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The Impact of Coronavirus Pandemic on the Mexican Economy

Updated on April 08, 2020 12:00 am
Mexico

The policies of nationwide lockdown enforced in many countries to slow down the spread of the deadly Coronavirus virus are having a significant impact on daily economic activity. As the world heads into a global recession due to the COVID-19 pandemic, developing countries remain the most vulnerable. 

On the 11th of March, 2020, the World Health Organization (WHO) declared the COVID-19 outbreak a global pandemic. Now, it has spread to over 180 countries and territories. The infected number of COVID19 confirmed cases has already crossed 1.5 million globally and killed more than 87,000 people based on the data compiled by Johns Hopkins University.

With the COVID-19 vaccine still in development, the only known effective measure available is to practice social distancing and self-isolation to prevent the further spread of the highly contagious virus.

The Fight between Coronavirus, Mexicans, and the Mexican Government

By the end of February 2020, coronavirus had reportedly entered Latin America. The outbreak had already caused serious damage to Europe, Iran and the US after it began in Wuhan, China in December 2019.

Mexico had its first COVID-19 confirmed case on February 28. As of this writing, Mexico has 2,785 confirmed coronavirus cases and 141 deaths. Health experts say the infected number could be higher as testing has not been conducted extensively due to limited test kits.

Mexican government's response to the pandemic has been heavily criticized for taking the looming threat of the disease very lightly. In the earlier days of the pandemic, the president Andres Manuel Lopez Obrador conducted rallies and encouraged people to remain calm and told them to go to restaurants and continue shopping. And broke his own travel regulations and went to meet the mother of the notorious drug kingpin Joaquin El Chapo Guzman.

Although initially, Mexico's wealthier section of the society were the ones getting infected by the virus. The working-class without access to healthcare are the most vulnerable. In addition to the lack of economic activity due to the lockdown, the healthcare system of Mexico was already overwhelmed and underfunded even before the pandemic. The total budget of the Mexican government for healthcare is only $5.4 billion for public health, which is 2.5 % of the GDP.

For a population of 130 million people, there are only 356 Intensive Care Units and only 5,523 ventilators for the whole country dedicated to COVID19 as per the data by Secretaría de Salud, the Ministry of Health of Mexico.

Infrastructure


Experts say that the Mexican government missed the crucial window of containing the virus spread by sending wrong messages and weak public health response. Eventual protests by the doctors and health workers have finally led the government to promise a $150 million sanction to hire 40,000 medical professionals and procure medical supplies.

Mexican health officials declared a public health emergency. The emergency measures are in place from March 30 to April 30, 2020. The health ministry also took the initiative to create a cartoon superhero Susana Distancia, which means "a healthy distance" to remind people on social distancing and hygiene to contain the spread of coronavirus.

Social Distancing


 

CLOSURE OF MEXICO-US BORDER AND THE MEXICO'S ECONOMY

On March 20, the United States and Mexico agreed to restrict non-essential travel over their shared border, US Secretary of State Mike Pompeo said at a White House news briefing. 

According to the Office of United States Trade Representative, an estimate of $671.1 billion cross-border trade was accounted for between Mexico and the US in 2018. The US imports from Mexico were $371.9 billion and the U.S. goods and services trade deficit with Mexico was $72.7 billion. 

The closing of the border will have an impact on both the US and Mexican economies. To give you an idea about its impact on the US economy, let's go back to November 2019 when U.S officials closed one border crossing in response to the migrant caravan that rushed to the border. It cost the retailers and local merchants in San Diego an estimated $5.3 million in lost sales in just a few hours.

The economics of Auto, Avocado, and Cancun

Auto: The top import category by the US were vehicles ($93 billion). The Mexican Auto sector is responsible for 3.6 million jobs, supplying or assembling for major US automakers such as Ford, General Motors, and Chrysler. All factories including the auto sector have stopped production owing to the pandemic. What is going to happen to that 3.6 million people? 

Avocado: Another top import category by the US is agricultural products ($26 Billion). Leading categories include fresh vegetables ($5.9 billion), other fresh fruit ($5.8 billion), wine and beer ($3.6 billion). 

Not just Avocados, Mexico is the largest exporter of agricultural produce for the United States and employs 12.87% of the population. Although, agricultural products are considered an essential item and are still moving across the border. Many fear that further restrictions on the border will have severe consequences.

Cancun: The country's economy relies heavily on trade and tourism with the US and imposing restrictions on travel due to the coronavirus outbreak will disrupt people's lives dramatically. U.S. imports of services from Mexico were an estimated $25.8 billion in 2018 and the leading sector was Tourism.

 In 2017, Mexico Hosted 39 Million Tourists and earned $21 Billion. Over 10 million Mexicans live directly or indirectly from tourism. An estimated 1 in every 4 border jobs is directly tied to trade with Mexico. Disruptions in production chains, reduction in business travel and tourism and the coronavirus spread in Mexico will take a huge toll on the economy.

Even if Mexico has a relatively low count of COVID-19 cases as per the official data, its economy is getting affected with the US going on near-total lockdown. Mexico's economy is in trouble as Americans lose jobs and stay home. A recession in the US meant fewer demands for goods made in Mexico.

Free Falling Peso

Mexican Peso has been free-falling amidst the Coronavirus pandemic and the price war between Saudi Arabia and Russia. Mexico's central bank The Bank of Mexico (Banxico) has further cut down its interest rate to 6.5% to ease the pressure.

However, the ongoing coronavirus outbreak, declining demands and manufacturing output, dropping of crude oil prices, US restrictions and ban on travel have been brutal on MXN. The Mexican peso has been performing worse, now trading over 24 MXN to the USD. Subscribe to CompareRemit's exchange rate alerts.

Last year the country received $36 billion from Mexican in the US. They have been also hit by the recession in the US economy due to this outbreak. The reduction in remittance from the US and the unemployment crisis in the region will be an economic disaster.

The Future

Mexican economy ranks 11th in the world but almost 50 percent live below the poverty line. The economic crisis due to the global coronavirus outbreak and the uncertainty surrounding the policies of Mexican President Lopez Obrador has led investors to pull away from their investment from the Mexican economy.

Millions of jobs lost, reduced economic activity, expected fall in crude production from state oil company Pemex triggered by the price war in the oil production industry, and reduced trade would have a long term effect on the Mexican economy.

Mexico's Real GDP Growth was forecasted to be 0.960 % in 2020 by the International Monetary Fund. Credit Suisse previously estimated that Mexico's real gross domestic product (GDP) would grow by 0.7% in 2020. The bank has since sharply lowered its forecast for Mexico's economic performance this year and now expects a 4.0% contraction.

Goldman Sachs expects a 1.6% to 7% contraction in the Mexican economy.

Barclays investment bank forecasts a contraction of 2% from a previous estimate for a 0.5% on GDP growth rate forecast.

In such an interconnected world, all of our economies are intertwined and the disruption is one economy that can send a ripple effect across the globe. As it happened after China shut down factories and restricted travel disrupting the global supply chains. As Wuhan, the epicenter of the pandemic opens its city and slowly starts getting back to normal, one can only hope that the road to recovery is quick.

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