Mexico Adds Political Infighting to Factors Weighing on the Peso

(Bloomberg) -- The surprise departure of Mexico’s finance minister Tuesday and his scathing resignation letter added another item to the list of risks that are keeping the peso weak and interest rates high.

Finance Minister Carlos Urzua cited disagreements over policy and unsound decision making for his exit, sending the peso as much as 2.3% lower on concern President Andres Manuel Lopez Obrador, known as AMLO, may now shift policy to the left.

Urzua departed just as the peso was recovering from President Donald Trump’s threat to impose tariffs in a dispute over immigration and a credit downgrade of the state-owned oil company. Faced with such hard-to-quantify risks, Mexico’s central bank has maintained the highest key rate since 2008 to defend the peso, even as growth slows and the rest of the world cuts borrowing costs.

The resignation “raises doubts about future economic, monetary and fiscal policy,” said Felipe Hernandez, who covers Latin America for Bloomberg Economics from New York. It raises the threat of “lingering headwinds for private investment and economic growth.”

Urzua was a longstanding Lopez Obrador ally who served as his finance secretary when the president was mayor of Mexico City.

“The market is right to take this seriously,” said Ilya Gofshteyn, a strategist in New York at Standard Chartered Plc. “Urzua was seen as ‘the adult in the room’ in the AMLO administration, someone who lent credibility to an otherwise economically heterodox administration.”

Regaining Trust

The peso pared initial losses on Tuesday af AMLO tapped Deputy Finance Minister Arturo Herrera to replace Urzua. While Herrera is well known to investors, he won’t find it easy to reassure them that economic policy won’t change.

“The conditions under which Urzua resigned, coupled with the uncertainty that has already affected the real economy for several months, makes it difficult for his appointment to have a significant impact on market confidence,” said Jesus Lopez, a strategist at Banco Base in Monterrey, Mexico.

Herrera will provide continuity, but whether he is willing to stand his ground on policy discussions is less certain, Citigroup Inc. analysts including Julio Zamora in New York wrote in a note.

Herrera said in a press briefing late Tuesday he has great confidence in AMLO and perfect understanding with him. At his daily press conference, AMLO said Wednesday that “there could even be other resignations” within his cabinet. The peso traded 0.6% lower against the dollar as of 9:08 a.m. in New York, the biggest decline in emerging markets.

Economic Headwinds

In a tweet announcing his resignation, Urzua spoke of discrepancies in economic matters and said decisions by Lopez Obrador’s government on matters of public administration lacked foundation.

Headwinds for the economy were already mounting. Growth has slowed to just over 1%, while a $106.5 billion pile of debt at state oil company Pemex threatens to undermine government finances. Fitch has downgraded the company’s bonds and one more downgrade -- into junk territory -- could lead to their removal from some indexes, forcing the sale of the bonds and a slump in the peso.

“There is a reason real rates are as high as they are in Mexico,” Gofshteyn said. “Tactically bullish MXN views are all good and well, but on any given day a development of this sort can creep up and force position liquidation.”

As a result, Urzua’s resignation could be enough to spook Banxico board members and prevent an interest-rate cut any time soon, Edward Glossop, a London-based economist at Capital Economics, wrote in a note to clients.

“Even if the peso rebounds, the board will be concerned about a possible deterioration in the fiscal position and credit-ratings downgrades,” Glossop said.

--With assistance from Lilian Karunungan and Tomoko Yamazaki.

To contact the reporters on this story: Justin Villamil in Mexico City at jvillamil18@bloomberg.net;Sydney Maki in New York at smaki8@bloomberg.net

To contact the editors responsible for this story: Julia Leite at jleite3@bloomberg.net, Philip Sanders

©2019 Bloomberg L.P.