US GDP plunged 4.8 percent in 1Q20 according to government results released today, providing the first glimpse on the real impact of the COVID-19 pandemic on the US economy. This marked the first negative GDP growth recorded in the US since the 1.1 percent decline in 1Q14 and the sharpest drop since the 8.4 percent plunge in 4Q08 following the global crisis. Economist surveyed by Dow Jones had expected a 3.5 percent contraction.
Decreased personal consumption expenditures and non-residential investments reflect that both US consumers and businesses are pulling back spending, according to the Bureau of Economic Analysis (BEA). The drop seen in consumption was also broader than expected, reflecting the lockdowns’ sharp economic impact. While the impact of these results on Mexico’s projections is yet to be seen, optimism is present among USMCA trade partners following the reactivation plan for production activities, which will put an end to COVID-19’s cease in operations.
USMCA’s enforcement on July 1 will allow a faster recovery and will boost the North American economy, according to analysts quoted by El Financiero. The agreement will provide legal certainty for the development of all three nations, highlighted José Luis de la Cruz, Head of the Institute for Industrial Development and Economic Growth (IDIC). “It will help to reactivate productive chains. Let’s see how they agree on the reactivation. From there, investment and trade will begin to flow,” de la Cruz said.
Grupo Financiero Monex reported that USMCA’s ratification is a positive sign since it ends months of uncertainty. “The sectors that could more rapidly implement measures to comply with the new agreement will be automotive, machinery and technology equipment,” according to Monex.
Despite good news, the global landscape is still driven by uncertainty on how long shutdowns will last, chiefly in the US. Regarding this, OECD Chief of Staff and Sherpa to the G20 Gabriela Ramos said that every month of confinement has caused the world GDP to contract 2 percent. During a discussion table organized by CCE, Ramos noted that among the most affected industries are tourism, entertainment, transport and aviation.
At the same forum, former US Ambassador to Mexico, Anthony Wayne warned of the need to protect supply chains among regional partners. “The US and Mexico must also establish mechanisms to address these issues on a regular basis and avoid major problems in these vital supply chains,” Wayne said.
Despite the sharp collapse in oil exports that was partially offset by increases in agricultural and extractive sectors, Mexico exports reached US$38.4 billion in March, a year-on-year drop of 1.6 percent according to INEGI. Mexican exports were also affected by restrictions in international markets due to the COVID-19 pandemic but benefited from the depreciation of the peso against the dollar and the closure of plants in China and Europe.
Last year, Mexico ranked 11th among the largest exporting economies with US$461 billion and 12th among the largest importing economies with US$467 billion, according to WTO. With USMCA’s date confirmed for July 1 and restrictions on global productive chains eased, global trade is expected to recover. For Mexico the opportunity can be even bigger after finalizing a new trade agreement with the EU.
The new EU-Mexico trade agreement (FTA EU-MX) can now move forward to its signature and ratification, the European body announced in a statement. This move is expected to boost Mexico’s exports to the EU, as the region’s main business partner in Latin America. The agreement will be translated to all EU languages to be sent to the European Parliament for signing and ratification.
“I am very pleased that together with our Mexican partners we share similar views and that our continued work could now come to fruition. This agreement will help both the EU and Mexico to support our respective economies and boost employment,” EU Commissioner for Trade Phil Hogan said after agreeing on the final details with Minister of Economy (SE) Graciela Márquez.
The Ministry of Economy announced the conclusion of the negotiation that started in June 2016 and that will include “new disciplines such as energy and raw materials, sustainable development, small and medium-sized companies, regulatory practices, transparency and anti-corruption.” Business associations praised the ministry and Márquez for the successful negotiation.
Under the new agreement, practically all goods will be duty-free. It was also the first time the EU agrees with a Latin American country on investment protection and simpler customs procedures that will further help boost trade. Mexico is the EU's number one trade partner in Latin America with bilateral trade worth US$75 billion on 2019. Trade between the EU and Mexico has more than tripled since the original agreement started in 2001.
Today, Mexico begins the Jornada Nacional de Sana Distancia (National Social-Distancing Program) to confront the COVID-19 outbreak. A lot has been said about the strategy but the general reception has been positive.
The Mexican healthcare sector has been challenged the whole year due to the many changes it has gone through and the COVID-19 outbreak was the last straw in an already strained system. Figures such as José Narro, former Ministry of Health, have said that Mexico has indeed the capacity to face this pandemic. “Mexico has a structure supported by equipment, techniques and specialized personnel,” he said. What is needed now is more investment on the sector.
On the other hand, institutions like INSABI and INER have stated that this situation is surpassing their capacity. On March 16, INER workers protested outside the institute due the lack of protocols and proper equipment to face the pandemic. Meanwhile, on March 20, families of patients demanded better information and attention to their situation. Other institutes such as INCMNSZ and INC are cancelling shutting down their normal services to support hospitals treating COVID-19 infected. Finally, on the night of March 20, the government announced that the Jornada Nacional de Sana Distancia would be implemented starting on March 23 and would last at least four weeks.
Given that the impact of the COVID-19 pandemic on the Mexican economy will be greater than expected, the Ministry of Finance (SHCP) is working on a preventive “cushion” that includes private investment in oil and gas projects. The goal is to be proactive and provide a coordinated effort to limit the damage, ministry head Arturo Herrera said.
“Even under the most favorable scenario there will be an impact on the economy,” Herrera warned during his inaugural address at the 83rd Banking Convention held in Acapulco. Herrera explained that besides the damage already done, stress in the transport and tourism sectors is likely to worsen. “We are not waiting for the impact to happen. We are starting now to provide incentives, to create an economic cushion,” he explained.
Among the incentives, the government will provide advance allocations for investment and acquisitions. Herrera said SHCP is already working on incentive programs with development banks to provide additional support to the most-affected sectors.
Hours before the convention started and after a meeting with Governor of Banxico Alejandro Díaz de León, Herrera said all possible scenarios to fight the pandemic are being assessed.
Oil & gas projects next
Mexico also will invite private firms to invest in oil and gas projects, Herrera said during the annual financial sector event. According to Reuters, Herrera said the long-awaited energy plan will be unveiled soon, disclosing all projects available. Energy auctions will not be included in the plan. “It’s not just a general outline, we’re going to say that this project here, here and here, this amount and size are open to investment,” Herrera said.
Some of the projects are considered in the US$92 billion investment package presented last week by private energy companies to President’s López Obrador administration. Herrera told Reuters that projects with PEMEX were not viable at the moment, after oil prices last week experienced their sharpest decline since 1991.
Herrera stressed that accelerating spending was a “more efficient” way of stimulating growth than raising spending, and added that PEMEX should spend its budget quickly too. “In this context, we need to make sure that PEMEX is executing its investment program on time and in a clear manner,” he said.
Given the surplus of fuel in Asia due to the COVID-19 pandemic, PEMEX is aiming to take advantage of cheap imports from China, South Korea and Japan. The Oil Price Information Service (OPIS) reported that PEMEX PMI is planning to import up to nine more fuel shipments in addition to two already purchased early in March, according to Reforma.
Total imports of 2.7 million barrels of gasoline, diesel or jet fuel are expected to reach the Salina Cruz refinery in Oaxaca, the only one of the National Refining System (SNR) in the Pacific Ocean. The medium range ships hired by PEMEX are scheduled to arrive to Mexico by April and have a capacity of between 280,000 and 300,000 barrels. No detailed information was available about which fuels are contained in these two shipments.
Cheap imports might become one less stress factor for the troubled NOC that doubled its loses from 2018 in 2019 and that now faces a sharp decline in oil prices. The global contingency gave also an opportunity for Asian markets to turn to Mexico to relieve their excessive fuel provision.
According to OPIS, PEMEX increased orders from Asia late in February and will likely continue in the short term. “We cannot know how much longer prices will drop and how long it will take for the Chinese economy to recover,” the agency has reported.
In 2019, the Salina Cruz refinery in Oaxaca recorded a production plunge of 24 percent, processing 125,104b/d and working at a 37.9 percent of its capacity, according to the latest Ministry of Energy crude oil processing report.
Despite the MX$25 billion (US$1.1 billion) investment announced for the modernization of the SNR, its six refineries are working at a modest production capacity of 36.1 percent, the lowest level in 30 years. The PEMEX Business Plan 2019-2023 contemplated a processing goal of 643Mb/d, which required the SNR to work at 39.2 percent of its installed capacity.
An intense program to improve the crude oil reception system and the primary plant distribution is ongoing at the Salina Cruz refinery, after facing a number of incidents. More investments in the port linked to the Tehuantepec Isthmus Railroad (FIT) project are also expected. Early in February four tenders were published to cover repairs of 157km of train tracks from the Port of Coatzacoalcos in Veracruz to the Port of Salina Cruz for the FIT project.
More troubles are likely to shake the markets even further after OPEC’s behemoth Saudi Arabia unveiled plans on Wednesday to dramatically ramp up oil production, raising the stakes of a lasting price war with non-OPEC leader Russia. Saudi Aramco was asked by the Saudi energy ministry to raise production to 13MMb/d, up from the 12MMb/d produced at the moment. If this trend keeps going, global oil prices will continue to plunge and more cheap fuels import form Asia will likely reach Oaxaca.