Finance

Mexican Finance Minister Resigns After Clashes With President; Peso Slides – The Wall Street Journal


Mexican Finance Minister Carlos Urzúa resigned on Tuesday from the cabinet of President Andrés Manuel López Obrador.


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henry romero/Reuters

MEXICO CITY—Finance Minister Carlos Urzúa resigned, a surprise departure that deepened doubts among investors over economic policy under President Andrés Manuel López Obrador, including fears he may eventually undermine Mexico’s financial stability.

In a strongly worded resignation letter on Tuesday, Mr. Urzúa cited “many disagreements over economic policy,” writing the administration was basing some economic decisions on extremist ideology.

A person close to Mr. Urzúa told The Wall Street Journal that the former finance minister had disagreed with a number of government decisions, including one to cancel a partially built Mexico City airport. He also clashed with how the government was cutting spending in order to fund new social programs.

The peso weakened on news of Mr. Urzúa’s exit, falling to 19.13 to the dollar from around 18.88 earlier. The benchmark IPC stock index fell 1.8%.

Fallout is likely to remain limited on the currency, some analysts said, mostly because higher interest rates in Mexico attract investors looking for better returns. The peso is the world’s eighth-most-traded currency and the most traded among emerging markets, according to the Bank for International Settlements.

Mr. López Obrador, a leftist nationalist who took power on Dec. 1, named Deputy Finance Minister Arturo Herrera, an economist with government and World Bank experience, to head the ministry.

Mr. Urzúa’s resignation “is an unexpected and negative development,” said Alberto Ramos, chief Latin America economist at Goldman Sachs, adding that it suggests friction within the administration.

Still, the appointment of the respected Mr. Herrera will limit the impact on financial markets, said Jaime Reusche, senior credit officer at Moody’s Investors Service.

Many investors viewed Mr. Urzúa, who holds a Ph.D. in economics from the University of Wisconsin, as an important figure in the administration, a man committed to maintaining budget discipline as the new government ratchets up social spending and investment at state oil company Petróleos Mexicanos.

“One clear possibility is that some powerful members of the left-wing government are pushing for looser fiscal policy,” said Edward Glossop, an economist at Capital Economics. “With Mr. Urzúa—one of the more hawkish members of the economic team—now out of the way, this could pave the way for a loosening of the purse strings.”

Mr. López Obrador released a video statement accepting Mr. Urzúa’s resignation. He said his government would remain committed to changing the country’s economic policy of the past 36 years—a period in which Mexico opened its economy to trade, sharply reduced the government’s role in the economy and stabilized public finances, but has struggled to generate broad-based growth or significantly narrow stark inequality.

He vowed to put the poor at the center of Mexico’s economic agenda, tackling corruption and slimming some areas of government to pay for social programs including higher pensions and jobs for young unemployed people. He said this was generating friction among his administration, an apparent reference to Mr. Urzúa.

The president and his economic team had clear policy differences even before he took power. As president-elect, he canceled the country’s biggest public-works project, a $13 billion Mexico City airport that was already a third complete, saying it was a waste of money. Mr. Urzúa as well as others opposed the decision, some economists and government officials said privately.

Mr. López Obrador has also backed, over the reported objections of Mr. Urzúa, an $8 billion refinery for state oil company Pemex. Many economists view the project as unnecessary, given Pemex—the world’s most indebted oil company— is struggling to reverse declining output.

Three international companies that Mr. López Obrador’s government invited to submit proposals for the project said they couldn’t deliver a refinery of the size his government wants under the budgeted $8 billion and in three years’ time. In response, the president handed the project to Pemex, which hasn’t built a refinery in decades.

Mr. Urzúa and other senior finance-ministry officials found out about the decision when the president announced it publicly during his daily morning news conference, the person close to Mr. Urzúa said.

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Pemex’s financial difficulties prompted Fitch Ratings to strip the company of its investment-grade credit rating in June. Fitch also downgraded Mexico’s sovereign rating to its second-lowest investment grade, citing among other things Pemex’s deteriorating credit profile, external threats from trade tensions and “some domestic policy uncertainty.”

“Urzúa had largely been viewed as a voice of common sense and stability in an otherwise unpredictable administration that often antagonized private interests,” said Alejandro Schtulmann, head of research at the Empra political-risk consulting firm. “Observers were aware of his struggles to persuade President López Obrador to make informed decisions.”

The former finance minister also clashed with the government over how it was cutting spending to fund new social programs and the refinery, the person close to him said. The new administration has slashed the salaries of top public servants and stripped many of private health insurance, leading to an exodus of talent among various bureaucracies. Cuts in areas like public health and public security have led to sporadic protests.

The person overseeing the budget cuts wasn’t Mr. Urzúa, but Raquel Buenrostro, a senior finance ministry official put in her job by the president and reporting directly to him, the person close to Mr. Urzúa said, adding that the former finance minister felt her “irrational” cuts were hurting economic growth. This person said the president pledged better coordination for Mr. Herrera, Mr. Urzúa’s successor.

Ms. Buenrostro couldn’t immediately be reached for comment.

The Mexican economy has slowed in recent quarters and is expected to grow 1.1% this year, according to the latest central bank survey, down from 2% in 2018.

Mr. Urzúa’s seven-month stint as finance minister was the third-shortest in Mexican history, said Sergio Negrete, an economist and professor at ITESO, a Jesuit university in Guadalajara. Mexico’s shortest-tenured finance minister was Jaime Serra Puche, who lasted just 29 days in late 1994, when Mexico’s currency collapse sparked a crisis shortly after the inauguration of then-President Ernesto Zedillo.

“The problem is, no matter who replaces Urzúa, you will see who is really in charge of economic policy, and that’s López Obrador,” Mr. Negrete said.

Mr. López Obrador has long disdained technocrats that he blames for Mexico’s weak economic record, and insiders say he often rejects evidence that doesn’t fit his world view.

Indeed, Mr. Herrera, the new finance minister, was caught out in March when he told the Financial Times that the government wouldn’t go ahead with the new refinery, spending the money instead to boost oil output. But he was quickly overruled publicly by the president, leading some investors to conclude that the president was the only one that matters when it comes to economic policy.

Mr. López Obrador has long pledged to keep Mexico’s finances in check. In April, the government cut spending by some 0.5% of economic output this year in order to keep the budget shortfall at about 2.5% of gross domestic product. Mexico has public-sector debt of about 45% of economic output—close to its emerging market peers, some economists said.

Many economists, however, feel the government’s projected savings from tackling corruption and cutting spending won’t be enough, forcing the government to decide between raising taxes, taking on debt, or scrapping some new programs.

Marco Oviedo, chief Latin America economist at Barclays, said he expects the López Obrador administration to stick to its goal of maintaining fiscal discipline, and that eventually it would raise taxes to fund the ambitious social programs, but not until 2021. “They’re at a very early stage with the programs, seeing how far they can go by reducing the size of government.”

Write to Anthony Harrup at anthony.harrup@wsj.com and Juan Montes at juan.montes@wsj.com

Copyright ©2019 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Appeared in the July 10, 2019, print edition as ‘Mexico Finance Chief Quits, Citing Rift With President.’

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