- How will Mexico’s «two economies» react to the Covid economy?
- What are the countercyclical opportunities in Mexico, both for Mexican companies and for foreign companies exporting to Mexico?
Our screens are whirling with webinars these days. Today, thanks to ANZMEX, the Australia New Zealand Mexico Business Chamber, we attended a talk with the Economist magazine’s Mexico Bureau Chief Richard Ensor. Some of the things he spoke of had been floating around our minds as well.
Let’s first alight on a fundamental of Mexico, which is its «exposure» to the United States and global economies. Macroeconomic shifts tend to buck Mexico in the same direction as the US goes, but further. We can generally think that whatever the US does on a graph right now, Mexico will do it in parallel, but more extremely.
- 80% of Mexico’s exports, which are primarily machinery/vehicles, machine/vehicle parts, produce, and alcohol are sold to the United States.
- Tourism is perhaps Mexico’s most important export industry, which is not only battered by the US and global market in this case, but the pandemic situation as a whole.
- Remittances, another important source of income for Mexico, come from Mexicans living abroad.
- The suffering of all these activities then converges, on this fact of Mexico’s exposure, to drive the value of the peso down.
Next up, there’s the systemic factor of Mexico’s two economies. This was a «featured insight» of the consulting firm Mackenzie several years ago, who wrote on the subject well. The concept is a familiar one in Mexican business communities: there’s the «developed» Mexico of 700 Starbucks and the «developing» Mexico that buys piloncillo-infused coffee on the street corner.
Essentially a very small but pronounced portion of the Mexican economy, almost entirely transnational companies, experienced about China-velocity YoY growth since 2010; the rest, over 90%, experienced negative growth each year on average. That netted out nationally to growth averaging between 0 and 3% those years, roughly. Inequality, traditionalism, neoliberalism, mom and pops, family offices, transnationals, holding companies, process management, innovation, investment, and access to risk management support, or lack thereof, are all themes here.
So we need to understand how the two Mexicos will play into each other during the economic fallout of the pandemic. On one hand, transnational Mexico that had liquid assets in-country seems to have sucked them out on and around the week of March 9. Many of its employees can maintain reasonable productivity via remote work, though not all. (See: tourism, manufacturing.)
On the other hand, traditional Mexico does not generally borrow from banks or otherwise buy into financial abstractions. It has a lot of informal workers, and it often lives day-to-day or week-to-week. While the Mexican government has issued a requirement that no employers let go of their workers in the pandemic, that is tough to enforce for companies that aren’t on the books, and much tougher for companies that go out of business.
Overseeing this interplay is the Mexican federal administration.
- President AMLO seems to be willing to let the big businesses («developed» Mexico) fall on their faces if necessary, perhaps because he realizes they ultimately will catch themselves. Also because they do not generally employ the most vulnerable in Mexico.
- The government has offered a loan to the approximately 4 in 10 businesses nationwide that happen to be microcompanies (under 10 employees), 25 thousand pesos each. That amount means very little to a lot of the eligible and very much to many more.
- Companies in the middle (10-300 employees) are likely to seek support from banks, which as mentioned on today’s call, may be according to AMLO’s goals.
The President is a spendthrift and would prefer the companies who can do so hold debt instead of the government. If AMLO really does resent neoliberal policies as he claims, this is an odd way of showing it. Again, though, anyone in a position to use the banking system is not within the President’s definition of vulnerable. Starbucks problems. From our perspective, this laissez-faire attitude could, as a silver lining, stimulate the underdeveloped financial services market for small and medium companies.
Which brings us back to our key interest here, both for Mexican companies and for our international clients that export into Mexico. Those who are only lightly damaged, or are perhaps even at an advantage, in the positioning of their services and products during these shocks and aftershocks. Even the companies with severe damage but still might pivot or reinvent themselves. For them, are there any constructive opportunities in the next 6-24 months? And what are the opportunities?
The government, in its austerity and prioritization of the unbanked, seems unlikely to step in with competing investment opportunities. Committed as it is to not spending money on this crisis, it could potentially brand its already-planned infrastructure projects (the Tren Maya, the Sta. Lucia Airport, and the Dos Bocas Refinery) as its stimulus package. In that sense, short of projects that require extensive federal permitting, private capital investors may meet a very thirsty, and open, market in Mexico.
Today’s conference was under the Chatham House Rule, but the academic in us would feel remiss not to attribute Mr. Ensor here on a point he mentioned more than once: During this massive disruption driven by the SARS-Cov2 virus, some of the things that were impossible three months ago are becoming possible.
We were thinking the same, and we continue to work on this very point for several of our clients. Particularly with logistics, supply chains and digital transformation/Industry 4.0, we believe there are many Mexican companies that are also seeking to seize on the opportunities for change.