Economics: An extended road to recovery
As we have known for some time, the economic fallout from Covid-19 will be felt on the external front as the global outlook remains highly uncertain, including on the level of the US economy, with which Mexico is so tightly linked. Its effects are also mounting in the strictly domestic sphere, where Mexico has been exposed by the utter absence of effective mitigation and stimulus policies even as employment and household incomes enter into free fall along with industrial activity, and more specifically manufacturing, with only the food industry continuing to show some growth.
The fall has been significantly steep among services, and all indications suggest they will remain locked into a negative trajectory for the foreseeable future. The public sector remains at best irrelevant to any prospects for recovery, and the government's push to reopen services such as hotels and restaurants, and expand flights, comes at a time when foreign tourists are unlikely to rush toward a country where the pandemic rages unabated, and most people in Mexico have been reducing spending to focus on essentials only.
Clearly the pandemic’s impact is not the transitory development officials have tried to make it out to be, and with López Obrador’s administration remaining fixated on its, at best, irrelevant infrastructure boondoggles instead of productive investments and policies for rebuilding investor confidence, the road to recovery is likely to prove long indeed.
Depending on the magnitude and duration of the crisis, the financial sector also looks increasingly exposed regarding the household and business sector debt it has issued. We can reliably assume that moves to refinance or extend existing debt are something that have been occurring with all manner of credit institutions, but with more and more people out of work and businesses closing their doors we can expect a sustained expansion of non performing loan portfolios and similarly adverse developments in the equity capital market. Banco de México’s most recent biannual report on financial stability warned clearly about such challenges with its description of the pitfalls to avoid going forward. Furthermore, as bad as 2020 will obviously prove to be, 2021 will pose additional challenges to public finance and sovereign risk.
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