October 7, 2020

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MEXICO: AMLO Rejects IMF Recipes but Agrees to Modest Infrastructure Stimulus

BY Nicholas Watson

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( 3 mins)

The concluding statement of an International Monetary Fund (IMF) Article IV mission published yesterday, 6 October, reaffirms existing concerns over the lack of countercyclical policies and, more specifically, the misguided direction of energy policy. In fact, the unusually direct statement from the IMF reads like the antithesis of President Andres Manuel Lopez Obrador (AMLO)’s economic vision. The finance ministry (SHCP) duly dismissed the IMF recommendations, which are of course non-binding. Judging from AMLO’s critical reaction in today’s morning press conference, he will look to exploit the IMF statement for political ends. Meanwhile, stimulus measures will remain meager, with public-private infrastructure plans announced on 5 October unlikely to spur economic reactivation or fix fragile business confidence.

According to the IMF, Mexico has the fiscal space and market access capacity to put in place a more comprehensive fiscal stimulus package of up to 3.5% of GDP. In practice, however, countercyclical measures are likely to remain limited in scope. The plan announced on 5 October involves 39 infrastructure projects worth roughly USD 14bn to 2022, or just over 1% of GDP. It is true that more infrastructure projects are set to be unveiled in November but these are unlikely on their own to spur a strong recovery. The IMF forecasts a 9% contraction this year, followed by growth of 3.4% in 2021 and “close to 2% thereafter”, which would make Mexico a global laggard in the post-pandemic recovery.

Energy policy comes in for particular criticism in the IMF statement. However, the Fund’s recommendations for state oil company Pemex to focus production in profitable fields, pull back from plans to increase refining output, postpone construction of the Dos Bocas refinery, and partner with private firms, run entirely counter to AMLO’s vision. Indeed, the bulk of the funds directed towards energy projects announced on Monday involve strengthening Pemex’s downstream capabilities.

In turn, government finances continue to be impacted by AMLO’s commitment to support Pemex (even though the government’s room to do so will be much more constrained next year). The most viable option to reduce the burden on government finances would be to undertake a fiscal reform, though AMLO repeatedly rules this out; SHCP under-secretary Gabriel Yorio – initially charged with delivering the government reaction to the IMF statement – was also quick to rule it out. Barring a flare-up in the Covid-19 outbreak that significantly complicates the economic outlook, any fiscal reform remains highly unlikely before the 2021 mid-term and state elections.

The 5 October announcements do represent a sliver of positive news about the scope for public-private partnerships, even if some are essentially re-heated from a previous announcement late last year, and seven are already underway. However, many investors and business figures express skepticism as to whether the projects will get off the ground, while concerns over the lack of regulatory stability persist. Whether the announcements mark the beginning of a new, more positive dynamic in AMLO’s relations with the private sector is doubtful given the depth of investor uncertainty. As if to make this point, after the announcements were made, AMLO embarked on another diatribe against neoliberalism and his critics in the press.

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