Image credits: Flickr: ECB profile
News Article

Another Investment Grade Hit, a W-Shaped Recovery on the Horizon

By Gabriela Mastache | Fri, 05/08/2020 - 11:54

Mexico is at risk of losing its investment grade in 2021, says Carlos Serrano, Chief Economist of BBVA. At the Economic Perspectives: Mexico After the Lockdown (Perspectivas Financieras: México Despues del Encierro) webinar organized by the newspaper El Financiero, Serrano said that if the federal government does not change the way PEMEX is managed, the country will certainly lose its investment grade by 2021.

According to Serrano, the government needs to reduce refinery activities, to import gasoline and to stop the construction of the Dos Bocas refinery, so the impact in public finances is reduced. The government must also reduce PEMEX’s spending and shut down fields that are not profitable. Moreover, Serrano noted that the company needed to allow for a larger participation of the private sector, which would allow the company to increase its production and deepwater exploration.

At the webinar, Serrano, alongside other experts, mentioned that the government’s refusal to implement incentives to boost the economy was the equivalent of being fiscally “irresponsible” and mentioned that if the government was willing to elevate debt, then this would assure a better recovery. “Containing public expenses and implementing an austerity policy is not being fiscally responsible, I think it is fiscally irresponsible,” said Enrique Quintana, Vice President and Editorial Director General of the newspaper El Financiero. Serrano noted that the public debt was bound to increase given the current economic contraction, combined with less tax collection and the depreciation of the exchange rate.

Serrano also noted that the COVID-19 pandemic was impacting the economy but also offered an important opportunity for the country to take over the gaps left by Chinese companies in US productive chains. For Serrano, the largest opportunity to recover economic activity in Mexico is through the manufacturing arena but only if the country manages to insert itself in the spaces left by Chinese companies.

Through trade between Mexico and the US remained solid through 1Q20, analysts believe that for 2Q20 the two economies will see a steep decrease in trade between the two nations, with the WTO foreseeing that there could be a reduction in trade that ranges between 20 and 40 percent. Citibanamex expects that trade between the two countries will experience a contraction of 25.3 percent, Credit Suisse puts its contraction estimate at 16 percent and Banorte at 8.6 percent.

A lower demand for Mexican products is also expected given the increase in unemployment in the US. According to information from the US Labor Department, unemployment applications in the US have reached a total of 33 million since the COVID-19 pandemic started.

Though many people believe that the economic recovery will be U-shaped, Christine Lagarde, President of the Central European Bank (BCE) warned that the economic recovery could follow a W-shaped pattern, which would entail periods of recession and recovery interleaved. According to Lagarde, the second wave of contagion alongside the looming trade war could spur a second economic fallout for the global economy.

The data used in this article was sourced from:  
El Financiero
Gabriela Mastache Gabriela Mastache Senior Journalist and Industry Analyst