Mexico: Updated Assessment of the Impact of the Coronavirus Pandemic on the Extractive Sector and Resource Governance
This is one of a series of country briefings produced by NRGI to summarize the evolving situation with respect to the pandemic and its economic impacts. The analysis it contains is subject to change with circumstances, and may be updated in due course.
Key messages:
- The coronavirus pandemic led to a historic drop in Mexico’s gross domestic product. In response, the Mexican government focused on social spending and loosening monetary policy, but largely skipped relief packages for private companies.
- Mexico’s government has deepened austerity measures except with respect to flagship infrastructure projects and state-owned enterprises like oil company Pemex.
- By the end of the third quarter of 2020, Pemex had accumulated a deficit of USD 10.9 billion. Meanwhile, Pemex’s debt rose by 26.9 percent in 2020. Agencies like Fitch Ratings and HR Ratings consider the state company a risk factor for the entire Mexican economy. Despite these results, the administration is gearing up to further inject cash into the company to improve its production and refining capacities.
- Mexico’s mining industry rebounded significantly during the second half of the 2020. Canadian and Chinese investments in the sector grew during the pandemic. However, as an austerity measure, the Mexican government downgraded the mining vice ministry to a department within the Ministry of Economy.
Economic impact
Mexico is slowly rebounding from the initial shock of the coronavirus pandemic. The National Institute of Statistics and Geography reported that Mexico suffered the largest quarter-on-quarter GDP retraction in its history, falling 17.3 percent in the second quarter of 2020. Lifting lockdowns last summer increased economic activity, especially in the service sector.
According to Fitch Ratings, in the third quarter of 2020 the Mexican economy recovered some of its coronavirus-related losses by growing 6.5 percent compared to the previous quarter. However, the agency warned about a recovery slowdown heading toward the fourth quarter. More specifically, the industrial production, manufacturing and services sectors showed patterns of contraction in the latter months of the third quarter. The unemployment rate has consistently decreased, however; at least 1.8 million people who lost their jobs during the early months of the pandemic have not returned to the work force.
During the pandemic, President Andres Manuel López Obrador has been inflexible in steering away from his development plans, even in face of the domestic and external shocks arising from the emergency. The president’s personal brand is characterized by strong leadership and a tight grip over economic policy, based on the principles of public austerity, control of strategic resources and the strengthening of state-owned companies. Mexico’s government did not issue a fiscal stimulus package to the private sector. However the state provided a relatively small credit line to mitigate the impact on small businesses during the first months of the pandemic and lowered the interest rates from 6.7 to 4.5 percent in order to facilitate credit for small businesses.
Since 2019, President López Obrador’s administration has negotiated World Bank loans totaling USD 2.1 billion. The largest, a USD 1 billion loan, was earmarked in April 2020. Though the World Bank specifies that this loan is meant to support the government’s efforts to bolster the financial sector and establish instruments for improved financial access to the poor, the government has said that that this credit line will not be used to respond to the pandemic.
This response from the government is in line with the ethos of President López Obrador, which is to not depend on foreign aid to face the crisis. In April 2020, the president vetted a Inter-American Development Bank loan negotiated directly by a group of companies to finance a credit line to help private companies endure the pandemic effects.
In the meantime, the pandemic has continued to impact Mexico as the country faces a second spike in infections. From the start of the pandemic to November 2020, 100,000 people had died of Covid-19, while more than 1 million people had confirmed cases of the virus.
Impact on the oil and gas sector
Pemex, the national oil company, has reported losses for eight straight quarters since 2019. As the pandemic began, during the first quarter of 2020, Pemex reported $23.6 billion in net losses. The company has since recovered somewhat but it still marked an overall $10.9 billion deficit by the end of the third quarter. In the meantime, the company’s debt continues to add up, growing by 26.9 percent in 2020 alone.
Production has declined over time. In October, Pemex reported a production average of 1,627,100 barrels per day (bpd), a 1.7 percent reduction over the previous October, and half of the average 3.4 million bpd during Pemex’s production peak in 2004. Overcoming Pemex’s falling production volumes has been a constant objective for the López Obrador government. For 2020, the government provided a safety net of $3.3 billion in capital expenditure to the company. Throughout the pandemic, production numbers did not improve, and the administration is gearing up to continue pushing cash into the company to address these declines. In October, Pemex’s general director, Octavio Romero, declared in front of Mexico’s congress that Pemex would reach production of 1.9 million bpd by 2021, and 2 million bpd by 2022, due to 20 new oil blocks assigned by the National Hydrocarbons Commission to Pemex during 2020.
In November, the risk analysis firm HR Ratings stated that Pemex was a net loss for Mexico, due to the company’s deteriorated revenues as a result of falling oil prices and production volumes. In April, Fitch Ratings downgraded Pemex’s credit score from BB to BB-. These actions also prompted Fitch to downgrade Mexico’s overall sovereign debt to BBB-. Fitch considers Pemex a “key risk factor.”
Pemex’s general director has strongly rebutted these assertions, stating that the national oil company does not represent a fiscal burden for the country and that it only receives direct resources from the government to finance the Dos Bocas refinery, a project for which the government spent USD 2.3 billion in 2020 alone. While it is technically true that Pemex uses its own resources to finance its operations, the government continues to include large expenses for infrastructure and debt relief to Pemex in the federal budget. In 2019, through the Ministry of Finance, the government allocated USD 5 billion for the repayment Pemex’s debt until 2023. In 2020 this amount increased by 1.4 billion. Additionally, Diario La Jornada calculates that the tax benefits applied to Pemex in 2020 will allow it to allocate USD 5 to 8 billion to debt payments in 2021. Meanwhile, the Dos Bocas Refinery has an approximate cost of USD 8.9 billion, also covered by the federal government. Including tax breaks, the federal government is spending up to USD 11 billion on managing Pemex debt, meaning that Pemex’s frail financial situation represents a burden for all Mexicans.
The parliamentary elections set for June 2021 could provide the López Obrador government with the votes necessary to push a constitutional reform that would overturn the energy reform passed in 2013, which opened the oil sector to private investment. The president has been open about his willingness to change the rules to implement his nationalistic vision for the hydrocarbon sector.
Impact on the mining sector
Even though Mexico’s mining projects are concentrated in a handful of producing states, the sector has experienced a significant expansion over the past few years. However, NRGI’s interim Resource Governance Index assessment of the mining sector found that the government struggles to implement its own rules. This has further complicated the institutional challenges faced by this sector in the second half of 2020. As part of pandemic austerity measures, the vice ministry of mines was dissolved by an executive order of the federal government and the agency was demoted to become a department within the Ministry of Economy. Despite being one of the most dynamic economic sectors in the country, mining is currently unrepresented by a high-ranking official.
The changes in the sector have put the reform of the mining fund, which was previously slated for mid-2020, on hold. This reform has been a source of conflict between the federal government and subnational entities, as it drastically changes the distribution of mining royalties in producing territories. In the absence of a mining vice-minister, the process stalled, leaving many subnational governments with uncertainty about what will happen with the fund.
By contrast, the mining industry had one of the biggest rebounds after the initial shock of the pandemic lockdowns. Driven by the international prices of gold and silver, foreign investment, (particularly Canadian and Chinese) has increased in the last year. Canadian investment in the sector grew five-fold in 2020. According to Douglas Coleman, CEO of the Mexico Mining Center, the coronavirus pandemic was a decisive factor in the recent investment wave, when the demand of copper, silver, lithium and zinc increased over the reactivation of Asian markets.
Another key development during the pandemic relates to the Bacanora lithium project in Sonora. The production phase of this project has been delayed to 2021. China’s Gangfeng increased its stake in the project from 22.5 percent to 50 percent. This project is set to produce 35,000 tons of lithium per year by 2023 and has supply agreements with electric vehicle makers such as Tesla. Investors’ sudden interest in Mexican lithium prompted a legislative initiative from the ruling party, MORENA, to nationalize the mineral. According to the promoter of this initiative, congressman Alejandro Armenta, the intent is not to close the door for private investment but to create a regulatory framework that prevents Mexico from “giving away” its lithium to Chinese, American and Canadian investors.
Looking forward
President López Obrador’s refusal to provide fiscal aid for businesses and its well-known feud with renewable energy firms have increased tensions with the private sector. It is likely that tensions between the private and public sector will increase, a scenario that the current administration had historically avoided.
Recent movements in key government positions may signal increasing tensions with the private sector. In December, Alfonso Romo, the president’s chief of staff, resigned his position. Romo presided over the “Mining Table,” a council that provided the mining companies direct access and coordination with the government. In December, President López Obrador also appointed a new economy minister, Tatiana Clouthier. She succeeds Graciela Márquez, the former minister who will be moving on to lead the National Institute of Statistics. (Clouthier oversaw López Obrador’s electoral campaign in 2018.)
Through 2021, President López Obrador’s bet on flagship infrastructure projects (e.g., the Dos Bocas Refinery, the Mayan Train, the Santa Lucía Airport) will cost an amount equal to 25.3 percent of Mexico’s GDP. The government, supported by the Mexican Construction Chamber, defends the projects by pointing to figures about job creation and a potential boost to the construction sector. The Dos Bocas Refinery represents additional capital expenditure for Pemex, which is likely to continue facing financial problems during 2021.
