OPINION THE AMERICAS
AMLO Tries to Capitalize on
Coronavirus
By Mary Anastasia
O’Grady (WSJ)
April 19, 2020
1:26 pm ET
He’s treating the
economic crisis as a chance to advance his socialist agenda.
The Fitch Ratings downgrade of Mexico’s foreign-currency
debt to BBB- last week surprised no one. The Mexican economy was already weak
going into the Covid-19 pandemic because President Andrés Manuel López
Obrador’s economic agenda is antigrowth. His strategy for dealing with
crumbling demand at home and abroad from the coronavirus is making things
worse.
It’s hard to know how sick Mexico is medically, because
Covid-19 testing is very limited. But the economy is deathly ill. The World
Bank forecasts a 6% contraction this year. The peso has fallen 22% against the
dollar in the past two months, robbing millions of Mexicans of savings and
purchasing power.
Only an ideologue like Mr. López Obrador could see this
human tragedy as opportunity. He won election in July 2018 on a pledge to usher
in a new era of socialism that he calls the Fourth Transformation. Now he’s
treating the pandemic-caused spike in unemployment, lost wages and business
failures as a chance to advance his agenda.
In a press conference earlier this month AMLO, as the
president is known, said that it would be “absurd” to stay the economic course
of his predecessors. The virus, he added with a smirk, has accelerated “the
collapse of the neoliberal model in the world,” which “already doesn’t work.”
AMLO has the upper hand now. But here’s betting that the
market will have the last laugh. Sadly, by the time he’s forced to acknowledge
his folly, a generation of middle-class gains may be lost.
Covid-19 is an international challenge, and economists
across the globe favor government efforts to soften the economic blow caused by
stay-at-home edicts. No solution is perfect. One popular idea, to extend
forgivable loans to employers who continue to pay employees, misses other
operating costs. The Federal Reserve’s aggressive bond-buying has been
criticized for favoring corporate America over midsize firms that could face
bankruptcy if shutdowns drag on.
Yet AMLO’s insistence that aid to midsize and large
businesses is a handout to corrupt elites is preposterous. As former Salvadoran
Finance Minister Manuel Hinds has written, the virus is like a tsunami bearing
down on a fishing village. The boats must be saved so that when the storm
passes, the villagers can go back to work and earn their livelihoods.
Mr. López Obrador isn’t interested in saving the boats. He
frames government support to entrepreneurs as harmful to the poor because it
would add to the debt. That argument would be more persuasive if he weren’t
spending billions of dollars on his own pet projects while destroying wealth at
the government-owned oil company Petróleos Mexicanos, a k a Pemex.
Pemex was once a powerful oil company and the symbol of
Mexican corporatism. Mr. López Obrador wants to make it so again. But the
company is suffering the effects of the global oil glut and drowning in debt
implicitly backed by the government. Pemex’s outstanding debts top $100 billion.
It owes another $10 billion to suppliers and has some $77 billion in unfunded
pension obligations.
Creating value ought to be job No. 1 at the company, but to
do that it needs the flexibility to manage its portfolio of oil fields. This
implies letting private investment bid on projects and exploit reserves where
Mexico lacks the technology or the capital to do it on its own. Or Pemex could enter into joint ventures with other companies, which would
provide know-how and money.
Some of this had been happening since Mexico opened its oil
and gas resources to private investment via a 2013 constitutional reform. But
the López Obrador government slammed on the brakes last year. In June it forced
the cancellation of tenders for development of seven onshore areas. These
areas, according to Natural Gas Intelligence, contain 392 million barrels of
oil equivalent in “proved, probable and possible . . . hydrocarbon reserves”
and 683 million barrels in “unrisked prospective
resources” as of June 2018.
By closing down the auctions, AMLO
gave up the opportunity to enhance the value of Pemex properties. But for this
president, oil is a zero-sum game and inviting entrepreneurs to share in the
profits is forfeiting Pemex resources, which he stresses are nonrenewable.
Meanwhile he’s sinking $8 billion into a new Pemex gasoline
refinery in his home state of Tabasco, even though all six existing refineries
have surplus capacity and lose money. If Pemex has a comparative advantage,
it’s in upstream crude production, not downstream refining. But that doesn’t
fit Mr. López Obrador’s vision for Mexican autarky.
Last week Fitch further downgraded Pemex debt, which was
already at junk status, and on Friday Moody’s cut Pemex debt to junk. This
means many institutional investors won’t be allowed to hold the bonds.
High yields may already be anticipating a restructuring.
AMLO doesn’t like markets. But he should worry about markets that don’t like
him.
Write to O’Grady@wsj.com