U.S. Stimulus Is Delivering the Cash to Mexicans That AMLO Won’t

Andres Manuel Lopez Obrador came to power promising to make Mexico’s economy less dependent on its giant northern neighbor. His pandemic policies are having the opposite effect.

The Mexican president has run one of the world’s most austere budgets through the Covid-19 crisis, declining to borrow extra money as the economy slumped. The stimulus that prevented an even deeper recession, and is set to drive a rebound this year, is coming from the U.S. instead.

U.S. Stimulus Is Delivering the Cash to Mexicans That AMLO Won’t

Mexico has benefited in two key ways from the U.S. pandemic spending, which is set to pass $5 trillion with the Biden administration’s new bill.

Remittances surged to a record, as Mexican expats received stimulus checks and sent some of the money home. And exports also hit an all-time high, because the things Americans wanted to buy in the era of lockdowns and work-from-home –- like new televisions or computer gear –- were a good match for Mexico’s manufacturing industry.

The upshot is that U.S. stimulus added about 3.5 percentage points to Mexico’s gross domestic product in 2020 -- seven times as much as the fiscal measures taken by the country’s own government, according to JPMorgan Chase & Co. calculations. This year’s numbers may be similarly lopsided.

Two-Speed Recovery

That Mexico is having “any sort of recovery is precisely because of the stimulus package in the U.S.,” said Gabriel Lozano, JPMorgan’s chief Mexico economist. It “to some extent compensated for what wasn’t delivered from the government.”

What Lopez Obrador promised to deliver, before and after his election in 2018, was an economy with a stronger domestic engine that would make it less reliant on exports to the U.S. –- and one where the poor, agrarian south would get a fair share of the proceeds of growth. “We live in an interconnected, globalized world but we have to care for our own,” the president said in 2019.

What he’s presiding over right now is a two-speed recovery propped up by U.S. demand -- and skewed toward Mexico’s wealthier north, where most of the factories are.

U.S. Stimulus Is Delivering the Cash to Mexicans That AMLO Won’t

After last year’s 8.2% slump in GDP, the worst in more than a century, the domestic economy has been slow to recover and tourism remains hobbled by travel restrictions. But exports were up 5.5% in the fourth quarter from a year earlier.

By January, formal employment in the industrialized northern border states had more than recouped its pandemic losses, climbing 1.9% from a year earlier. In the rest of the country, it was down 3.9% -- with women taking the biggest hit.

Meanwhile, remittances reached $41 billion last year, about 4% of GDP. Almost all of that money came from the U.S. Lopez Obrador hailed Mexicans living there as “ heroes” for their financial support.

The increased economic reliance on the U.S. risks becoming entrenched, according to Jessica Roldan, chief economist at local brokerage Finamex.

“We’ll keep depending on what happens externally to be able to grow,” she said. “It’s like a bicycle that doesn’t have enough power to keep going forward.”

U.S. Stimulus Is Delivering the Cash to Mexicans That AMLO Won’t

By standard measures, Mexico has room to provide more budget support for its own economy. Its national debt is moderate by emerging-market standards at 52% of GDP, and with an investment-grade credit rating it can sell 10-year dollar bonds at around 3%.

Lopez Obrador has allocated some extra cash for investments, especially in the state oil company, and social programs. But in general he’s outlined a philosophy completely at odds with the borrow-and-spend policies that have become orthodoxy for much of the world in the pandemic.

The president, known for his frugal lifestyle, says his brand of austerity is focused on trimming wasteful spending by other public officials. He invokes past bailouts -– when he says politicians ran up public debt to help private cronies –- as examples of the kind of corruption his government will fight.

The hawkish approach has worked in its own terms, making Mexico one of few countries to post a budget surplus before interest payments in 2020. Many economists say that’s come at the price of a deeper slump, and a slower recovery, than was necessary.

‘Much Stronger’

There’s not much sign that Mexico’s economic underperformance has hurt Lopez Obrador’s standing with the public. His approval rating remains above 60%. Much of his support is concentrated among workers in the informal economy, who have seen social programs expand earlier in Lopez Obrador’s presidency and have low expectations for other government help.

Deputy central bank Governor Gerardo Esquivel, a Lopez Obrador appointee, says there’ll be a payoff in the longer term for the government’s budget restraint. Mexico “will exit the pandemic much stronger than other emerging economies,” he said in an interview.

Esquivel acknowledges that Mexico is getting plenty of help from its northern neighbor. External demand “really helped stop the contraction from being so drastic in 2020,” he said. And that should remain the case into 2021 – partly thanks to “the very important stimulus program” in the U.S.

U.S. Stimulus Is Delivering the Cash to Mexicans That AMLO Won’t

That $1.9 trillion plan arrives at a convenient time for Mexico, where analysts expect the economy to shrink again in the first quarter.

But the government would be foolish to bet on a continued bailout from U.S. growth, because the conditions that led to surging demand for goods manufactured in Mexico won’t last, according to Alonso Cervera, chief Latin America economist at Credit Suisse AG.

As vaccines roll out and the economy reopens, Mexico’s tourism industry may get a boost, but overall “people in the U.S. will be demanding services -- restaurants, museums, concerts, sports events, travel -- and in that case, Mexico won’t participate significantly,” he said. “We need to be mindful of that.”

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