Mexico Manufacturing During the COVID-19 Crisis

Carlos Calderon

Like most of the countries in the world, Mexico has been and will be significantly impacted by the Coronavirus outbreak. With the shutdown of non-essential activities, the peso has devaluated, the index of risk has risen and unemployment rates have soared. Manufacturing, similar to other industries is suffering; however, there is a light at the end of the tunnel considering that Mexico may become one of the most competitive markets post-COVID-19 due to the devaluation of local currency.

Mexican Peso Devaluation

As the Mexican peso has plummeted over the past couple weeks, and is currently at its lowest level in history, today one USD equals 23.48 Mexican pesos.  The currency has devaluated more than 30% over the past few weeks.

• Over the past two years, the highest peak was 20.71 on June 18, 2018, and the rock-bottom was 17.97 on April 19, 2019
• During March the peso has depreciated versus the USD more than 30% and remains  extremely volatile

Main drivers of the negative fluctuation of the Mexican Peso include:

• COVID-19
• Prices of oil – Since Mexico is a strong producer of oil, its economy is highly dependent on the increase or decrease of the oil. The current conflict between Saudi Arabia, Russia, and the United States has impacted Mexican oil prices.

What does it mean for the manufacturing industry during this outbreak in Mexico?

• Manufactures considered essential during this shutdown will be allowed to keep activities following the sanitary rules established on March 30^th on the Mexican Federal Official Gazette, Mexico’s government publication
• Non-essential manufactures are mandated to shut-down their operations during this shutdown. Refer to the graph below for automotive OEM closings, provided by the Guanajuato Automotive Cluster “Claugto”

Source: Automotive Cluster of Guanajuato

• Since the government made it official and mandated the lockdown of non-essential businesses, employees must #stayhome and work remotely
• The Mexican government has requested employers to keep the current salary for the shutdown period
• The Mexican Federal Labor Law (MFLL) establishes that in the event of a sanitary contingency, which affects and shuts down the operation of a company, the affected company could pay employees one minimum salary (from 5 USD to 7.7 USD) per day, for up to a month.
• The Federal government stated that during April 2020 they will disclose an economic package
• Certain states, such as Nuevo Leon, have announced that at a state level they will provide tax and economic incentives, such as the potential exemption of payroll tax for three months and potential loans.  Rules of this pronouncement haven’t been released yet.

Description of essential vs. non-essential, according to the Official Gazette published on March 31^st, 2020

1. Those that are needed to attend the health emergency, such as health care workers and national health care administrators; those who supply or service medical needs; manufacturers of medical or pharmaceutical supplies, equipment and technologies; those involved in the proper disposal of infectious biological hazardous waste, as those involved with cleaning and sanitizing medical units in the different levels of care;
2. Those involved in public safety and citizen protection; in the defense of national integrity and sovereignty; the procurement and impartation of justice; as well as legislative activity at the federal and state levels;
3. Those in the fundamental sectors of the economy, such as: financial, tax collection, distribution and sale of energy, gas and gas stations, the generation and distribution of drinking water, the food and non-alcoholic beverages industry, food markets, supermarkets, self-service stores, groceries and the sale of prepared food; passenger and cargo transportation services; agricultural, fishing and livestock production; agro business; the chemical industry and cleaning products; hardware store; courier services; guards in private security tasks; day-care centers and nurseries; asylums and residences for the elderly; shelters and centers for women of domestic violence, their daughters and sons; telecommunications and information media; private emergency services; burial and burial services: storage services; and chain of essential supplies; logistics (airports, ports and railways); as well as activities whose suspension may have irreversible effects for its continuation.

In conclusion, the manufacturing industry must make financial adjustments to measure the early impact of COVID-19 for their Mexican subsidiaries, forecasting the potential shutdown for non-essential manufactures. We can help with a tailored assessment of COVID-19 for the Mexican subsidiaries as well as applying for the existing tax incentives. Contact us to learn more.

The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.