Mexico: an economic basket case set to turn around

Mexico's economy shrank by 8.5% last year and has suffered one of the world’s worst Covid-19 death tolls. But things could be looking up.

Is Mexico a bargain or a basket case? Latin America’s second-biggest economy shrank by 8.5% last year and has suffered one of the world’s worst Covid-19 death tolls. Yet now it stands to gain from two key trends, Mathieu Savary of BCA Research told Barron’s.

Firstly, Joe Biden’s stimulus-fuelled boom is excellent news for the country’s manufacturing and tourism sectors: more than three-quarters of Mexican exports go to its northern neighbour. Secondly, a renewed focus on simplifying and “reshoring” global supply chains away from China could mean that corporate investment that once went to Asia is now directed towards Mexico. Local assets are now set to eclipse their emerging-market peers. 

On a cyclically adjusted price/earnings ratio of 18.6 the local market trades on a reasonable valuation. The country’s benchmark IPC stock index has gained 7.5% so far this year but is still down by 3% since President Andrés Manuel López Obrador (known as “AMLO”) was elected in July 2018. Poor management saw the economy contract during his first year in office. Then Covid-19 arrived. 

AMLO has scared investors away by tearing up contracts and passing protectionist laws to prop up Pemex, the ailing state oil firm, says The Economist. The result? Investment in Mexico has fallen to the lowest level as a share of GDP for a quarter of a century. He has also overseen one of the world’s most inept pandemic responses: 47% of voters say AMLO is managing the economy badly, and most think he has failed to get a handle on organised crime. Yet so far he has managed to duck responsibility; his party leads in polls heading into mid-term elections in June. 

Voters elected AMLO because they were fed up with decades of “corrupt dealings between Mexico’s narrow oligarchy of billionaires and the political class”, says Nathaniel Parish Flannery on Forbes.com. Sometimes described as a left-wing populist and noted for his “messiah” complex and intolerance of criticism, the real question is whether AMLO wants to become “Latin America’s next autocrat”. 

The president’s belief system amounts to “ideological necrophilia”: he is attracted to ideologies that have been tried, and have failed, “an infinite number of times” , Moisés Naím of the Carnegie Endowment for International Peace told Jude Webber and Michael Stott in the Financial Times. AMLO is “deeply in love with bad ideas”. But for all of AMLO’s denunciations of critics as “lackeys of the rich” he also has an “unlikely obsession with fiscal prudence”. He refused to turn on the spending taps last year in response to the crisis. Mexico is unlikely to go completely “off the rails like Venezuela”, but expect a “bumpy ride”. 

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