Background. The Mexican authorities have reported 56,594 confirmed cases and 6,090 deaths as of May 20th, 2020, and estimated the total number of cases to be 104,562 as of May 3rd.
To delay the spread of the coronavirus, the government declared a health emergency and is implemented a range of measures, including travel restrictions, social distancing, closure of schools and shutdown of non-essential activities. On April 5, President Lopez Obrador outlined his government’s policy priorities to combat the economic effects of COVID-19, including more health spending and strengthening of the social safety net.
Mexico was also hit by the global selloff in financial markets and the declining oil price—since February 20, local government bond markets saw nonresident outflows of around US$ 12.5 billion (1.2 percent of GDP), the 10-year dollar credit spread widened from 132 bps to 434 bps at peak on April 28th bust has since declined to 278 bps for the sovereign and from 377 bps to 768 bps for Pemex after peaking at 1186 bps, while the peso has depreciated by 18 percent relative to the US$ (as of May 21, 2020), down from 25% at peak.
Key Policy Responses as of May 21, 2020
FISCAL
- The government announced that it would: 1) ensure that the Ministry of Health has sufficient resources and does not face red-tape, and sufficient supply of medical equipment and materials; 2) advance pension payments to the elderly; 3) accelerate the tender processes for public spending to ensure full budget execution; and 4) consider setting-up a Health Emergency Fund to request additional resources from Congress, that could reach up to 180 billion pesos (0.7 percent of 2019 GDP).
- In his speech to the nation on April 5, President Lopez Obrador outlined the government’s priorities to combat the economic effects of COVID-19. Besides higher health spending and strengthening of the social safety net, the plan includes measures like: 1) frontloading of social pension and disability payments by four months; 2) accelerating procurement processes and VAT refunds; 3) lending to SMEs; 4) liquidity support by development banks; 5) some workers accessing loans against their social security accounts. In addition, the government announced 1) public housing credit institute covering three months of workers’ debt (defer further six months for those let go); 2) lending to small businesses who has not fired workers or reduced salaries since the outbreak. The week of April 19 the President further announced an austerity program for public expenditures including wage reductions and a hiring in order to finance additional health expenditures and priority investment.
MONETARY AND MACRO-FINANCIAL
- The central bank has cut rates by 150 basis points since the pandemic break, from March until May 2020. Conducted several government bond exchanges, mainly to shorten maturities; and revised plans for new government bond issuance. Announced additional measures to provide MXN and USD liquidity to the banking system and improve the functioning of the domestic financial markets: 1) reduce the mandatory regulatory deposit with Banxico (by 50 billion pesos, or about 15 percent of the current stock); 2) halved the cost of repos; 3) provide USD liquidity (via auctions) to banks by drawing on the $60 billion swap line with the Fed ; and 4) in conjunction with the Ministry of Finance, seek to strengthen market making in the government bond market. Activated the swap line with the Fed, auctioned already US$ 5 billion to commercial banks and announced a second auction (US$ 5 billion) . Temporarily adjusted the accounting rules for banks and other financial institutions to facilitate debt service rescheduling ; recommended suspension of dividend payments and share buybacks . The central bank has also substantially expanded its liquidity facilities making them more affordable, accepting a broader range of collateral and expanding eligible institutions while establishing a corporate securities repo facility to support the corporate bond market. The central bank has opened financing facilities for commercial and development banks (350 billion pesos) to allow them to channel resources to micro, small- and medium-size enterprises and individuals affected by the COVID-19 pandemic. Credit will be provided in exchange for conventional repo collateral as well as banks’ corporate loans, which would free up liquidity in the banks’ balance sheets currently used especially by corporate credit lines for new credit extension.
EXCHANGE RATE AND BALANCE OF PAYMENTS
- The exchange rate has been allowed to adjust flexibly, while supporting US$ liquidity. The non-deliverable forward hedging program (NDF, in domestic currency) was extended by $10 billion to $30 billion; two NDF auctions were conducted offering $2 billion each (allocated $2 billion total, 0.2 percent of 2019 GDP). A new tool was added permitting the central bank to intervene in offshore non-deliverable forwards markets, in case intervention is warranted during European or Asian trading hours.