AMLO Tries to Capitalize on Coronavirus

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.