover some value and then boom the Coronavirus and we’re in lockdown and everyone’s going out of business.
In the end, the purpose of the brief detour down our rubble-strewn memory lane is not to crab about poorly-timed investments but rather to demonstrate that it seems like around here, at least, historically bad years in the economy create pent up demand that tends to gush forth once underlying conditions improve. We saw that in 1996 and then again after around 2012, and a couple years after the 2017 earthquake. To our astonishment, we have observed numerous new businesses opening in 2020 around Roma-Condesa. Wethinks a number of these neighborhood startups may not endure the particular challenges of operating during the pandemic, but even if they conk out in the next two or three months, the irrepressible entrepreneurial spirit that leads investors to open a new restaurant in the middle of a pandemic lockdown surely bodes well for recovery once the COVID is vanquished.