Mexico’s Ortíz: Into the breach

Early on December 11 Mexico’s Senate voted resoundingly to reappoint Guillermo Ortíz as governor of Mexico’s central bank.

Early on December 11 Mexico’s Senate voted resoundingly to reappoint Guillermo Ortíz as governor of Mexico’s central bank. That afternoon a raucous Chamber of Deputies narrowly defeated President Vicente Fox’s tax reforms, in the process all but burying his chances of enacting energy and labor initiatives before his term expires in December 2006 -- and considerably complicating Ortíz’s job.

The Senate ratified the 55-year-old Stanford economics Ph.D. to a second six-year term as central banker, starting this month, by a vote of 84 to 17, with nine abstentions. Amid the current disarray and paralysis in Mexican politics, Ortíz’s Banco de México represents one government institution that works. “In the environment in the country, in which nothing momentous comes out of Congress, it was important to send a message that Mexico ratifies public policies that are functioning well,” explains Senator Alfredo Reyes Velázquez of Fox’s Partido Acción Nacional party.

When Ortíz took over the bank in January 1998, inflation was about 18 percent; today it is less than 4 percent. Peso stability has returned to a country that has endured four major devaluations and attendant economic crises in less than two decades. “The most successful part of the Mexican economy has been the stabilization,” declares Arturo Porzecanski, chief economist for emerging markets at ABN Amro in New York. “Ortíz is very well respected internationally.”

In an interview before his reappointment, Ortíz told Institutional Investor : “The country has had enormous advances in many fields. It is much more resilient to external shocks.”

Despite Ortíz’s strong record, his nomination appeared uncertain until just ten days before the Senate was to vote on his reappointment. True, back in June, when International Monetary Fund managing director Horst Köhler had pointedly asked Fox who would be running the Banco de México in 2004, he had promptly replied, “Ortíz.” In the months that followed, however, grumbling about Ortíz among certain senators within Fox’s party grew louder, clouding the banker’s prospects. The legislators’ hostility toward Ortíz traced back in large part to his leadership as Finance minister during Mexico’s 1996'97 bank rescue, when the government took on bad loans from foundering banks in a $90 billion bailout. The Chamber of Deputies later commissioned an audit that found that the government had absorbed countless “irregular” loans that had been made to bank board members or that lacked proper collateral.

Before sending Ortíz’s name to the Senate, Fox coaxed and prodded his party’s disgruntled legislators. In the end, Ortíz’s mastery at the bank won them over. “His institutional performance has been effective independent of the fact that the administration of Fobaproa [the bank rescue agency] has been questionable,” says Senator Fauzi Hamdan, who as a PAN deputy in 1997 opposed Ortíz’s bank rescue plan.

Ortíz’s reappointment hardly removes him from the hurly-burly of Mexican politics. Indeed, turmoil in the Chamber of Deputies, where the still-powerful Partido Revolucionario Institucional -- Ortíz’s own party -- has split into two factions, formed the backdrop to Fox’s meeting with PAN senators.

Markets read this political infighting as yet another impediment to Fox’s reforms. Indeed, since Ortíz was confirmed the divisions within the PRI have deepened. Pro-reform leader Elba Esther Gordillo launched an independent faction within the party and initially took 70 of the PRI’s 222 deputies with her. Meanwhile, Priistas opposed to the Fox reforms remain an overwhelming majority within the party.

Mexico’s constitution putatively protects the central bank from political interference -- the Banco de México gained autonomy in 1994 -- and Ortíz’s own political savvy provides a further buffer against meddling. “He has always been on the correct side [of monetary issues] in taking decisions,” notes Raúl Feliz, an economist at Mexico City’s Centro de Investigación y Docencia Económica. For instance, after the disastrous 1994 peso devaluation, thenFinance minister Ortíz rejected a currency board and pushed for the free float of the peso -- a policy generally judged a big success.

Ortíz will need a skilled and steady hand because the Mexican economy, and the central bank, face enormous uncertainty and volatility. Now that the prospects for fiscal reform are dim, Mexico will have to run an austere budget. As it is, the country collects barely 12 percent of GDP in taxes. “The Bank of Mexico is not capable of containing a fiscal problem,” Ortíz dryly observed on Radio Formula in the wake of the defeat of tax reform.

Early signs suggest that center-leftist Andrés Manuel López Obrador, mayor of Mexico City, is in a strong position to replace Fox as president in 2006 ( Institutional Investor , September 2003). As the election draws nearer, markets are sure to react with anxiety. That will pose an indirect challenge for Ortíz -- and make his bank even more crucial to maintaining stability.