A Blow Against AMLO Bodes Ill for Mexico

(Bloomberg Opinion) -- After seven months of laboriously convincing the international markets that he can be trusted with the presidency of Mexico, Andres Manuel Lopez Obrador risks seeing all his work undone by tweet. The sudden resignation of Carlos Urzua as his finance minister, and the resignation letter he posted on Twitter are deeply damaging. In combination, they are almost exactly what investors were worried could happen when they sold off Mexican assets ahead of AMLO’s inauguration last December.

This is partly because of the importance of the finance minister in Mexican politics. The Finance Ministry, known as Hacienda, has a strong tradition of independence and continuity, which has remained intact over the last two decades as Mexico has gingerly embarked on democracy. It has a deep bench of economists with excellent U.S.-trained academic credentials, who usually alternate between the treasury and the central bank. Since Mexico’s last major devaluation crisis in 1994, Hacienda has maintained rigid fiscal orthodoxy. While it hasn’t managed to widen the tax base in a way that politicians of all sides have hoped, the ministry has strengthened its reputation with foreign investors. Thanks to Hacienda, Mexico’s credit has been rated investment grade since 2002, and the country is regarded as so safe that it can even launch bonds that won’t be repaid for a century.  

In a country of weak institutions, then, the Finance Ministry is a vital exception. To use a popular soccer analogy, Hacienda is the goalie of Mexican politics. Other politicians slip and fall and allow all kinds of attacks to penetrate the country’s defense – but Hacienda is always there to make the save at the last minute. Mexico may not win, but it can avert disaster.

Urzua’s resignation now puts that institutional strength to the test. The president was wise to replace him immediately with his deputy, Arturo Herrera. An economist with a doctorate from New York University, Herrera has spent most of his career at the World Bank, and is thus exactly the kind of career technocrat that international investors want to see in charge of the budget.

But Herrera’s freedom of movement will be limited, because Urzua’s resignation also calls the entire AMLO approach to government into question. A U.S.-educated economist, Urzua spent three years as AMLO’s head of finance when he was the mayor of Mexico City. At that point, AMLO surprised critics by running the city relatively conservatively, and also by juggling finances in such a way as to create the funds for him to pay small but symbolic “pensions” to the city’s elderly. It is very damaging that a man who has been so closely involved in the AMLO project, and who played an important role in his success, should have decided to quit.

His public reasons are even more damaging. According to Urzua, he had to contend with “the imposition of functionaries with no knowledge of Hacienda,” thanks to people with influence over the government who had a “blatant conflict of interest.” He also alleged that there was no reflection in the government for his belief that “all economic policies must be based on evidence, guarding against the diverse impacts they might have, and free of all extremism, be it of the left or right.” From a close colleague of AMLO, and addressed to an audience worried that the new president is an extremist prone to appointing cronies who might want to weaken the orthodox hold over Hacienda, this is as damaging an allegation as Urzua could possibly have made.

Ultimately, AMLO knows that he is answerable to international capital markets, like his predecessors. A run on the peso or a steep hike in borrowing costs would render his more ambitious plans moot. And the credit-rating companies loom large. Years of hard work have left Mexico with a rating comfortably within investment grade, according to all the main rating firms. It can withstand one downgrade without much difficulty. But the signal of lost confidence would be powerful, and both S&P and Moody’s Investors Service have the country on negative outlook. Even with the swift appointment of Herrera, downgrades must now be very likely.

AMLO’s administration has finally done exactly what the markets and the agencies feared it would. Now the question is whether the credit-rating companies and markets will do what the left in Mexico had always feared – and render impossible the kind of social change and public investment that AMLO wanted to achieve.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

John Authers is a senior editor for markets. Before Bloomberg, he spent 29 years with the Financial Times, where he was head of the Lex Column and chief markets commentator. He is the author of “The Fearful Rise of Markets” and other books.

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