Director, Latin America Credit
July 10 2019
Mexico’s Finance Minister Carlos Urzua resigned in a surprise move yesterday, stating that "policy decisions were being made without sufficient foundation" and that "these (policy decisions) should be made based on fact and free from political extremism, whether from the left or from the right". His replacement is Deputy Minister Arturo Herrera.
Although the resignation was indeed surprising, there had been persistent rumours that Urzua did not see eye-to-eye with President Lopez Obrador (AMLO) or his chief of staff, Alfonso Romo, on several (unspecified) matters.
We believe the development will further damage the credibility of the ministry and the government, and may lead to volatility across Mexican assets, including the peso, with possible repercussions for central bank policy.
Our view on Arturo Herrera
Prior to AMLO taking office last year, we had the opportunity to host Herrera at investor events. Our impression was not positive. We believed then, and believe now, that Herrera was not communicating well with AMLO, as he made statements to investors that were later proven to be incorrect, such as claiming that construction of the new Mexico City Airport would not be stopped.
Since the administration has been in office, AMLO has contradicted Herrera on at least two separate occasions. First, Herrera correctly said that construction of the Dos Bocas refinery would not happen, because the project did not have the necessary permits and environmental studies had not taken place; AMLO said the opposite at his daily press conference the next morning. Second, Herrera said that a vehicle ownership tax that had been eliminated under a previous administration would be reinstated; again, AMLO contradicted him the following day.
Our view is that there appears to be a material risk of a lack of coordination and communication between the head of the executive and the Ministry of Finance. Moreover, given Herrera did not comment on those occasions, there is a risk that he will be no more than a “yes man” in this crucial role. Some analysts have suggested that it is AMLO himself who dictates economic policy and that the minister of finance is there merely to toe the official line.
Damage to credibility
We believe the major consequence of Urzua's resignation will be yet another blow to the government's credibility, following on from poor decisions such as the cancellation of the Mexico City Airport and others.
Moreover, although Herrera continues to meet with investors periodically (in part, because Urzua did not like to do so unless it was absolutely necessary) and has become more well known in the investor community, there will be a period during which he will have to explain to market participants what changes, if any, there will be to economic and fiscal policy under his leadership. This task will take time, and may well lead to some volatility in Mexican markets across asset classes, including the peso.
We see the Urzua resignation as highly negative. Not only because of the uncertainty that it injects into the Mexican economy, but also because of the impact of his highly critical statement on the market. On top of this, we believe that, if there is indeed added volatility, it could change the independent Banco de Mexico's timing for the much-expected interest rate cuts.
Although we believe the markets will give Herrera the benefit of the doubt, in our opinion he does not possess the economic acumen and knowledge that Urzua has, and that, a little over half a year into the new administration, this crucial ministry will have a major task to rebuild its credibility.
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