BANK GOVERNOR APPOINTMENT SPARKS CABINET RESHUFFLE

UNCLAS SECTION 01 OF 03 MEXICO 003486 SIPDIS SENSITIVE STATE FOR WHA/MEX, WHA/EPSC, EEB NSC FOR RESTREPO, FROMAN USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD TREASURY FOR NANCY LEE, IA ENERGY FOR WARD, LOCKWOOD AND DAVIS E.O. 12958: N/A TAGS: ECON EFIN ETRD ENRG ELTN EAIR PGOV SENV MX SUBJECT: BANK GOVERNOR APPOINTMENT SPARKS CABINET RESHUFFLE ¶1. Summary. (U) On December 9, President Calderon nominated Finance Secretary Agustin Carstens as the country's new central bank governor (Banxico). Carstens, whose nomination still needs to be ratified by the Senate, will replace Guillermo Ortiz who finishes his second six-year term at the end of 2009. Taking Carsten's place as Finance Secretary (Hacienda) is the Secretary of Social Development (SEDESOL) and Calderon's close associate Ernesto Cordero. Heriberto Felix, former Under Secretary for Small and Medium Enterprises (SMEs) in the Secretariat of the Economy, replaces Cordero at SEDESOL. Following the news, the stock market was down 0.2% from the day before and the peso was down 0.3%. Most analysts attribute this reaction to the market's skittishness over Cordero's new position at Hacienda, as as well as some concern over the autonomy of the central bank under Carstens. End Summary. Banxico Governor: Carstens to Replace Ortiz -------------- 2.(U) After considerable uncertainty, President Calderon nominated Finance Secretary Agustin Carstens as the country's central bank governor on December 9. Carstens will replace Guillermo Ortiz who finishes his second six-year term as governor at the end of this year. Since becoming autonomous in 1994, the Bank of Mexico (Banxico) has strengthened its economic policy-making role and credibility. The president appoints the BOM's governor, with Senate confirmation, for a six-year period, with no term limits. The appointment is timed deliberately at the mid-point of the government to avoid electoral pressure. The president cannot remove the governor. 3.(U) Carstens holds a doctorate in economics from the University of Chicago and an undergraduate degree from the Mexico City-based Autonomous Technological Institute of Mexico (ITAM). Carstens is not new to Banxico. He joined the Bank in 1982 after completing his economics degree. He completed his doctorate at the University of Chicago on a Banxico scholarship. Within the BOM he occupied top positions such as treasurer, head of economic research, and chief of the governor's cabinet. As the BOM's chief economist, Carstens was a key player at the BOM during its most difficult era, helping Mexico to mitigate the effects of the 1995 peso crisis, when soaring interest rates caused defaults on loans and put banks on the verge of collapse. According to chief economist at JP Morgan Chase Gabriel Casillas, Carstens also formed plans in the late 1990s to create the rainy-day oil fund and to hedge oil exports, strategies that were first implemented early this decade. Before returning to Mexico to become Calderon's Finance Secretary following Calderon's 2006 election, Carstens was Deputy Management Director at the IMF and prior to that he was Undersecretary of Finance under Francisco Gil Diaz during the Fox Administration (2000-2006). ¶4. (SBU) While Carstens performed generally well at the Finance Secretariat in recent months, particularly his work on the 2010 budget, his domestic prestige was damaged early on when he forecast that the U.S. crisis would have little impact on Mexico. Instead, the crisis caused GDP to contract by about 7% this year. Nonetheless, Carstens leaves Hacienda on a high note, announcing on December 8 that the GOM had hedged the 2010 Mexican oil price at US$57 per barrel, almost the same as what was approved in the budget. A similar 2009 hedge averted a more serious budgetary crisis. Carstens recently expressed confidence that sustainable fiscal accounts would mean Standard & Poor's would not downgrade Mexico's sovereign rating, despite a negative outlook since May -- Fitch Ratings last month cut the rating one notch to BBB. He also led efforts this year to win approval for the tax increases aimed at offsetting falling oil revenue. If ratified as Banxico governor, he will guide policies amid inflationary pressures from those tax increases he proposed and an economy recovering from recession. At a press conference yesterday, Carstens said his mandate will be to promote a stable peso. He said "My commitment will be to make sure that this constitutional mandate is carried out faithfully.". ¶5. (SBU) The media reported pressure in recent weeks for Calderon to reappoint the departing governor, Guillermo Ortiz -- in the post since 1998. Observers noted that Ortiz's performance was excellent, and that change during a financial crisis was inadvisable. Nonetheless, Ortiz will end on a high, with inflation within Banxico's 2-4% target range, and the peso stabilizing in recent months. According to BOM information released December 9, twelve-month inflation in November reached 3.86% -- its lowest since March 2008. However, Calderon and Ortiz have had a tense MEXICO 00003486 002 OF 003 relationship since 1999, when the former (who then led the PAN) made the latter's resignation a condition for approving legislation concluding the post-1995 crisis banking. Ortiz refused to step down, arguing that Banxico was autonomous. GOM-BOM Policy Coordination Raises Eyebrows -------------- ¶6. (SBU) Although analysts are supportive of Carstens' qualifications and understanding of monetary policy, some are concerned that the BOM will lose some of its autonomy based on previous comments made by Carstens as well as remarks made by both Carstens and Calderon during the December 9 press conference. Calderon said the GOM "will work in close coordination with the Bank of Mexico, without diminishing its complete autonomy, and in particular in designing and putting into practice public policies of a monetary, fiscal or currency nature." Calderon also referenced the law when he said that as governor Carstens would be "a close and constant adviser for the federal government's most important decisions on economic policy." Carstens said he would continue to fight inflation, which is the central mandate of the central bank, "but that does not preclude that we can exploit much more effectively opportunities to coordinate between Banxico and the federal government on achieving broader goals." While these remarks may signal a more accommodating monetary policy, earlier this week Carstens said that the autonomy of the BOM was safe since the vote of the Governor was only one of five on the Board of Governors. Hacienda: Cordero Replaces Carstens -------------- ¶7. (SBU) Ernesto Cordero, the current Secretary of Social Development, will replace Carstens as Finance Secretary. He studied to be an actuary at ITAM and holds a Master's in Economics from the University of Pennsylvania. Cordero's closeness to Calderon has raised issues for many observers. Cordero has limited economic experience in the Secretariat as Undersecretary for Expenditures during the first year of the Calderon administration. In January 2008, he was promoted to head the Social Development Secretariat. This short tenure at Hacienda makes him the most inexperienced Finance Secretary since the late 1970s. Many observers speculate that Calderon chose Cordero to groom him as a potential PAN nominee for 2012. Comment: While serving as Finance Secretary offers him potential to gain name recognition and wider confidence, it also carries risk of assuming the blame for continued economic troubles. End Comment. ¶8. (SBU) Econoff's conversations with contacts revealed lack of enthusiasm over the prospect of Cordero becoming the next Finance Secretary. Economists Ramirez de la O said he would be "a disaster," Jonathan Heath said he would be Calderon's "yes man," and Luis Rubio said he wasn't a smart pick. Observers also note that he is a close friend of Calderon's, owes his political career to him and is virtually unknown in international financial circles. On the other hand, others think that Cordero could be effective if he keeps the cadre of technocrats in place, namely powerhouse Finance Under Secretary Alejandro Werner. Comment: Cordero may well have time to prove himself, with Congress having approved the 2010 budget, and the oil hedge providing public finances breathing space. Nonetheless, Calderon continues to appoint close allies to the cabinet, rewarding loyalty rather than seeking expertise, especially in a Secretariat that was the preserve of proven technocrats. The 'bunker mentality' that has tainted the Calderon government for some time remains in place. This also was apparent with Cordero's successor at Sedesol. End Comment. Social Development: Jesus Heriberto Felix Guerra -------------- -------------- ¶9. (SBU) Jesus Heriberto Felix Guerra was named Secretary of Social Development (Sedesol),replacing Cordero. He moves to Sedesol from his position as Undersecretary of SMEs in the Economy Secretariat, where he served since 2006. Prior to joining the federal government, Felix Guerra served in the government of Sinaloa, first as Secretary for Economic Development for PRI governor Juan S. Millan from 1998 - 2003 and then as senator for a short period in 2006. Felix Guerra ran as the PAN candidate for governor of Sinaloa in 2004 and lost by a very small margin. In 2006, shortly after winning his senatorial race, Felix Guerra accepted the job as Undersecretary of SMEs. In MEXICO 00003486 003 OF 003 his private life, Felix Guerra has founded and runs industrial businesses. He holds a master's degree in economics from the Instituto Tecnologico y Estudios Superiores de Monterrey. Comment: His appointment comes with some criticism for lacking relevant experience, particularly with anti-poverty programs. His appointment may signal a presidential desire to give the Sedesol budget and programs a more political orientation. Poverty is increasing due to the deep recession, and Felix may struggle to address this given his lack of familiarity with the Secretariat. End Comment. Comment -------------- ¶10. (SBU) Following the news on Calderon's appointments, the stock market was down 0.2% from the day before and the peso was down 0.3%. Most analysts attribute this reaction to the market's skittishness over Cordero as new Finance Secretary, who may be seen as yet another close personal and political associate of President Calderon's. There are also some concerns that a central bank under Carstens may lose some of its autonomy. Although significant market reaction in not expected short term, it will still be important to assess the market's reaction following the Senate's ratification of Carstens as Banxico's new Governor. While the Senate is virtually certain to confirm him, the markets will scrutinize his early actions, particularly on interest rates. His views on exchange rate policy are unclear as yet. He will probably continue intervening in markets -- heavily if necessary -- if a sudden peso depreciation risks increasing inflationary expectations, but will otherwise allow the currency to float. Carstens' strong relationship with the IMF might also facilitate activating Mexico's Flexible Credit Line with the Fund, if there were sudden currency volatility. Overall, the announcement of the new appointments could be positive for local markets and other financial variables in the medium term, particularly as the announcement removes another source of uncertainty. End Comment. PASCUAL