The Covid-19 pandemic exacerbated an already weak economic situation in Mexico and caused a severe economic contraction of more than 8% in 2020, with only a weak recovery expected in 2021, according to credit insurers. As a result, bankruptcies in the private sector are forecast to rise.
Trade credit insurer Atradius said Mexico was already in a mild recession going into 2020, due to fiscal tightening and falling investments on the back of rising political uncertainty.
Atradius said Mexico’s high vulnerability to the effects of the pandemic stem from its relatively weak healthcare system, the close synchronisation of its economy with the US business cycle (making it more susceptible to external shocks) and its relatively high dependence on the services sector (including tourism). The automobile sector, Mexico’s leading source of exports, suffered from a sharp fall in external demand and severe supply chain disruptions.
Atradius rates chemicals/pharmaceuticals, electronics/ICT, financial services and food most positively, each given a ‘fair’ outlook with an average credit risk and expected stable business performance. At the other end of the scale, Atradius gives the construction, machines/engineering and steel industries a ‘bleak’ outlook, with a poor credit risk situation and weak business performance.
Meanwhile, the agriculture, automotive/transport, consumer durables, metals, oil/gas, paper, services and textiles industries have a ‘poor’ forecast, with a relatively high credit risk situation and business performance in these sectors below long-term trends.
Darren Power, head of commercial for Atradius UK’s northern region, said: “Mexico is reported to be a trillion-dollar economy with a young and burgeoning population. As businesses consider new markets outside of the EU, Mexico therefore has an understandable appeal within the Latin America region. Of course, like all markets around the world, the Covid-19 pandemic has taken its toll on Mexico and consequently creates new risks for businesses to navigate. During this time of uncertainty, a constant flow of real-time information is critical to prepare for changes within the wider market and the subsequent knock-on impacts at an individual business level. A cautious and flexible approach, together with protection against the risk of non-payment, is essential.”
Atradius noted that the fiscal policy support has been very limited so far, at just 1% of GDP, as the government remains committed to fiscal discipline for the time being. Due to the meagre fiscal support and comparatively tighter monetary policy, the recovery will be protracted and GDP will only return to its pre-pandemic level in 2024. In 2021, GDP is forecast to partially rebound, increasing by 5.6%, said Atradius.
European credit insurance group Credendo said that ongoing Covid-19 pandemic and government policies are hurting private businesses. It said an economic recovery of 4.3% and 2.5% is expected for Mexico in 2021 and 2022, respectively. “This is quite weak given the deep recession last year, and a weak performance compared with the world’s expected average real GDP growth rate. Furthermore, this recovery will be mostly due to the impact of a sizeable stimulus package in the US, which implies higher economic growth in the US and better exports for Mexico and stronger remittances,” said Credendo.
Jolyn Debuysscher, an analyst at Credendo, said: “Measures to stem the Covid-19 outbreak, mainly involving localised lockdowns and restrictions, are hurting many businesses in Mexico. On top of that, government support for the private sector is extremely limited. Mexico has only spent an additional 0.7% of GDP on tackling the Covid-19 crisis – comprising mainly of loans to poorer households – compared to 8% of GDP in Brazil and an average of 4% of GDP for emerging markets. Furthermore, the government of President Andrés Manuel López Obrador is making decisions that could hurt the private sector even further: it favours a greater state role in the economy and won’t hesitate to revise contracts and impose new rules and controls. For these reasons, further bankruptcies and job losses can be expected in Mexico’s private sector in the coming months.”