Mexican President Andrés Manuel López Obrador has become an international symbol of ridicule in the middle of the pandemic. As he continues to flaunt his disregard for prudence — just this weekend he visited and shook hands with the elderly mother of convicted drug lord Joaquin “El Chapo” Guzmán — the number of cases of the novel coronavirus has kept rising in Mexico. The government mulishly delayed the adoption of social distancing and other measures, and now the country is ill-prepared for what comes next, scrambling to persuade citizens to stay indoors.
It wouldn’t take a worst-case scenario to overstretch Mexico’s limited health-care resources. Mexico has twice the population of Italy but only slightly more than half the hospital beds. It lacks enough intensive-care units, respirators or even properly trained professionals for a severe outbreak of any illness, let alone the aggressive covid-19. Even if the government manages to somehow contain infection to only 20 percent of the population, half a million Mexicans could die in the next 18 months.
And yet, this astounding human cost could be just the beginning of Mexico’s tortuous experience with the pandemic. The country’s economy relies on oil, remittances and tourism. Oil and tourism are already showing dramatic declines, and we can expect remittances from the United States to follow. In a conservative scenario, the country’s tourism industry could lose more than $2 billion over the coming months. The price of Mexico’s oil has plummeted. Some analysts suggest the country’s economy could shrink between 4 percent and 5 percent in 2020.
One would think that, in such a dismal economic climate, Mexico’s government would work overtime to fortify the country’s standing with jittery investors. The exact opposite has happened. At the beginning of his presidency, López Obrador supported an illegitimate, unrepresentative and hastily assembled referendum to cancel the construction of a state-of-the-art international airport in Mexico City that had been meant to turn the country’s capital into a transportation hub and strengthen the tourism industry. Even though a third of the airport had already been built, López Obrador couldn’t have cared less: Instead of dealing with alleged corruption with some of the airport’s contracts, the project was abandoned. The consequences were severe, with investors voicing their concerns over the country’s lack of commitment and trustworthiness.
Now, in the middle of a crisis that could bring the Mexican economy to its knees, López Obrador has done it again.
A couple of weeks ago the government once again organized an informal vote to determine the fate of a massive private investment project, this time in the northern city of Mexicali. Less than 5 percent of the city’s 1 million residents took part in the vote, which had no legal basis or guarantees of fairness. Just like the airport, this project, a brand-new plant owned by U.S. brewery giant Constellation Brands was well on its way to completion. With all the permits in order, the company had invested $900 million of its $1.4 billion budget. While some local activists resisted its construction due to concerns over water shortages (which the company addressed), the plant would have given the region a boost, including creating almost 4,000 jobs.
According to López Obrador, the decision to cancel the project was justified. “There was influence peddling,” he said. Rather than sort out the alleged corruption through the rule of law, López Obrador once again decided to erase the project whole. The president has said he will meet with representatives from the company to try to reach an agreement. For now, he doesn’t seem willing to budge.
It could prove costly.
If the deal to build the plant falls through, the company might sue under the terms of current trade deals. Mexico’s government would most likely have to pay hefty compensation. Still, the immediate consequences could pale in comparison with the effects on future investment.
“The López Obrador administration doesn’t seem to understand the concept of sanctity of contracts, and how it relates to attracting foreign investment,” analyst Jorge Suárez Vélez told me. “Canceling a plant where $900 million were already invested, at this moment, is like shooting yourself on the foot, but using a bazooka.”
He is right. Last year, even as the U.S. economy expanded, Mexico’s economy ground to a halt. Public investment had its worst year on record (relative to gross domestic product), making private investment much more urgent. This year, the Mexican peso has been the worst-performing currency relative to the U.S. dollar. Mexico’s economy could suffer the most severe contraction among Latin American countries (except for Venezuela).
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Mexico is only one of three Group of 20 countries (along with Turkey and India) that has yet to announce any fiscal specific stimulus package to support small businesses or corporations facing fallout from the pandemic. In that environment, the last thing Mexico needed was to send the wrong message to potential foreign investors. The country needs them now and will need them even more soon. If confidence among investors in Mexico’s reliability falters further, the country could face an economic crisis not seen in decades.
Perhaps then López Obrador will finally shed his stubbornness.
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