As World Spends Heavily on Virus Fight, Mexico’s Leader Bets on Austerity

(Bloomberg) --

Governments everywhere are pouring money into their economies to cushion the blow from the coronavirus. Mexico’s president is almost alone in bucking that trend.

Andres Manuel Lopez Obrador was elected on a pledge to fight inequality and corruption. He insists that past bailouts made those problems worse, as Mexico’s politicians racked up public debt in order to take care of cronies.That’s one reason why Lopez Obrador has run tight budgets since he took office in 2018. As the virus spread through Mexico in March and early April, shutting down most of the economy, business leaders were hoping he would relent. They watched in horror as the president stuck with his austerity program.

“Everyone is supporting their private sectors, their industries,” said Francisco Cervantes, president of industrial chamber Concamin. “Not here in Mexico. They have ignored us.”Mexico’s anti-virus budget so far looks set to be the smallest in Latin America, according to International Monetary Fund calculations. Total measures announced as of last week were worth around 1% of GDP, S&P Global Ratings said in a report.

MEXICO INSIGHT: Containment and Constraints to Drag Down Growth

‘Repair the Damage’

The limited government response means “it will take longer to repair the damage done” to jobs and investment, S&P Global Ratings analyst Elijah Oliveros-Rosen said last week. He said Latin American peers like Chile and Peru, which have announced measures worth 7% and 12% of gross domestic product respectively, will enjoy stronger recoveries.

While Lopez Obrador comes from a leftist tradition, he has proven to be a fiscal conservative. Even when he’s promised more cash for social programs, the president sought cuts elsewhere, including to the salaries of public officials.

Again and again, the president invoked Mexico’s debt crisis of the 1980s, and the currency crash and bank bailout of the following decade, as examples of the traps he’s determined to avoid. Some analysts say his fixation with those episodes stops him from grasping today’s very different threat.While the pandemic’s effects are everywhere, the biggest blow is falling not on financial institutions but on small businesses -- and on millions of Mexican workers who are at risk of losing their jobs.“We’re not in a financial crisis, we’re not in an exchange-rate crisis,” said Santiago Levy, who was head of Mexico’s social security institute last decade. “We’re in a health and economic crisis. It’s a different situation. Our views of the past should not fog our ability to understand this crisis.”

‘Change the Model’

About 350,000 Mexicans were fired between mid-March and early April -- and that’s just in the formal sector, where losses could easily exceed 1 million, according to Cervantes. More than half of the country’s workforce is in the informal economy of street merchants and unregistered businesses.Employers are seeking the kind of assistance, like deferrals of tax payments and social security dues, that firms are getting in other countries. Lopez Obrador has instead demanded that big companies cough up billions of pesos in tax debts.The president won election in a landslide two years ago, wiping out the established political parties and promising to govern in the interests of Mexico’s poor. The epidemic appears to have deepened his zeal to transform the country.“We think it is time to change the model,” he told reporters this week. Of the 1990s bank rescue, he said that it “turned the debts of a few into public debt, which we are all still paying.”Ordinarily, investors might be expected to welcome an administration committed to tight budgets. But the currency sank in March and is trading close to a record low. Credit rating companies have downgraded Mexico on the prospect of a severe recession, as well as tumbling oil prices.

Many experts say that fiscal inaction is adding to the risks for the economy. That could expose Lopez Obrador, who still gets high poll ratings, to a political backlash, according to Viri Rios, a Mexican political analyst. “If he continues along this path, his actions may lead to the empowerment of the opposition and the weakening of his own party.”

Presidential spokesman Jesus Ramirez said while things could change if the recession turns out being worse than the president expects, for now there’s no plan to raise debt levels or reduce taxes.

“We’d take measures at that time, we still don’t know what,” he said. “In our country we have different experiences, like 1994, when there was a rescue but the last people who benefited were the under-privileged.”

‘Wasted or Stolen’

Some of Lopez Obrador’s allies are hinting it’s time for a bigger rescue effort, even at the cost of additional borrowing. Gerardo Esquivel, a campaign adviser to the president who was appointed to the central bank’s monetary policy board after he won, said last week said the government needed to spend about 1% more of GDP to help the unemployed.The leader of Lopez Obrador’s Morena Party, Alfonso Ramirez Cuellar, has his own bad memories of the banking crisis of the mid-1990s, when he led a group of rural debtors. He says Lopez Obrador has “been doing everything possible to avoid indebting the country,” but predicts that the president will come around to the need for more spending.“The money won’t be thrown in the trash, it won’t be wasted or stolen by officials or businessmen,” Ramirez Cuellar said. “This time, it’s going to be well invested.”Last week there were signs that Lopez Obrador is ready to loosen the purse strings. He promised more loans worth around $1,000 for small businesses, including those operating in the informal economy.

On Thursday, the government published a decree where it said it would channel 623 billion pesos ($25 billion) from budget savings into loans for three million people and social programs for the poor. It also said it will move forward with two contested projects, an $8 billion oil refinery and a tourist train on the Yucatan peninsula. The decree said the government would create 2 million jobs and protect “70% of the homes of the republic,” without providing details.

Marco Oviedo, an economist at Barclays, said the funds were not new spending but the reallocation of monies from projected savings. This “implies a 75% reduction in some components, which I believe is quite unrealistic,” he said, adding that the job creation decree was “just wishful thinking.”Oscar Gonzalez, who owns a spray-painting business in the northern industrial city of Monterrey, says Lopez Obrador is more interested in scoring political points by attacking businessmen than in understanding the crisis they’ve been plunged into.Gonzalez lost about half his orders last month when the auto industry was shuttered. He has sent 250 of his 650 workers home, as he maintains some production related to essential industries. He hasn’t fired any of his employees yet. But he isn’t sure how much longer he can keep going without government help.And he’s not sure, under Lopez Obrador, if any will arrive.“He is taking advantage of the situation to divide us instead of uniting us as a country,” says Gonzalez. “His reality is very different from the reality that companies face.”

(Adds spokesman comments from 17th paragraph, details on government spending plan in 23rd paragraph)

For more articles like this, please visit us at bloomberg.com

Subscribe now to stay ahead with the most trusted business news source.

©2020 Bloomberg L.P.