Cumberland Advisors Market Commentary – Mexico’s Twin Crises: The Pandemic and a Plunging Economy

Author: William Witherell, Ph.D., Post Date: June 4, 2020

South of the border, our neighbor and the second largest economy in Latin America, Mexico, is experiencing a severe and still worsening health crisis due to the COVID-19 pandemic. The dire effects of the illness itself are compounded by a brutal decline in the economy, which at the start of 2020 had already been in recession for most of the past year.

Market Commentary - Cumberland Advisors - Mexico's Twin Crises The Pandemic and a Plunging Economy

Mexico has recorded over 10,000 deaths from COVID-19 and almost 100,000 confirmed cases. As the country is testing at a much lower rate than most other countries are – the lowest rate among the OECD nations – it is evident that the actual rates of deaths and cases there are significantly higher than the confirmed numbers. Like Bolsonaro in Brazil, Mexico’s leader, President Andrés Manuel López Obrador, has sought to play down the pandemic and was slow to act in shutting down the economy to limit the spread of the disease. He said that COVID-19 was “not as bad as the flu.” Since late April, he has been claiming that Mexico has tamed the crisis, but last week the country saw its highest daily increases in deaths and new cases. Nevertheless, just last Thursday López Obrador claimed once again, “We are doing well; the pandemic has been tamed.” The government announced that it is reopening after two months of quarantine, even as Hugo López-Gatell, the official in charge of Mexico’s pandemic response, admitted that he does not know the actual case and death rates. Social distancing measures are being lifted nationwide, apart from areas listed as red zones. Yet most of the country remains red.

It should be noted that even Latin American countries whose leadership acted swiftly and wisely are suffering heavily from the pandemic. Peru has seen a dramatic rise in cases even though its government moved quickly to mandate stay-at-home orders, curfews, and border closings. Two factors shared by Mexico and indeed most countries in Latin America account for this outcome: inadequate healthcare systems and income inequality that ranks among the world’s worst.

These countries have large shares of the population (more than half of the adults in Mexico) working in the informal sectors of the economy; and, regardless of lockdown orders, these people need to go to work every day to survive. Also, millions of the poor live in the region’s huge metropolitan centers, like Mexico City, in densely crowded barrios or favelas where social distancing is impossible.

Most countries in Latin America have also neglected for years to invest adequately in their healthcare systems. Costa Rica is an exception and has an infection rate lower even than that of New Zealand. Meanwhile, the hospital systems of both Peru and Brazil are becoming overwhelmed by the pandemic. Mexico’s healthcare system is broken, following years of neglect. Mexico has devoted less than 3% of its GDP to health care. Only two countries in Latin America, Guatemala and Venezuela, spend a smaller share of their national output on health care. Shortages of doctors, nurses, and equipment are claiming lives in Mexico, where lack of medical attention and even negligence result in poor outcomes. One in five confirmed cases are healthcare workers. More than 11,000 healthcare workers have been stricken.

As COVID-19 cases and deaths continue to rise, Mexico’s economy has fallen into a deep recession caused by the shutdown in Mexico, with impacts evident in all its major markets. Last year the economy fell 0.3% at a time when emerging-market and developing-country economies advanced some 3.7%. Then, in the first quarter, Mexico’s economy contracted 1.2% from the previous quarter (down 4.9% in annualized terms), with industrial output down 1.2% and services down 0.9%, reflecting early pandemic effects that began in March.

Mexico’s central bank, the Bank of Mexico, projects that the economy could decline as much as 8.8% this year. The shutdown in April of all industries and services considered as nonessential, which for the most part extended through May, caused an unprecedented drop in output in the first two months of the second quarter. The manufacture of cars and auto parts fell to close to zero, as did air traffic to popular tourism resorts. Exports of Mexican goods in April were down 41% from the level reached in April 2019. Business confidence declined in May, as did the INEGI Manufacturing Purchasing Managers Index, following declines in April and March. The fall in oil prices and reduced remittances from Mexicans working in the US are other headwinds for the economy. Stimulus measures by the government and the central bank to counter these developments have so far been relatively weak.

Mexico has now begun to reopen its economy, moving toward what President López Obrador calls a “new normal.” The auto sector has been designated as essential along with mining and construction in order to give them a head start. Pressure from the US to restore cross-border supply chains has been a factor in these early reopenings. The US National Association of Manufacturers urged action in tandem with industrial reopening in the US. Mexico’s positive response to this pressure is understandable since the United States is the destination for some 80% of Mexico’s exports. The shape and speed of the recovery in Mexico’s economy will depend heavily on the recovery in the US. We anticipate that the reopening of the US economy will generate strong growth numbers in the second half of 2020. Those numbers will be a positive factor for Mexico. Yet we think the downside risks for Mexico’s economy and for Mexican stocks are significant in view of the uncertainty about the current spread of COVID-19.

Bill Witherell, Ph.D.
Chief Global Economist & Portfolio Manager
Email | Bio

Sources: Financial Times, Bloomberg, New York Times, Wall Street Journal,,

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