AMLO’s Money Guy Sends Message to Anxious Wall Street Crowd

(Bloomberg) -- In his first trip abroad as Mexico’s finance minister, Carlos Urzua had a message he clearly wanted to deliver to the New York investing community. It was, in essence: Don’t worry, the young administration of President Andres Manuel Lopez Obrador understands the laws of economics and isn’t about to try any radical experiments that could jeopardize Mexico’s financial health.

Over the course of an almost 40-minute interview that he packed into a day full of meetings with Wall Street financiers, Urzua emphatically, and repeatedly, stated that the government will not seek to engineer faster growth than the economy can realistically handle (a mere 2 percent this year); that it respects the autonomy of the central bank; that it’s slashing spending in some ministries; that there will be no tax increases and, if anything, possibly a tax cut to help turn around the state-run oil giant Petroleos Mexicanos.

The peso’s rally in recent weeks was an affirmation, Urzua said, of the market’s growing confidence in a leftist president many had feared, and he predicted excitedly that the currency could keep strengthening in coming weeks — to trade below 19 pesos per dollar or better.

"We have a budget that’s a substantial reduction in spending for many ministries," Urzua said. "We will be very respectful with the Banco de Mexico. We’ll respect their autonomy completely."

All of this, though, raises some key questions: Did the Mexican people really vote AMLO into power to proceed so cautiously? Isn’t the slow-and-steady approach that locked the country into 2 percent annual growth rates for decades what pushed fed-up Mexicans to vote overwhelmingly last year for AMLO, an outsider with a populist streak over the years? How will they react when this reality eventually sets in? 

‘Properly Run’

Urzua says improving social programs will alleviate some of the immediate-term pain and anguish Mexicans suffer and will take some pressure off the government. More efficient and robust public investment will eventually help lift growth in the second half of Lopez Obrador’s six-year term to an average of 4 percent, he said.

"Social programs will be properly run," rather than riddled with corruption and clientelism, Urzua said.

Lopez Obrador recently called on the central bank, which has a single inflation mandate and has been raising rates for three years, to pay more attention to growth. That contrasts with Urzua’s insistence during the interview in not interfering in any way with the central bank’s work.

In the interview, the first he’s given since becoming minister, Urzua said that the government’s 2019 budget forecast of 20 pesos per dollar is somewhat pessimistic and that he thinks that economic growth could reach the upper band of his 1.5 percent to 2.5 percent estimate.

Reforms, Budget Control

Mexico hedged oil for 2019 as did Pemex, as the state oil company is known, Urzua said. He wouldn’t reveal at what price. Both plan to hedge again for 2020, he said.

Lopez Obrador has been mending fences with investors after sending the peso into a tailspin in late October when he said he’d cancel a $13 billion airport already under construction. The peso has now fully recovered from that rout thanks to a 2019 budget widely regarded as prudent, if not somewhat optimistic, and a deal struck with bondholders of the cancelled airport project.

Urzua said that while he’s in no rush to buy back more bonds from the canceled airport project, he may eventually do so if there’s money left over. Mexico has repurchased $1.8 billion of the $6 billion outstanding.

He added that royalties Pemex pays will likely continue to be reduced in coming years, and that he doesn’t believe a law to reduce bank fees is the proper way to bring those rates down.

Tight Ship

The nation’s stock exchange rallied after an announcement on Tuesday that Mexico will cut the tax rate paid by companies on the proceeds of initial public offerings and eliminate a withholding tax for foreign investors in corporate bonds. However, the Bolsa hasn’t fully recovered from news in early November that members of Lopez Obrador’s Morena party in the Senate want a law to cut bank fees.

Urzua, a 63-year-old mild-mannered professor who earned a doctorate in economics from the University of Wisconsin, has taught at Princeton and Georgetown. He managed the finances of Mexico City from 2000 to 2003 when Lopez Obrador was mayor. He reined in expenditures then, restraining the increase in indebtedness in real terms during his boss’s term to 3.3 percent, compared with the previous administration’s 19 percent, according to data from the Mexico City government.

For a brief moment during the interview, Urzua seemed as though he might go off script, saying Mexico’s benchmark lending rate of 8.25 percent "is an obstacle that could be a bit complicated." But he quickly returned to his message of non-interventionism: "The rate isn’t that high, and we think if we can fine-tune the financial system we could increase credit."

To contact the reporter on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, ;David Papadopoulos at papadopoulos@bloomberg.net, Robert Jameson

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