Another Lost Decade for Latin America

President López Obrador says that his government will present a plan for economic recovery on Wednesday or Thursday. According to the president, the plan must come now that the country has passed the peak of contingency, which according to his administration happened at the end of last week.

Though details are still needed regarding the economic plan, the president says that the economy will open in stages and there needs to be a definition of which are the sectors that will open first. Moreover, López Obrador said that the country’s economic recovery will not take place in an even manner, with certain geographic areas opening first, as well. However, the president warned that the plans depends on the population following social distancing rules.

The plan is expected to include the automotive industry, which has experienced intense lobbying from the US to be reactivated as soon as possible. The North American automotive industry has a high dependency on Mexican manufacturing, especially for auto parts. In the US, some automotive companies reactivated operations on May 4, while others are expected to start operating today.

The plan gains even more relevance after IMF acknowledged that even though 2021 is expected to experience economic recovery, the decade 2015-2025 could be seen as another lost decade for Latin America. IMF has warned that it expects many businesses to go bankrupt in the stage of economic recovery, which will inevitably impact Mexico’s financial sector.

“The implications on the financial sector will come. We will see problems of important corporate restructuring in the tourism, aviation, automotive sectors, etc.,” said Alejandro Werner, Director of the Western Hemisphere Department of IMF, at a video conference organized by Columbia University.

“These banking and non-banking financial institutions, which are very oriented to these types of credits, will have certain problems which will affect the economic evolution in the recovery stage, and will make it slower than what we had originally anticipated,” Werner said.

For Mexico, Werner said that one of the greatest challenges that Mexico faces is regarding investors’ trust. “The distortion of global value chains after the pandemic revalues the element of geographic closeness and that is beneficial for Mexico, but to capitalize it needs to reduce uncertainty.”

Werner also said that macroeconomic stability, governmental changes or even the political bias of administrations do not alter investors’ certainty. However, Werner said that there have been changes at a microeconomic level, especially in the regulatory arena, that have impacted investors’ trust. “When you have solid institutions, this gives more certainty and it is a part we need to reinforce.