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Mexico's Leftist President Becomes Fiscal Hawk in Midst of Pandemic

12/02/2020 | 05:45am EST

By Santiago Pérez and Anthony Harrup

MEXICO CITY -- While most of the world's largest economies embarked this year on spending sprees to cushion the economic hit from Covid, Mexico's leftist President Andrés Manuel López Obrador has doubled down on budget discipline and austerity despite a rise in poverty.

When he took office two years ago, many economists feared that Mr. López Obrador would behave like other leftist leaders in Latin America, running up large deficits to fund welfare programs. Instead, he now faces criticism for not spending enough during the pandemic.

Mexico's stimulus, either additional spending or tax breaks, ranks at the bottom of the Group of 20 nations at just 0.6% of gross domestic product, according to estimates from the International Monetary Fund. Among developing economies, Brazil's stimulus is the relative highest, amounting to 8.3% of GDP, followed by South Africa and China, at 5.3% and 4.6%.

Mr. López Obrador has long been cautious about government overspending after he witnessed several Mexican debt crises in the 1980s and 1990s that led to peso devaluations, high inflation and government bailouts of private banks and other industries.

As a result, he has criticized forms of economic stimulus such as credit or tax breaks for companies to avoid laying off workers, which he sees as helping the wealthy at the expense of the poor.

The conservative approach has kept Mexico's peso relatively steady against the dollar, and leaves the country's budget deficit and debt levels well below those in large emerging markets such as Brazil.

Mexico is expected to end the year with a budget gap of just 4% of GDP, among the narrowest of countries with similar sovereign credit ratings such as Colombia, Peru, Italy and Russia, according to Fitch Ratings.

Brazil, in contrast, is facing a budget shortfall of almost 17% of GDP, Fitch estimates, among the widest in emerging markets. Mexico's government debt will be almost half of Brazil's, which is on course to end this year at 95% of GDP.

Mexico's caution may pay off when the pandemic ends and other countries are stuck with large piles of debt, said Eric Baurmeister, who manages billions of dollars in emerging market debt at Morgan Stanley Investment Management.

"It's possible that Mexico is rewarded six to 12 months hence for being in a good debt-to-GDP ratio, not putting on too much debt as Covid passes," he added.

But some other investors worry that Mexico's economy will underperform other developing markets "because you won't have the stimulus we've seen elsewhere in the region," said Gustavo Rangel, chief Latin America economist at ING Financial Markets.

The López Obrador administration has disbursed just $1.7 billion since the pandemic hit Mexico, mostly in loans to individuals and small and micro enterprises. The conservative government of Brazilian President Jair Bolsonaro has been giving out as much as $10 billion a month to help the poor.

"It's extremely odd, being a government concerned about the poor," said Nora Lustig, an expert on Latin American poverty who directs the Commitment to Equity Institute at Tulane University. Of Latin America's four biggest economies, only Mexico didn't expand anti-poverty programs, she added.

The relative austerity clashes with Mr. López Obrador's self-styled image as a champion of the poor, and is deepening the economic impact of the pandemic in Mexico compared with other countries. The IMF expects Mexico's economy, despite record remittances and healthy exports, to contract 9% this year, compared with a drop of 5.8% in Brazil.

Mexico's conservative approach has even put leading economists at the IMF, which usually encourages countries to not overspend, in the unusual position of urging Mexico to spend more.

"In a context where the government must act as an insurer of last resort when facing one of the worst crises triggered by a pandemic, the public sector must take care of those most affected," said Alejandro Werner, head of the IMF's Western Hemisphere Department and a former Mexican deputy finance minister. "It's difficult for anyone to tell you that investing to support the poor, in health programs, or to help affected firms isn't a correct fiscal policy."

Mexican Finance Minister Arturo Herrera says the government's cost of borrowing is much higher than in developed economies, and that the interest on additional debt would eat into future budgets, limiting the government's ability to spend.

The three main debt-rating agencies have lowered Mexico's credit score since Mr. López Obrador took office, and his administration is eager to avoid losing its investment grade, which would raise borrowing costs. The budget is already under some strain because the government helps support debt-laden state oil company Petróleos Mexicanos.

"Mexico is giving priority to the stability of the public finances, but avoiding large-scale assistance to households and businesses represents a possible cost to growth," Fitch Ratings said last month in ratifying Mexico's investment grade rating and stable outlook.

The number of Mexicans living below the poverty line with an income of less than $5.5 a day will rise by more than 11 million to almost 44 million due to the pandemic, according to projections by the Commitment to Equity Institute. That's double what's expected in Brazil, which has wider income disparities and a population that is 60% larger than Mexico's.

Because of the pandemic, Adriana Juárez, a single mother of three in the northern city of Chihuahua, was fired from her job stocking supermarket shelves a few months ago when she returned from maternity leave.

"I wake up anxious every morning just thinking about how I'm going to feed my children," said the 30-year-old Ms. Juárez, who recently applied to get food supplies from Caritas, a Catholic charity.

The portion of Mexicans who don't earn enough to cover the cost of a basic basket of food rose to 44.5% in the third quarter from 35.7% in the first three months of the year, the result of lower earnings, higher inflation and greater unemployment, according to government estimates.

Demand for Caritas's food-distribution program in Chihuahua, which borders Texas, has more than doubled as a result of the pandemic. It now supports 700 households with weekly delivery of boxes filled with basic food supplies, fruit and vegetables.

"The profile of our recipients changed as a result of the pandemic," said Soraya Olivas, who works as Caritas liaison with private donors such as supermarkets or hotels. "Before we had senior citizens, single mothers or people with disabilities. Now we get people who previously had a steady income, like factory workers or restaurant waiters who lost their jobs."

Mr. López Obrador even recommended to leaders of the Group of 20 major economies to not take on public debt to bolster private interests, saying that bailouts should be "from the bottom up." He said his administration made payments to beneficiaries "without intermediaries, to the base of the social pyramid," to maintain consumption of food and other basic needs.

But the brunt of the pain has still fallen on Mexico's poor. In Chihuahua state's Sierra Madre mountains, indigenous Tarahumara communities are suffering from a severe drought and have lost the income generated by selling handicrafts to tourists visiting the Copper Canyon since tourism dried up with the pandemic, Ms. Olivas of Caritas said.

On a national scale, Mexico's Food Bank Network, made up of charities and nonprofit organizations across 27 states, has almost doubled its food assistance program to reach 2.1 million people, a record since its creation 25 years ago.

"We were caught by surprise," said Manuel García, the network's head of innovation. "We thought that demand was going to increase, but not almost double."

Write to Santiago Pérez at santiago.perez@wsj.com and Anthony Harrup at anthony.harrup@wsj.com

(END) Dow Jones Newswires

12-02-20 0544ET

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