Juan Francisco Torres Landa
Director Partner
Hogan Lovells
/
Expert Contributor

Mexico's Last Call

By Juan Francisco Torres | Mon, 07/13/2020 - 09:11

2020 has certainly turned into a very complex year. Who could have predicted the impact of a worldwide pandemic that started in Wuhan, China, and in the course of a few months spread like wildfire to the entire world, provoking a complete rout of supply and demand in the world economy. These are quite complex times for many nations. But the problem does not stop there. In the case of Mexico, the impact of COVID-19 has been quite worse given the lack of preparation and the decision by the government that took office in late 2018 to eliminate the federal health insurance without having a replacement program in place.

Mexico's federal government won the 2018 elections based on a platform to fight corruption, impunity, insecurity and poverty. The arguments were compelling, and led to a landslide victory that included not only the presidency, but both houses of Congress, 19 local congresses and five governorships. That overwhelming victory, however, has not translated into the implementation of programs and actions that generate the much needed and awaited results. The contrary is true. Mexico has gone awry in terms of accomplishments. Let us pinpoint some of the most important issues that are worth highlighting:

Each year for the past two years, there has been record-level violence, with the death toll reaching an average of roughly 100 people per day (10 of whom are women);
Investor confidence has been destroyed with the cancellation of key projects like the new airport for Mexico City in Texcoco and a brewery complex in Mexicali, Baja California;
Instead of pushing for more wind and solar-based power projects, these have been banned in favor of carbon and fuel oil plants;
Tender procedures have been curtailed and 80 percent of government purchases are done through direct awards with little or no transparency;
Regulatory agencies have been watered down through new rules and/or appointments of incompetent people;
Given problems in tax collection and excess spending on social programs with clear electoral connections, the government has eroded federal reserve funds;
The lack of respect for environmental standards and rules is offensive, with large projects dear to the president being exempted from environmental impact statements;
In the context of COVID-19, the government decided not to support health needs and provided even less liquidity to the market. Instead, it has allocated funds to three projects favored by the president that for the most part make no economic sense;
The government cut federal support for most government agencies and capped salaries for all public servants, thus creating severe bottlenecks and real impossibility to run basic government tasks;
In spite of an offer to have gone in a different direction, the decision to militarize public safety has been favored, while destroying capabilities with civil police forces at the municipal, state and federal levels;
The voice and contributions of experts and sophisticated consultants have been ignored and set aside as the government claims that the people it retains need to be 90 percent honest and only 10 percent prepared.

These decisions and actions have prompted an adverse environment for legal certainty, business promotion, and project development. In the absence of such elements, it is not difficult to understand why the forecast for GDP variation in Mexico is at a range that touches at least minus-10 percent, a figure that has not been seen in the last 80 years.

The impact of all these events is not only that the electoral promises will not be delivered, but that the massive impact from loss of employment, demand contraction, supply shortage, and lack of investments will trigger a growth in poverty levels coupled with additional problems of insecurity and violence.

One would expect that in these circumstances the government would reconsider many of its existing decisions and look for a different approach in the key components of what may prompt a different outcome, in particular in the economic aspects of Mexico’s performance as a host for new projects and investment.

In the difficult context of the COVID-19 pandemic, the dire health and economic conditions, and difficult prospects, there is one good piece of information: the much awaited USMCA came into effect on July 1, 2020. A great deal of complicated negotiations took place to be able to strike an agreement with the US and Canadian negotiators, and it was almost a miracle that such understanding was reached.

The USMCA is thus the one thing that the Mexican federal government can cling to in terms of a possible better performance of its economy, investment cycles, employment sourcing, and overall growth in new projects. The main question here is whether this international trade instrument, which replaces a very successful NAFTA, will have the power and effect to overcome the otherwise complicated scenario we have described above.

This is likely the last call for this government that will undergo its first significant evaluation in the midterm elections scheduled to take place on June 6, 2021. What happens between now and then will determine just what the citizens' evaluation is of the government's performance. Another miracle is needed for something dramatically different to occur next year. At this time, the government is likely going to fail this test. Time will tell.
 

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