Credit: UnsplashMexican Economy Left Vulnerable Before COVID-19
April 6, 2020Real Estate
Mexico’s confirmed COVID-19 cases are doubling by the day, businesses are closed and people are working from home. Did Mexico learn from Spain and Italy’s mistakes as to how to confront the coronavirus pandemic? The last weeks have hit the Mexican economy and the health of its citizens, but just how severe will it get?
GRI Club Real Estate Members gathered together virtually during last week’s eMeeting to have a clearer understanding of the effects the industry is feeling from the COVID-19 pandemic. Guillermo Aboumrad, Chief Economist of Santander Mexico, shared his economic analysis of how the Mexican economy will be impacted by the COVID-19 crisis and what factors increased its vulnerability with more than 100 real estate investors, developers and experts.
What happened in 2019 that increased the country’s vulnerability to COVID-19?
Mexico’s fight against corruption placed all private contracts, concessions, permits and purchases under the microscope, affecting not only the players that were directly involved but consequently tainting the market with uncertainty that impacted private sector investments and overall private consumption. This led to capital flight, pushing some companies to invest their money and develop their projects elsewhere.
The government also adopted a fiscal austerity policy that when combined with the fight against corruption has weakened the national healthcare sector. The sector was hurt by a slash in public spending on the purchase of new equipment, medicine and on the hiring of personnel. The Mexican government declared COVID-19 a health emergency on March 30, stopping all non-essential labors as part of Phase 2 and on April 1 presented new measures to cope with the pandemic. The question that remains: will it be too late?
Apart from the austerity policy, the government decided to implement a fiscal reform to raise more money to save PEMEX (but for 2022 after the midterm elections), rather than inviting the private sector, and taking a complete U turn with the ratification of the Energy Reform implemented by the previous administration. This, in turn, generated further uncertainty in the market. In addition, the decision to cancel the Constellation Plant in Baja California may suggest that the government has no intention of changing course, meaning obtaining more debt, rescuing banks, nor the private sector, and that the National Energy Infrastructure Plan that will be soon released, will not include farm-outs.
Is Mexico’s Health Sector Ready to Face COVID-19?
As Mexico’s confirmed COVID-19 cases continue to climb, more questions are rising as to the country’s capacity to take care of an ill population. Aboumrad explained that as of April 2, the country has 1,215 confirmed cases and 29 deaths. Nevertheless, these not so elevated figures could be attributed to the private sector's decision to cancel mass events and close thousands of bars, restaurants and offices, and sending people to work from home before the government’s decision to implement Phase 2 of its contingency plan. “The first cases in Mexico appeared on February 28, indicating that we are approximately one month behind the experiences of Italy and Spain. Confirmed cases in both of these countries increased from 400 to 1,000 cases in just three days. So if Mexico adopts similar behaviors, we could reach more than 50,000 cases in a month’s time,” says Aboumrad.
At the moment, the government estimates that Mexico will have a maximum number of 250,000 cases during the pandemic cycle. “This is calculated in comparison with China’s population and number of cases in the Hubei province. These numbers would indicate that 24,500 would need to be hospitalized and 10.5 intensive healthcare units will be needed, as long as not all cases are at the same time and that there are no other illnesses that require them,” explains Aboumrad. “The approximate installed capacity of the intensive care units is 40-50 percent of those needed, considering private sector hospitals.
But Aboumrad explained that if we take into consideration the recent statistics from the US, which estimates approximately 150,000 deaths, and apply this proportionally to our population, the numbers could change drastically. “The patients that need intensive care units could be 10 times more than the estimated, perhaps even 100,000 or more with the maximum capacity of only 5,000 at a time and only 3,000 ventilators,” says Aboumrad.
According to the OECD, the Mexican healthcare system is insufficient given its deficit of recommended number of beds, doctors and nurses. The OECD recommends that for every 1,000 inhabitants, there are 4.7 beds, 3.4 doctors and 9 nurses. “Mexico currently has 1.5 beds, 2.4 doctors and 2.8 nurses per every 1,000 citizens. The austerity measures taken in the last year have made a significant impact on the healthcare system’s budget, leaving the country low on doctors and nurses, which are now imperative to confront the crisis,” he says. “The fight against corruption has on the other hand halted the purchase of medicines and equipment, putting the system in this vulnerable position.”
Something to keep in mind is that over half of the workforce is part of the informal sector, which must continue working as they live from their daily earnings. They are the ones that are at most risk of contracting the virus. “The government recently announced a program to provide the vulnerable population with loans, but the entire program represents only 0.1 percent of the GDP,” he says. “Although the government has adopted a tight spending policy to not increase the country’s debt, with the drop in tax and petroleum revenues, it could take the country’s debt from 44.9 percent to 52.1 percent according to the pre-criterias document that was just released.”
Mexico’s Problem with Black Gold
PEMEX has been battling to stay afloat for quite some time now, and has recently been downgraded by agencies. Aboumrad explains that PEMEX has been impacted by the price of the export mix that reached US$10.61 per barrel last week. This level compares unfavorably with the average at US$49.00 per barrel estimated on the 2020 Federal Budget. The 2020 Federal Budget estimated that PEMEX would produce 1.95 mbd and that the country would experience a 2.0 percent GDP growth rate. “But when adjusted to a more conservative budget,1.85 mbd and -3.9 percent GDP growth, like the government just did, the country would have to use the money from the Stabilization Fund that currently has a balance of MX$160 billion. Leaving only MX$30,000 in the fund.” According to Aboumrad, the money from the Stabilization Fund would be used to finance part of the increase in the traditional budget deficit that will increase from -2.1 percent of GDP to -3.3 percent. “But due to the drop in oil prices, PEMEX income would drop by about US$8 billion,” he says.
But how will oil prices impact the economy or the country’s ability to face COVID-19?
“We believe that if the public sector has less revenue, it could translate to a decrease in public sector investment. Particularly impacting PEMEX’s capital expenditure since it has been low and has been the rating agencies’ biggest worry as it would endanger the country’s medium term production goals. As well as a downgrade below investment grade in PEMEX’s debt,” he says. “This is the reason why the conservative members on the Banxico board have been worried. The medium-term risk (before the recent collapse of the oil price) slowly deteriorates Mexico’s risk premiums, which is why Banxico is not as eager to alleviate a restrictive monetary policy.”
Mexico’s Inevitable Economic Recession
The country’s delicate situation will inevitably lead to a recession, but the question on everybody’s mind is: how big and how bad will it be? The Mexican government estimates a -3.8 percent recession, but according to Aboumrad, our economy will drop at a higher rate than the US, given its greater fiscal and monetary capacity, along with the measures being taken to fight COVID-19’s impact. “We expect consecutive negative rates for the first two quarters of 2020. But the overall market consensus has changed in respect to the lack of synchronization of countries and the virus’ cycle. Before it was thought that the market would recover in V-form, but now it is in U-form. US forecasts have dropped from -2 percent to -4 percent, which means Mexico’s forecast would change from -4 percent to possibly -6 percent.”
The Vulnerabilities Will Leave Scars on the Mexican Economy
If the economy was to drop to those levels, the Mexican economy would require help from the national government to stay afloat. But according to Aboumrad, local banks and the private sector are worried that since the government has not given many signs that it would provide direct support to the private sector and banks, and if that were the case, there would be great tension in the sector.
“In our opinion, once the dust settles, Mexico’s fiscal vulnerabilities will be exposed by the crisis and it would leave scars in the shape of a more steep yield curve. The Mexican peso could not bounce back to being at MX$18.5 per dollar, and perhaps instead settle at MX$21,” says Aboumrad.
Aboumrad explains that previous to the crisis, the market had an overweight mexican peso and local bonds due to the high nominal rate and the carry trade that the mexican markets offered, despite the economy’s vulnerability. “In our opinion, Banxico will try to maintain a restrictive monetary policy rate for the time being,” he says.
During the GRI Member discussion, investors and developers voted that 71 percent of their businesses were observing and holding off decision making at the moment. Those that were investing, are doing so with caution and are using structured instruments that were issued into the market long before. They believe that there will be good opportunities to invest, but heed that it must be done cautiously as it will be an act of magic, rather than financial.
Some members are feeling more pressure as their assets are in the hospitality sector. In Mexico, hotels have been paralized and the goal is to not fire anybody. Nevertheless, some members have had to close more than 50 percent of their hotel assets, and as soon as the guests leave, close the doors of remaining hotels. The light at the end of the tunnel seems farther away as they expect a rather long, U shaped recovery.
Multifamily and Industrial Continue Despite COVID-19
Some members agree that the multifamily sector is holding on. According to information from the Chinese markets, it has impacted over the sector’s ability to construct housing units, but the demand will continue and will put pressure on the supply.
When it comes to self-storage, members feel it will have good opportunities in the near future and it will follow similar trends. These may be the assets that suffer the least and will be able to recuperate the fastest as the 4Q20. From the perspective of members in industrial parks, they are revising their portafolios. Manufacturing and logistics remain active, but areas that depend heavily on the automotive sector, have experienced a slow down due to the close of various American and Mexican manufacturing plants. Yet, most have closed, not due to the crisis, but instead taking advantage of the time to give their plants maintenance. Although the sector remains active, the government has given the order to close and stop activity for the next 30 days, making members in the sector analyze operations to reactivate in the next 30-60 days.
Join the discussion and register for our next eMeetings here: griclub.org/emeetings
GRI Club Real Estate Members gathered together virtually during last week’s eMeeting to have a clearer understanding of the effects the industry is feeling from the COVID-19 pandemic. Guillermo Aboumrad, Chief Economist of Santander Mexico, shared his economic analysis of how the Mexican economy will be impacted by the COVID-19 crisis and what factors increased its vulnerability with more than 100 real estate investors, developers and experts.
Mexico’s Economic Vulnerabilities: Perspective of Guillermo Aboumrad, Chief Economist of Santander Mexico
Mexico’s economic performance dipped in 2019, leaving the country vulnerable to the crisis it is facing today. Aboumrad explained that COVID-19, accompanied by the drop in oil prices will hit the Mexican economy in various ways. From the offer side: the health system, supply chains and an economic downturn and from the demand side: fall in exports, delayed projects, drop in private consumption and PEMEX. Although in the last month Mexico has taken a hit, there were many factors in 2019 that increased the country’s vulnerability to an event such as this, Black Swan event or not.What happened in 2019 that increased the country’s vulnerability to COVID-19?
Mexico’s fight against corruption placed all private contracts, concessions, permits and purchases under the microscope, affecting not only the players that were directly involved but consequently tainting the market with uncertainty that impacted private sector investments and overall private consumption. This led to capital flight, pushing some companies to invest their money and develop their projects elsewhere.
The government also adopted a fiscal austerity policy that when combined with the fight against corruption has weakened the national healthcare sector. The sector was hurt by a slash in public spending on the purchase of new equipment, medicine and on the hiring of personnel. The Mexican government declared COVID-19 a health emergency on March 30, stopping all non-essential labors as part of Phase 2 and on April 1 presented new measures to cope with the pandemic. The question that remains: will it be too late?
Apart from the austerity policy, the government decided to implement a fiscal reform to raise more money to save PEMEX (but for 2022 after the midterm elections), rather than inviting the private sector, and taking a complete U turn with the ratification of the Energy Reform implemented by the previous administration. This, in turn, generated further uncertainty in the market. In addition, the decision to cancel the Constellation Plant in Baja California may suggest that the government has no intention of changing course, meaning obtaining more debt, rescuing banks, nor the private sector, and that the National Energy Infrastructure Plan that will be soon released, will not include farm-outs.
Is Mexico’s Health Sector Ready to Face COVID-19?
As Mexico’s confirmed COVID-19 cases continue to climb, more questions are rising as to the country’s capacity to take care of an ill population. Aboumrad explained that as of April 2, the country has 1,215 confirmed cases and 29 deaths. Nevertheless, these not so elevated figures could be attributed to the private sector's decision to cancel mass events and close thousands of bars, restaurants and offices, and sending people to work from home before the government’s decision to implement Phase 2 of its contingency plan. “The first cases in Mexico appeared on February 28, indicating that we are approximately one month behind the experiences of Italy and Spain. Confirmed cases in both of these countries increased from 400 to 1,000 cases in just three days. So if Mexico adopts similar behaviors, we could reach more than 50,000 cases in a month’s time,” says Aboumrad.
At the moment, the government estimates that Mexico will have a maximum number of 250,000 cases during the pandemic cycle. “This is calculated in comparison with China’s population and number of cases in the Hubei province. These numbers would indicate that 24,500 would need to be hospitalized and 10.5 intensive healthcare units will be needed, as long as not all cases are at the same time and that there are no other illnesses that require them,” explains Aboumrad. “The approximate installed capacity of the intensive care units is 40-50 percent of those needed, considering private sector hospitals.
But Aboumrad explained that if we take into consideration the recent statistics from the US, which estimates approximately 150,000 deaths, and apply this proportionally to our population, the numbers could change drastically. “The patients that need intensive care units could be 10 times more than the estimated, perhaps even 100,000 or more with the maximum capacity of only 5,000 at a time and only 3,000 ventilators,” says Aboumrad.
According to the OECD, the Mexican healthcare system is insufficient given its deficit of recommended number of beds, doctors and nurses. The OECD recommends that for every 1,000 inhabitants, there are 4.7 beds, 3.4 doctors and 9 nurses. “Mexico currently has 1.5 beds, 2.4 doctors and 2.8 nurses per every 1,000 citizens. The austerity measures taken in the last year have made a significant impact on the healthcare system’s budget, leaving the country low on doctors and nurses, which are now imperative to confront the crisis,” he says. “The fight against corruption has on the other hand halted the purchase of medicines and equipment, putting the system in this vulnerable position.”
Something to keep in mind is that over half of the workforce is part of the informal sector, which must continue working as they live from their daily earnings. They are the ones that are at most risk of contracting the virus. “The government recently announced a program to provide the vulnerable population with loans, but the entire program represents only 0.1 percent of the GDP,” he says. “Although the government has adopted a tight spending policy to not increase the country’s debt, with the drop in tax and petroleum revenues, it could take the country’s debt from 44.9 percent to 52.1 percent according to the pre-criterias document that was just released.”
Mexico’s Problem with Black Gold
PEMEX has been battling to stay afloat for quite some time now, and has recently been downgraded by agencies. Aboumrad explains that PEMEX has been impacted by the price of the export mix that reached US$10.61 per barrel last week. This level compares unfavorably with the average at US$49.00 per barrel estimated on the 2020 Federal Budget. The 2020 Federal Budget estimated that PEMEX would produce 1.95 mbd and that the country would experience a 2.0 percent GDP growth rate. “But when adjusted to a more conservative budget,1.85 mbd and -3.9 percent GDP growth, like the government just did, the country would have to use the money from the Stabilization Fund that currently has a balance of MX$160 billion. Leaving only MX$30,000 in the fund.” According to Aboumrad, the money from the Stabilization Fund would be used to finance part of the increase in the traditional budget deficit that will increase from -2.1 percent of GDP to -3.3 percent. “But due to the drop in oil prices, PEMEX income would drop by about US$8 billion,” he says.
But how will oil prices impact the economy or the country’s ability to face COVID-19?
“We believe that if the public sector has less revenue, it could translate to a decrease in public sector investment. Particularly impacting PEMEX’s capital expenditure since it has been low and has been the rating agencies’ biggest worry as it would endanger the country’s medium term production goals. As well as a downgrade below investment grade in PEMEX’s debt,” he says. “This is the reason why the conservative members on the Banxico board have been worried. The medium-term risk (before the recent collapse of the oil price) slowly deteriorates Mexico’s risk premiums, which is why Banxico is not as eager to alleviate a restrictive monetary policy.”
Mexico’s Inevitable Economic Recession
The country’s delicate situation will inevitably lead to a recession, but the question on everybody’s mind is: how big and how bad will it be? The Mexican government estimates a -3.8 percent recession, but according to Aboumrad, our economy will drop at a higher rate than the US, given its greater fiscal and monetary capacity, along with the measures being taken to fight COVID-19’s impact. “We expect consecutive negative rates for the first two quarters of 2020. But the overall market consensus has changed in respect to the lack of synchronization of countries and the virus’ cycle. Before it was thought that the market would recover in V-form, but now it is in U-form. US forecasts have dropped from -2 percent to -4 percent, which means Mexico’s forecast would change from -4 percent to possibly -6 percent.”
The Vulnerabilities Will Leave Scars on the Mexican Economy
If the economy was to drop to those levels, the Mexican economy would require help from the national government to stay afloat. But according to Aboumrad, local banks and the private sector are worried that since the government has not given many signs that it would provide direct support to the private sector and banks, and if that were the case, there would be great tension in the sector.
“In our opinion, once the dust settles, Mexico’s fiscal vulnerabilities will be exposed by the crisis and it would leave scars in the shape of a more steep yield curve. The Mexican peso could not bounce back to being at MX$18.5 per dollar, and perhaps instead settle at MX$21,” says Aboumrad.
Aboumrad explains that previous to the crisis, the market had an overweight mexican peso and local bonds due to the high nominal rate and the carry trade that the mexican markets offered, despite the economy’s vulnerability. “In our opinion, Banxico will try to maintain a restrictive monetary policy rate for the time being,” he says.
Mexican Real Estate Players Prepare for COVID-19
Mexican Fibras (REITS) and Investors Start to Feel EffectsDuring the GRI Member discussion, investors and developers voted that 71 percent of their businesses were observing and holding off decision making at the moment. Those that were investing, are doing so with caution and are using structured instruments that were issued into the market long before. They believe that there will be good opportunities to invest, but heed that it must be done cautiously as it will be an act of magic, rather than financial.
Some members are feeling more pressure as their assets are in the hospitality sector. In Mexico, hotels have been paralized and the goal is to not fire anybody. Nevertheless, some members have had to close more than 50 percent of their hotel assets, and as soon as the guests leave, close the doors of remaining hotels. The light at the end of the tunnel seems farther away as they expect a rather long, U shaped recovery.
Multifamily and Industrial Continue Despite COVID-19
Some members agree that the multifamily sector is holding on. According to information from the Chinese markets, it has impacted over the sector’s ability to construct housing units, but the demand will continue and will put pressure on the supply.
When it comes to self-storage, members feel it will have good opportunities in the near future and it will follow similar trends. These may be the assets that suffer the least and will be able to recuperate the fastest as the 4Q20. From the perspective of members in industrial parks, they are revising their portafolios. Manufacturing and logistics remain active, but areas that depend heavily on the automotive sector, have experienced a slow down due to the close of various American and Mexican manufacturing plants. Yet, most have closed, not due to the crisis, but instead taking advantage of the time to give their plants maintenance. Although the sector remains active, the government has given the order to close and stop activity for the next 30 days, making members in the sector analyze operations to reactivate in the next 30-60 days.
Join the discussion and register for our next eMeetings here: griclub.org/emeetings
