Executive summary

Mexico suffered a sharp drop in GDP as a result of COVID-19, derailing economic revitilization plans.

In 2Q20, Mexico’s GDP contracted 18.9%, the lowest drop recorded in national history according to an estimate of the National Institute of Statistics and Geography. However, these numbers do not come as a surprise considering that for two months, April and May, non-essential activities were completely halted, causing an obvious impact on the wellbeing of the economy. Protocols have now been implemented and an action plan based on a traffic-light system released by the government. With time, the gears of the economy are bound to grind again as businesses and citizens alike adapt to what the administration calls the “new normal.”

The context is also an opportunity to shake things up in the market for both deeply grounded conglomerates that were overdue a makeover as well as opening doors to newer players that were better prepared for the digitalization of the economy and its services. While large companies struggle to adapt to the new necessities, room is being made for smaller, more progressive players.

While many decisions remain in the air, one thing is for sure; the pandemic will mark a clear before and after period for both Mexico and the world.

REVAMPING MEXICO’S OIL INDUSTRY

AMLO continues to work hard to return Pemex to its glory days and increase national production. The modernization of the country’s six refineries are still in place, as well as the construction of the Dos Bocas plant in Tabasco, which is expected to have a processing capacity of 1.5 million barrels per day. Exploration is also advancing as Mexico achieved one of its largest discoveries in two decades, the Zama field, which is estimated to contain up to 2 billion barrels of oil-equivalent.

But the battle has not been easy as nothing could have prepared the administration for the unexpected hit of an even steeper drop in oil prices caused by the pandemic and OPEC’s decision to cut oil production in a scaled manner from May 2020 to April 2022 as part of an effort to turn things around for the sector. On top of these factors, the private sector continues to feel resentment over the cancellation of

the bidding rounds that were successful in attracting much-needed investment to Mexico’s oil fields. However, considering the complexity of the situation, players will have to call truce and collaborate with the president to create a new strategy for the future of Mexico’s oil production.

NEW HORIZONS FOR RENEWABLES

Mexico is at a crossroads when it comes to its energy capacity as the country holds both some of the largest oil fields in the world and is also one of the territories with some of the biggest potential to take advantage of solar and wind energy. Players face the president and his policy preferences over fossil fuels on the one hand and a global transition toward green energy on another.

However, investors may no longer have to take sides for much longer. The line between fossil fuels and renewable energies is likely to blur in the course of the next couple of years as more and more traditionally oil and gas companies announce new investments in green energy. BP, one of many examples, announced that it will increase its investment in low-carbon energy investments to USD5 billion by 2030 and that it expects demand for fossil fuels to drop significantly over the next 30 years.

Meanwhile, renewable energy companies remain attractive to investors. Cox Energy made headlines by releasing the first IPO in Mexico since November 2017 and the first IPO for the new stock exchange, BIVA, in July 2020.

MEGAPROJECTS MOVE FORWARD

Besides establishing energetic sovereignty, the president also holds close to his heart megaprojects of his six-year term that seek to promote economic development in the southern region of the country and strengthen national connectivity. The three big projects of the south include the Tren Maya, to be Mexico’s third passenger train line and crossing a distance of 1,500km over five states, the Interoceanic Multimodal Corridor of the Isthmus of Tehuantepec, and the Dos Bocas refinery, mentioned previously.

Additionally, the president is prioritizing the creation of a civilian airport in the grounds of the military airport in Santa Lucía, replacing the new Mexico City Airport of the previous administration. The projects are not easily gaining community and environmental approval but the president has announced that he is committed to making sure the projects are completed during his term and hopefully revive underdeveloped areas in the country.

All of these have the benefit of using a model that requires private investment and are opportunities for international companies to have their fingers in these megaprojects.

DISRUPTED TRAVEL

The light at the end of a long and dark tunnel is finally approaching for players in the tourism industry. Mexico’s GDP depends on tourism, with the sector representing 8.7% GDP. Without a doubt, tourism was one of the hardest hit industries in 2020. According to official data, hotel occupation in April 2020 dropped 60.2% in comparison to the previous year and some analysts estimate that tourism consumption could drop 48% in 2020.

However, hotels are reacting quickly by incorporating new protocols in their operations and adapting to new government regulations. The private sector has additionally launched, with the leadership of the National Council for Tourism Entrepreneurs (CNET), a national alliance for tourism dedicated to the safe reopening of tourism destinations in Mexico.