Publish in Perspectives - Wednesday, July 17, 2019
Mexican Finance Minister Carlos Urzúa unexpectedly stepped down on July 9, citing “many disagreements over economic policy” in a strongly worded resignation letter. Urzúa and President Andrés Manuel López Obrador. (Photo: Mexican Government)
Mexico president expected to continue with same policies hurting economy.
BY LATIN AMERICA ADVISOR
Mexican Finance Minister Carlos Urzúa unexpectedly stepped down on July 9, citing “many disagreements over economic policy” in a strongly worded resignation letter. Urzúa and President Andrés Manuel López Obrador reportedly clashed over several decisions, including one to cancel the construction of a new airport for Mexico City. What does Urzúa’s departure say about the direction of Mexico’s economic policy? What can be expected of his successor, Arturo Herrera? What are the most important economic decisions facing López Obrador, and what is at stake for Mexico’s economy?
Ariane Ortiz-Bollin, assistant vice president in the Sovereign Risk Group at Moody’s Investors Service: The resignation of Mexico’s finance secretary reflects disagreements about economic policymaking prompted by different economic visions within the López Obrador administration. Even though the appointment of Arturo Herrera—a government official recognized for his technical capacity—as the new secretary will help mitigate immediate investor concerns and the potential impact on the financial markets, it is not clear that the factors that led to Urzúa’s resignation will change in the near or medium term. We therefore expect continued uncertainty in the direction of economic policy, which is in line with the views that led us to assign a negative outlook on Mexico’s sovereign rating earlier this year. We think Mexico’s policy framework is weakening, with potential negative implications for growth and debt, as deteriorating economic rationality behind policymaking is undermining investor confidence and medium-term economic prospects. In addition to persistently lower growth, prospects of substantial and recurrent support to Pemex introduce risks to the medium-term fiscal outlook, despite the government’s near-term commitment to fiscal austerity and this year’s fiscal deficit goal. The key challenge facing the president and his team is the need to articulate a coherent and consistent set of policies that will reinstate policy credibility, particularly for Pemex. The government’s commitment to fiscal austerity, while simultaneously providing financial support to Pemex and meeting its social and infrastructure agenda, pose a policy trilemma for the administration, particularly in the current low growth context.
Antonio Ortiz-Mena, senior vice president at Albright Stonebridge Group: Carlos Urzúa’s resignation took many by surprise given its suddenness and his ‘slamming the door’ on his way out. There is broad consensus within the AMLO administration that a main challenge is to attain high and sustainable GDP growth rates that translate into improvements in real GPD per capita, the need for the Bank of Mexico to remain independent and maintain its core mission of combating inflation and to maintain fiscal prudence. There are nonetheless significant disagreements on the nature and extent of budget cuts and spending priorities. Urzúa expressed disagreements on both counts.
Macroeconomic stability is a necessary but not sufficient condition to attract foreign and domestic investment and thus foster greater economic growth. The government needs to speak with a single voice regarding economic policy and to provide legal certainty to foreign and domestic investors.
The clash between the Federal Electricity Commission (CFE) and several foreign and domestic companies over the terms of pipeline contracts does not bode well; in an interview, Urzúa said this was one of the reasons for his resignation. The president has second-guessed former Undersecretary of Finance Herrera in public at least twice.
As finance minister, Herrera will have his work cut out in ensuring fiscal stability and making sure that budget cuts do not harm the ability of key government agencies to function adequately and that spending has significant positive externalities. That means he must have a say in Pemex’s business plan and set limits to its fiscal support going forward, and he must make sure that there are no market-adverse actions announced either by the president or top government officials. That is a tall order.
Jonathan Heath, deputy governor at the Bank of Mexico: Urzúa’s resignation did not come as a complete surprise, as he was expected to return to academia sometime in the first half of Andrés Manuel López Obrador’s presidency. What was unexpected, however, was the swiftness of it, the strongly worded notification letter and the resulting post-resignation interviews that have highlighted the many disagreements between the two. Some were well-known, such as the Mexico City airport project, the construction of the Dos Bocas refinery, Pemex’s business plan and the elaboration of the National Development Plan. Still, the manner in which Urzúa left underlined his growing frustration with AMLO’s style and obstinacy. Nevertheless, Urzúa’s departure, coupled with Herrera’s appointment, does not necessarily entail a change in economic policy, as fiscal conservatism, independent monetary policy and a flexible exchange rate regimen remain firmly in AMLO’s mind. AMLO’s overall goals remain intact: to fight corruption, to spend better, to reduce inequality and to dismantle the crony-capitalism structure that dominates most businesses.
In the short-term, his biggest challenges lie in getting the economy up and running, which entails redirecting public expenditures toward a much more efficient arrangement, together with a renewed participation with the private sector, which still needs to be convinced that his policies make sense.
The U.S. ratification of the new trade treaty would definitely help. In the medium- to long-term, AMLO needs to determine how to effectively fight rising crime and violence.
Beatrice Rangel, member of the Advisor board and director of AMLA Consulting in Miami Beach: What is at stake in Mexico is perpetual stagnation or growth.
To achieve more robust growth and continue to push households from poverty into the middle classes, Mexico needs to engage in second-generation reforms. This entails less government intervention, credit expansion, heightened competition and better education and training. And this needs to be done while preserving macroeconomic virtue.
These rather obvious strategic choices do not seem to be a priority for President López Obrador, whose current focus is constitutional reform, most likely to allow re-election.
This vision would most probably clash with that of Urzúa, who had as his highest priority tax reform to enhance receipts and the cost of evasion. This evidently did not sit well with López Obrador, whose chief of staff is one of Mexico’s richest businessmen and a beneficiary of current tax laws. Urzúa has completed the learning circle for those who study populism. Like Felipe Pazos in Cuba, Maritza Izaguirre in Venezuela and Roberto Lavagna in Argentina, Urzúa’s departure signals the end of the primary phase of populist deployment when the head of state attempts to bedazzle everyone in order to get the nation to engage in constitutional reform.
When this proves to be impossible, the head of state gets rid of those who delay or block changes that increase the already powerful executive branch of government. Urzúa’s departure can only be read as ‘populism is well and alive in Mexico.’ ”
José Carlos Rodríguez Pueblita, CEO and founding partner of Pondera Lab: Urzúa’s departure was expected, given the recent performance of the Mexican economy and reported constant clashes with other cabinet members. The timing of his departure was surprising though. Urzúa was an outcast among AMLO’s economic team: he is an economist with solid academic credentials and is known for using evidence, rather than sentiment, to design polices, closer to a ‘neoliberal,’ as AMLO likes to call technically sound bureaucrats.
The tone of Urzúa’s letter of resignation was also unexpected for a man known for being conservative in his communications. Two specific claims set the alarms: he implicitly recognizes that his role as head of the economic cabinet was minimized, and that cronyism has not been expelled from the federal government. The former sets doubts on whether Arturo Herrera, his successor, will have a stronger role in setting economic policies. The latter reflects that the fight against corruption is far from successful if not just pure rhetoric.
Urzúa’s resignation letter unveils what has been known for several months already: the president concentrates all decisions; thus, we shall expect the immediate continuation of economic policies that are contracting the Mexican economy. Overall, Urzúa’s departure sent a clear message to the markets: economic policy is not designed by the Finance Ministry, but rather by the office of the president or the president himself—a major change that should alarm national and foreign investors. We should expect a fragile business plan at Pemex, the continuation of major infrastructure projects with doubtful social returns and policies motivated by ‘other data.’