July 9, 2019 / 11:44 PM / 3 months ago

Instant View: Mexico's finance minister quits, deputy named successor

MEXICO CITY (Reuters) - Carlos Urzua resigned as Mexico’s finance minister on Tuesday, a blow to the government of President Andres Manuel Lopez Obrador, who named a well-regarded deputy minister to replace him.

FILE PHOTO: Mexico's Finance Minister Carlos Urzua speaks as President Andres Manuel Lopez Obrador looks on during a news conference to announce a plan to strengthen finances of state oil firm Pemex, at the National Palace in Mexico City, Mexico February 15, 2019. REUTERS/Henry Romero /File Photo

Urzua, a moderate, said in his resignation letter that the administration made policy decisions without “sufficient foundation,” and that his belief was not shared that economic policies should be based on evidence and free of political motivation.

MARKET REACTION:

* Mexico’s peso declined 2.25% to 19.34 per dollar, its weakest level since May 31. It rebounded in part after Deputy Finance Minister Arturo Herrera was named as Urzua’s replacement.

* The country’s benchmark stock index fell 1.77%, to its lowest closing level since June 3.

COMMENTS:

GABRIEL LOZANO, CHIEF ECONOMIST FOR MEXICO AND CENTRAL AMERICA, J.P. MORGAN

“The timing is not good at all. The Ministry of Finance is currently working on next year’s budget - to be presented in early September - and the role of Hacienda in the discussion of Pemex’s business plan is essential. In our view we have to be aware of further details about what motivated Urzua to resign at this moment.

“Our prevailing cautious stance on monetary policy is partially rooted in events like these. The overnight policy rate has worked as an important anchor, allowing the orderly movement of the currency during the tariff scare, rate downgrades in early June, and now, with the resignation of Urzua.

“We do not expect any rate cuts this year, and provided fiscal policy uncertainty/political tensions extends further, we would not be surprised by rates on hold for longer.”

ED AL-HUSSAINY, SENIOR INTEREST RATE AND CURRENCY ANALYST AT COLUMBIA THREADNEEDLE:

“If Urzua’s resignation is (an indicator) that the government is preparing to materially increase its fiscal backstop for Pemex, Pemex’s hard currency credit spread to the sovereign should tighten despite the deterioration in Mexico’s credit profile.

“Fiscal uncertainty and Mexican peso volatility are likely to delay and limit Banxico’s (the Bank of Mexico’s) ability to follow the Fed and execute an easing cycle to support a slowing economy. The local rates curve is pricing over 100 basis points of easing over the next 12 months and we expect the front end of the local rates curve to sell off. Real rates remain high and provide a cushion for the long end of the curve.”

ALBERTO RAMOS, HEAD OF LATIN AMERICAN RESEARCH, GOLDMAN SACHS:

“This is an unexpected and negative development for it suggests significant policy and inter-personal frictions within the AMLO (Lopez Obrador) administration.

The move suggests “economic policy decisions may be guided and informed by non-economic/financial criteria and led by policymakers without the required and relevant credentials to define policy and manage the fiscal accounts.

“He was seen as a moderate policymaker, and a pretty disciplined manager of the public finances.”

JAMES BARRINEAU, HEAD OF EMERGING MARKETS DEBT RELATIVE, SCHRODERS:

“We think this is a negative development. While Secretary Urzua’s second in command will take over, this will increase questions about the AMLO administration among both investors and credit rating agencies.”

AARON GIFFORD, EMERGING MARKETS SOVEREIGN ANALYST, FIXED INCOME DIVISION, T. ROWE PRICE ASSOCIATES:

“Urzua’s departure is evidence of the disarray the government is experiencing.

“With a market-friendly figure out the door, risk premium will need to rise, especially as this is probably just one of the perhaps several departures to come from AMLO’s relatively pragmatic economic and finance team.

“The question is whether even fewer capable people can successfully steer the ship during these turbulent times.”

RICARDO ADROGUE, HEAD OF BARINGS’ GLOBAL SOVEREIGN DEBT AND CURRENCIES GROUP:

“The one calling the shots is Andres Manuel Lopez Obrador. Having a good finance minister is a positive, but not a necessary condition for investors to like Mexico.”

ALBERTO GOMEZ ALCALA, CORPORATE DIRECTOR OF INSTITUTIONAL DEVELOPMENT AND ECONOMIC STUDIES, CITIBANAMEX:

“Arturo Herrera has extensive experience. His performance as the Finance Secretary of the Federal District (Mexico City), and more recently as Undersecretary of Finance, was outstanding.

“Without a doubt, it is a great appointment. He inspires confidence and understands the market.

Herrera “knows the market’s problems and has shown a persistent will to solve them. He is a good communicator and has always been attentive to the concerns of financial market investors and participants.”

SHAMAILA KHAN, DIRECTOR OF EMERGING MARKET DEBT, ALLIANCEBERNSTEIN:

“The deterioration in macro policies has negatively impacted the growth outlook for Mexico as well as undermined business confidence. The energy policies have led to a downgrade of Pemex to below investment grade which has been a longstanding concern of ours. The resignation today is a result of these policies.

“In the short term, we do not think that it changes the direction of policy making in Mexico. Financial markets will need to exert more pressure to change the current mindset of the government.”

ABBAS AMELI-RENANI, PORTFOLIO MANAGER, GLOBAL EMERGING MARKETS, AMUNDI:

“The development is a big negative for Mexican assets. Firstly because Urzua was one of the very few market-friendly, business-oriented individuals in AMLO’s cabinet and secondly, because of the content of Urzua’s resignation letter. It confirms much of the market’s concern around the lack of credibility in economic decision-making and the absence of due process in appointments to key government positions.

“We expect the sell-off to be somewhat contained given the quick nomination of Arturo Herrera as Urzua’s replacement. Herrera has been the face of Mexico’s Finance Ministry in meetings with international investors in recent months and is a credible choice.

“The outgoing minister’s resignation letter confirms the waning influence of the office of the Finance Minister over key economic decisions. We view Mexico as a gradually deteriorating story within the emerging market landscape.”

GABRIELA SILLER, ANALYSIS DIRECTOR, BANCO BASE:

“The market reaction is responding not only to his resignation, but also to the letter.

“His rationale is very strong, and we believe this will alarm the ratings agencies even more and increase the probability of a credit ratings cut, not immediately, but probably towards the end of the year.”

EDWARD GLOSSOP, LATIN AMERICA ECONOMIST, CAPITAL ECONOMICS:

Urzua’s resignation “hints that loose fiscal policy may be on the way. While that might boost growth, it would cause bond spreads to widen and could generate a lasting risk premium on Mexican assets.

The peso’s drop is “likely to spook most members of the central bank, with the exception of Gerardo Esquivel, who is voting for interest rate cuts, and prevent monetary easing in the near term.

“While AMLO has so far kept investors onside, cracks might now start to be appearing.”

ALFONSO ESPARZA, SENIOR MARKET ANALYST, OANDA:

“Investors will be monitoring the situation, with an eye on what Urzua’s resignation means for the financing of large projects that have been promised by the Mexican president.

“The peso has been trading higher on dollar softness, but now political issues have put the Mexican currency on the back foot.”

Reporting by Stefanie Eschenbacher, Rebekah F Ward, Abraham Gonzalez, Noe Torres, Miguel Angel Gutierrez and Julia Love; Writing by Anthony Esposito; editing by Cynthia Osterman, Rosalba O'Brien, Lisa Shumaker and G Crosse

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