Reopening of the Mexican Economy in times of COVID-19

The road to economic recovery after covid19

Mexico as with many countries in the world, has faced a dramatic decrease in economic activity due to the government’s efforts to contain the spread of the COVID-19. Many investors and businesspeople at this time wish to understand if their business opportunity in Mexico remains viable. Objectives: What is the short-term economic impact of the COVID-19 pandemic on Mexico? What measures has the Mexican government taken with regard to economic stimulus to boost the economy? 

Timeline for Relaxing of Sanitary Measures:

We expect the economic situation in Mexico to begin the long track to recover beginning at the end of May 2020. The government of Mexico has signaled that it will take a phased approach to reinitiating economic activity and relaxing of sanitary measures. We expect the transitionary period to last from approximately May 17^th to June 25^th, 2020. The Mexican health authorities have as of April 17^th, extended the social distancing measures to May 30^th. In areas that have seen lesser incidence of transmission, the measures may be relaxed beginning May 17^th.  On April 16^th 2020 the Sub Secretary of Public Health of Mexico listed a series of municipalities in the Country that are still on phase 1 on the health emergency due that they have a lower percent of infection growth or no cases at all. This means it has not been possible to announce phase 3 of the pandemic emergency in Mexico and that is why specialist’s predictions have come to the conclusion that each state and municipality will be treated differently, in the way we can begin normal economic and social activities in a staggered manner.

Mexico began to take the pandemic seriously and take social distancing measures about the same time as the United States, which appears to have had a significant impact in limiting the spread of the disease. Though the United States may have been slow to adopt measures, Mexico’s timing appears to have been “early” and as such the disease has not spread extensively throughout the general population relatively speaking, to the same degree witnessed in Europe and other North American countries. Therefore, the social distancing and restrictive measures in place are functioning according to computer models from the Autonomous University of Mexico and the University of Guadalajara. These measures will continue to have good effect so long 55% social distancing compliance is maintained. Therefore, though the trajectory of the virus appears to be “good” at present, this could change depending on the continued implementation and adherence to social distancing measures as demonstrated by current computer modeling.

It is possible that the short-term effects of the COVID-19 situation could be felt heavily in Mexico as households’ savings are exhausted. Unlike their counterparts in the United States and Canada, the Mexico Federal Government does not provide extensive unemployment benefits to the general population in the case of employment separation. The Gross Savings Rate is defined as the percentage of household income saved during an annualized period. The rates in Canada, United States and Mexico are 21.4%, 17.3% and 21.5%, respectively (CEIC Data). This means that theoretically, the typical household across the North American region should be able to cope with the economic restrictions for a similar amount of time. Nevertheless, the lack of a widely available unemployment benefits program in Mexico poses a short-term risk to social and economic stability should normal economic activity not resume within the next month or so as some members of population find it increasingly difficult to meet basic subsistence needs.

The Mexican Government declared a health emergency on March 30^th, this means companies not considered as fundamental for economic activities in the country, had to pause activities and obligate all workers to work from home. On the other hand, companies fundamental for economic activities are still operating in Mexico, including energy and gas distribution, food, supplier markets, public transportation, logistics, and airports. Localized measures at the state and municipal level had already been in place from mid-April.

Business and Investor Confidence:

The fundamental elements of economic activity in Mexico remain stable at present and significant restriction on foreign investment in not necessary at present. The economic shock upon the labor, manufacturing and services markets is temporary. The International Monetary Fund predicts that Mexico will return to growth in the first quarter of 2021. Investment for outbound industries including companies expecting to retain domestic human capital, should not experience significant interruptions in activities after June 2020, once social distancing measures are withdrawn as is expected. The workforce has not disappeared. Companies can continue to contract local personnel. It is true that manufacturing capacity in the short term has been reduced or halted in many industries. However, moving into the summer of 2020, locally sourced raw materials and inputs should resume a level of normalcy as factories and logistics capacity begin a return to regular levels.

The period from June to December 2020 will be an essential lapse of scrutiny for economic continued investment. However, companies can take several mitigating steps:

• Confirm the availability and operation of suppliers of raw materials and services.
• Identify any particular licensing requirements for products or services that may be required and understand if the applicable authority is operating.
• Plan an additional 3 months into investment timelines to account for administrative delays as government agencies resume operations.

New investment operations in Mexico can expect delays. Nevertheless, investment can continue. Companies are still able to incorporate a legal entity, open a bank account and begin operations without significant interruption. Companies may continue to rent office space and will be in a position to take advantage of lower prices and incentives by property owners seeking to resume activities (MexInc has recently secured additional office space in Mexico City at almost 40% discount). In brief, companies interested in investing in the short term in Mexico, specifically with regard to services or products delivered to the domestic market, will experience a contraction most likely until the 1^st quarter 2021, as economic activity normalizes. However, mid to long term invests should continue. At the macroeconomic level this conclusion is supported by the stabilization of the Mexican peso as a significant indicator of long term economic confidence. The short term drop in the value of the currency indicates a concern for the short term as opposed to the long term.

On the ground, many companies are operating under the timelines presented above assuming a resumption of normal business activities toward the end of May and into June 2020. For example, Mercedes-Benz, Audi and many other automotive companies are offering customers the opportunity to acquire a new vehicle without payments being made until August. Restaurants and other businesses are sending out memos to employees and clients expecting to return to work according to a similar timeline. The business community appears to have confidence in a return to relative normalcy during the periods indicated above.  The confidence of the business community and the population as whole underpins economic activity and is far stronger than any specific economic stimulus that can be provided by the government. At present, firm data and polling related to business confidence is not available. Nevertheless, preliminary conclusions concerning business confidence are made evident by internal communications and policies within the core group of companies analyzed.

Preliminary Economic Impact:

The Mexican Central bank expects an economic contraction of approximately 6.9% of GDP. This number arrives in the context of a country already in economic recession, prior the commencement of the COVID-19 situation. The full extent of economic difficulties will not be known until the virus reaches its apex, however, indications at this time demonstrate that Mexico has been spared some of the worst effects of the virus. As stated above, these conclusions operate under the notion of continued adherence to social distancing measures taken by the Mexican government.

From February 14^th to March 23^th, the Mexican pesos experienced a depreciation of 26.8% from 18.54 MXN to 25.34 MXN to the Dollar. The Peso is expected to end this quarter at or near 24.05 MXN to one dollar. A further contraction of the Mexican Peso’s value is not expected. Being that peso’s value has “hit bottom”, exchange rate risk is not likely to pose significant negative effects on foreign direct investment for the time being. The downward pressure on the value of the Mexican peso also represents an opportunity for pending investments and expansion projects to take advantage of lower input prices for domestically sourced capital investments.

Particular attention should be given to the United States recovery as per its effects in Mexico, given that the United States is Mexico’s primary international trading partner. The integrated supply chains across the United States, Canada and Mexico means that a return to normalcy in Mexico, particularly in the domestic manufacturing sector, relies heavily on the timetable to economic “reopening” throughout the countries in the North American region.

Areas Most Affected:

First, the Mexican health authorities predict that the virus will peak during the first and second weeks of May, approximately from May 8^th to May 10^th 2020. From that point on, the social distancing policies enacted at the federal and state levels will begin to be relaxed. This includes the opening of business establishments considered non-essential. As will be discussed later on, the impact of the virus is not evenly spread. There will likely be variations in local government social distancing measures by regions: Northern Border Region, Mexico City and industrial zones will likely see different measures relaxed at different times. The remainder of the country outside of the above areas has seen relatively mild infection rates of a less than a few dozen cases at the date of this writing. Therefore, we expect an “opening for business” to occur unevenly. Specifically, areas closest to Mexico’s three largest cities, Mexico City, Guadalajara, and Monterrey, will likely see a more delayed return to economic normality, as well as areas in the northern border region.

Government Economic Stimulus Activities:

President of Mexico Andres Manuel Lopez Obrador, announced a series of benefits to the Small and Medium business in all the country. The Mexican government has established a series of small business loan schemes at low interest rates including differed monthly payments. Economic relief is also being presented in the form of payroll tax cuts and tax incentives. Though many of these measures are available to both formal and informal businesses, the prevalence of informal business operations in the Mexican market especially in terms of small business, may potentially limit the diffusion of these stimulus measures as we can assume a lower level application for these benefits within the informal economy.

Despite certain measures at the micro-economic or “firm level”, the Mexican authorities at this time have not made significant and coordinated macro-economic stimulus plans similar to those implemented by the governments of Canada and the United States. The Mexican government does not appear to have plans to provide direct payments to citizens or large-scale intervention to boost economic activity.

Closing and Limitations of Government Services:

Mexican government services, including offices, appointments and services to the public are restricted or limited. Businesses will experience interruption in availability of applications and various procedures related to operations until at least June 1^st.

• National Institute of Migration Immigration (INM):  until June 1^st
• Mexican Social Security Institute (IMSS): until June 1^st
• Tax Administration Service (SAT): until June 1^st

 

Annex I.

 

Mexico’s industrial north that shares a border with the United States has seen some of the greatest impact from the virus:

 

• Baja California  505 cases
• Nuevo León 159 cases
• Sinaloa  327 cases
• Tabasco  233 cases

 

Mexico’s industrial centers have seen similar figures:

 

• Puebla 305 cases
• State of México 695 cases
• México City 1,828 cases

 

Relatively few cases have been seen in places that are unexpected such as:

 

• Jalisco 178 cases
• Guanajuato 96 cases
• Querétaro  76 cases

 

Annex II.

 

Below it’s a list of the most relevant states benefits and Government stimulus activities individually:

 

Nuevo León

 

• Exemption for businessmen from paying the Water and Drainage service for one month.
• Consideration is being given to reducing or temporarily eliminating the Payroll Tax.
• It is planned to grant financing to Micro, Small and Medium Businesses.
• It is planned to grant benefits in relation to the Lodging Tax.

 

Jalisco

 

• Emerging Plan for the Protection of the Employment and Income of People of $1,000 million pesos and which is divided into 3 sub-programs:
• $450 million pesos for Micro, Small and Medium Businesses, with an approach directly related to maintaining jobs.
• $150 million pesos to protect income of corn producers (Fideicomiso Maicero).
• $400 million pesos for people with informal economic activities (80,000 supports of $5,000).
• At the municipal level, financing will be granted to Micro, Small and Medium Businesses, extensions and grace periods in current credits, forgiveness of payments and renewal of permits for street vendors and businesses in open markets, as well as extension of the period for the payment of endorsement of licenses.

 

 Mexico City

 

• It is planned to grant 50,000 micro-credits of $10,000 each for microenterprises, with 0% interest, 4 months’ grace and payable over 2 years.

 

Baja California

 

• At the moment, fiscal supports and incentives are not being granted to the business sector.

 

State of México

• 50% discount on Payroll Tax during the month of April for companies with up to 50 workers.
• $300 million pesos for farmers in the field to purchase supplies, equipment, fertilizer and baskets for self-consumption.
• $200 million pesos for productive projects, micro credits at zero rate and with a grace period of four months.
• Line of credit for $300 million pesos to finance small and medium-sized companies.

 

   Querétaro

• A stimulus plan is being worked on, but there is still nothing concrete.

 

Annex III.

 

CORONAVIRUS CASES IN MEXICO APRIL 17^th, 2020

 

STATE	CORONAVIRUS CASES	LOSSES
Aguascalientes	71	2
Baja California	505	31
Baja California Sur	166	6
Campeche	45	3
Coahuila	214	15
Ciudad de México	1,828	110
Chiapas	54	3
Chihuahua	108	23
Colima	7	0
Durango	17	4
Estado de México	695	46
Guanajuato	96	6
Guerrero	100	9
Hidalgo	67	12
Jalisco	178	11
Michoacán	84	13
Morelos	58	10
Nayarit	29	5
Nuevo León	159	5
Oaxaca	53	5
Puebla	305	32
Querétaro	76	5
Quintana Roo	276	28
San Luis Potosí	56	4
Sinaloa	327	40
Sonora	89	10
Tabasco	233	25
Tamaulipas	78	4
Tlaxcala	62	4
Veracruz	112	6
Yucatán	131	7
Zacatecas	18	2

 

Annex IV.

Essential economic activities not subject to closure

• Distribution and sale of energy.
• Gas and gas stations.
• Generation and distribution of drinking water.
• Food and non-alcoholic beverages industry.
• Food markets, supermarkets, self-service stores, grocery and prepared food sales.
• Passenger and cargo transportation services.
• Agricultural, fishing and livestock production.
• Agroindustry.
• Chemical industry.
• Cleaning products.
• Hardware stores.
• Courier services.
• Guards in private security tasks.
• Kindergarten and children nurseries.
• Nursing homes and stays for older adults.
• Shelters and care centers for women victims of violence, their daughters and sons.
• Telecommunications and information media.
• Private emergency services.
• Funeral and burial services.
• Storage and cold chain services for essential supplies.
• Logistics (airports, ports and railways).
• Activities necessary for the conservation, maintenance and repair of critical infrastructure that ensures the production and distribution of essential services; namely: (a) drinking water, (b) electric power, (c) gas, (d) oil, (e) gasoline, (f) jet fuel, (g) basic sanitation, (h) public transportation, (i) hospital and medical infrastructure, among others.