The recent interview that former Mexican Finance Minister Carlos Urzúa gave to the Spanish newspaper El País allows us to look into how dogmatism has inundated President Andrés Manuel López Obrador’s government. It also shows how the government lacks more and more in skill. Former Minister Urzúa stresses that AMLO’s government has no money. It’s true. Tax collection in Mexico is low and for years the Mexican government got used to obtaining rents from the national state-owned company (Pemex) that now, far from adding money to the government’s coffers, is actually draining them. International credit rating Moody’s estimates that AMLO’s “bailout” of Pemex will cost the government two points of GDP every year. If we count AMLO’s proposed investments in Pemex this would add one extra point of GDP. AMLO’s dream, where Pemex continues to provide the Mexican government with high levels of oil rents, is 50 years out of date.
The Covid-19 pandemic accelerated a long-term revolution: oil as an energy source is facing extinction, just like it happen once to the fossilized matter from where it originates. The Anglo-Dutch company Royal Dutch Shell, the largest non-state oil company in the world, recently announced that it will it will write down the value of its assets by up to US $22 billion because of lower energy demand due to the pandemic and, particularly, because they have the goal of reaching zero emissions by 2050, “to align” themselves with the 2016 Paris climate change agreement. BP, the second largest private oil company, will write down another US $17.5 billion. US shale producers have already written off US $38 billion more. Consulting firm Deloitte predicts there could be US $300 billion in writedowns this year. The oil industry’s calculation is definitive: many fossil fuels will never be extracted and is not prudent to take in account their potential value. However, Mexico’s Pemex has decided that it will develop (with no help) a portfolio of lower-quality reserves, while not having deep-water technology, nor enough capital. To this, you have to add an old and hefty workforce. What could go wrong?
Former Minister Urzúa (himself a competent official) left the López Obrador government last year given the President’s reluctance to listen to experts. Meanwhile, Mexico’s Energy Minister Rocío Nahle -the epitome of ignorance and incompetence- and Mexico’s power utility head Manuel Bartlett -known for his ancient dogmatism- tell almighty AMLO what he wants to hear. Other Cabinet members and advisors -like current Finance Minister Arturo Herrera, Foreign Minister Marcelo Ebrard and central bank’s deputy governor Gerardo Esquivel- have opted for an immoral silence. Unlike the radicals, they do understand the seriousness of what is coming and remain silent out of convenience.
AMLO’s approval rating will continue to decline. His party (Morena) will lose its legislative majority in Mexico’s Lower House Chamber in the upcoming 2021 midterms. AMLO will also lose the referendum he is planning to hold in 2022 to let Mexicans decide if he completes his 6-year term in 2024. AMLO could plan something illegal like dismantling the Mexican Elections Institute (INE). However, even if AMLO loses the referendum, he will not actually follow through if Mexicans decide to sack him. AMLO and his team will blame the Covid-19 pandemic for the already inescapable catastrophe (“We were doing so well!”, they say). As AMLO has been doing with disturbing frequency, they will also argue that the private sector is to blame. Mexico is walking the same path of leftist governments in Latin America that misinterpreted the rational allocation of financial sources with “boycotts” of their governing projects. In reality, private investment in Mexico is collapsing as a result of authoritarianism, arbitrary rule change and a hostile business environment.
Unlike other countries in Latin America, the weight of the private sector in Mexico is much greater. Without their investments, Mexico will not recover from the current economic crisis. Just as former Finance Minister Urzúa highlighted, recovery without the private sector is impossible because the government simply has no money. Resources will be even more scarce due to the clientelistic programs the AMLO government has committed and growing contingent liabilities in the forms of public sector pensions. In order to increase tax revenue, the AMLO government will resort, as they already do, to “fiscal terrorism” against the private sector. This is a suicidal tactic. Despite the collapse in interest rates, the weight of the government debt will grow as Mexico’s credit rating deteriorates, the Mexican peso’s value decreases and as the value of debt itself grows with respect of a lower GDP both in absolute and relative terms. According to former Minister Urzúa, debt could grow from 49% of GDP when AMLO took office to 60% this year. AMLO’s cruelest enemy is simple mathematics.
Himself a great fan of history, AMLO seems determined to fight the historical transformation that the world is undergoing at this moment. Not even the worst economic crisis in a century is making him to change course. AMLO’s implausible foolishness and terrifying obscurantism could make Mexico fall in a deep hole from which it would be impossible to escape, even if Mexicans are able to get rid of his cancerous government and any frightening metastasis.
* Jorge Suárez-Vélez is an economic and political analyst He is the author of The Coming Downturn of the World Economy (Random House 2011). A Spanish version of this Op-Ed appeared first in Reforma’s newspaper print edition. Twitter: @jorgesuarezv