Economic trouble south of the border

So much for the positive economic and social change that the July 2018 election of Andres Manuel Lopez Obrador (AMLO) was supposed to bring to Mexico. 

Two years into his administration, AMLO’s mismanagement has contributed to the Mexican economy being among those emerging markets hardest hit by the COVID-19 pandemic. At the same time, AMLO’s Trump-like pandemic denial has made his country the one with the world’s third-highest number of COVID mortalities.

The last thing that the United States needs is an economically and socially weak neighbor to the south of its border. However, barring a change of heart by AMLO that might prompt an abrupt policy U-turn, this is what we should be expecting from Mexico. This would especially be the case if there were to be a second wave in the U.S. pandemic or if the currently highly favorable international liquidity situation were soon to come to an end.

Even before the pandemic struck, Mexico’s economy was under performing. Taken aback by AMLO’s market unfriendly policies and by his undermining Mexican economic institutions, domestic and foreign investment took a marked turn for the worse. As a result, already in 2019 the country found itself in a recession. 

As has been the case for many other emerging market economies, the global pandemic has brought in its wake a perfect economic storm for Mexico. The swooning of the U.S. economy, Mexico’s main trade partner, and the collapse in international oil prices dealt a severe body blow to Mexico’s U.S. and oil-dependent economy. So too did the major disruption of international travel to an economy where tourism accounts for over 8 percent of its GDP. 

While the Mexican economy was bound to be damaged by the pandemic, there was no good reason other than government incompetence to expect that Mexico’s GDP would drop by almost 19 percent in the second quarter of this year. Nor was there any reason to expect that U.S. investment banks would now be projecting a Mexican GDP decline of more than 10 percent for 2020 as a whole at a time when they are expecting around half that decline in other Latin American economies.

AMLO’s mishandling of the pandemic has contributed to the country’s economic malaise. Not only was he painfully slow to recognize the pandemic’s seriousness, he was overly eager to relax those quarantine restrictions that were eventually introduced. It also has not helped matters that like his counterpart to the north, AMLO has consistently defied his public health authorities on the need for social distancing, has continued to hold politically rallies and has belittled the need for face masks.  

A more surprising way in which AMLO has helped to deepen Mexico’s pandemic-induced recession has been his reluctance to open the public purse strings to provide support to the ailing economy. According to the IMF, the budget support that Mexico has provided to its economy to cushion the pandemic’s fallout has been little more than 1 percent of GDP. That is less than a third of the budget support that other emerging markets have provided to their economies. This is all the more surprising considering that Mexico’s public debt is still at a moderate level and that it is still running a primary budget surplus. 

Compounding Mexico’s economic woes is the fact that the decline in its economy and the rise in its unemployment rate has been accompanied by an uptick in inflation. This has been largely the result of the almost 20 percent decline in the Mexican currency since the start of the year as investors became increasingly unsettled about the direction in the Mexican economy and as the Bank of Mexico has been forced to reduce interest rates. 

All of this suggests that the Mexican economy is particularly poorly placed to withstand a second wave in the global pandemic or an appreciable tightening in global liquidity conditions. This should be of particular concern to the United States. Any failure of the Mexican economy to stage an early recovery could both constitute a headwind to our own economic recovery and add impetus to the number of Mexicans seeking to enter our country in pursuit of better economic opportunities.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.