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News Article

Obrador’s Policy Agenda: Major Concern for Economic Recovery

By Andrea Villar | Wed, 03/17/2021 - 13:30

How will the economy behave in 2021? Amid a pandemic and during a slow vaccination process, there are several factors, such as the political agenda of President Andrés Manuel López Obrador, that worry the private sector regarding Mexico’s economic recovery. Advisory firm FrontierView developed a framework for key economic drivers to understand this transformation process during the MexicoView Executive Network Launch on Wednesday, Mar. 17.

Mexico and the Pandemic: No End in Sight

Geopolitical risk strategist and Associate Practice Leader Mexico and Central America at FrontierView Alejandro Valerio noted that in terms of vaccination, Mexico is still lagging behind other emerging countries like Chile, which has been one of the countries leading vaccination plans in Latin America. “Mexico needs to ramp up the vaccination rollout if it wants to reach the expected economic recovery,” he said, during his presentation “Mexico Economic and Business Outlook for 2021.” 

Last week, Minister of Finance Arturo Herrera estimated that with the recent arrival of new vaccine batches, 500,000 COVID-19 vaccines would be applied daily, which will “help to reach the stage of economic growth,” he said. Minister of the Interior Olga Sanchez Cordero also said that by 4Q21, Mexico will have 80 million people vaccinated if pharmaceuticals comply with supply contracts. As of Mar. 16, 4,530,784 doses have been provided in Mexico. 

Valerio sees this as an unlikely scenario given the rate at which the country has been vaccinating the population. “This year still looks quite challenging and we are forecasting the GDP to grow 4.1 percent in Mexico (by the end of 2021),” he pointed out. One of the factors contributing to this is that the peso will appreciate against the dollar, although it will not recover the ground it lost in 2020. 

FrontierView
Source: FrontierView

When participants at the event were asked which external factor will have the biggest impact on their sales this year, 37 percent said the current administration's economic and industrial policies, followed by 32 percent who said the biggest impact will be the vaccination progress in Mexico. “One of the big pressures for the peso is, on the one hand, López Obrador’s energy policy and its impact on macroeconomic stability. On the other hand, there is also the threat to Mexico's central bank's independence,” Valerio explained.

FrontierView
Source: FrontierView

FrontierView's analysis highlighted that in the best-case scenario, Mexico will see  economic recovery by 2022, with a 10 percent probability, mainly through these key drivers: 

  • A moderate fiscal response (equivalent to 4 percent of the national GDP) with adjusted fiscal spending and the government agreeing to help the private sector

  • MORENA losing control of Congress and relinquishing part of the governorships after the elections on June 6

  • A change in the government’s energy policy as a result of PEMEX’s dire situation, which would lead to a stable credit rating

  • Infrastructure spending prioritized via fast-tracked public-private partnerships

  • The US prioritizing trade over immigration, decoupling both issues and taking them back to pre-Trump administration levels.

The 55 percent probability scenario, however, projects a recovery by 2024 under the following conditions:

  • President López Obrador fiscal response remaining below 2 percent of GDP amid an economic recovery led by exports

  • MORENA falling short of gaining an absolute majority in the Chamber of Deputies but winning most governorships and retaining control of the Senate

  • A sovereign rating downgrade in 2021 due to PEMEX’s dire situation, but not below investment grade

  • Infrastructure plans being implemented in 2020 and accelerating in 2021, led by the Mayan Train

  • López Obrador establishing a good working relationship with the Biden administration

Andrea Villar Andrea Villar Journalist and Industry Analyst