Mixed Reaction to Mexico’s New Chief of Central Bank

A day after he cajoled the opposition-controlled Congress into approving the national budget, Finance Secretary Guillermo Ortiz was given the equally daunting job of running the Mexican central bank, where he once worked.

The Senate on Monday confirmed Ortiz’s surprising nomination, which was announced Sunday night by another former employee of the Bank of Mexico--President Ernesto Zedillo. The president and Ortiz have worked together closely to revive the Mexican economy since Ortiz became finance secretary in December 1994 at the height of the peso crisis.

By putting Ortiz at the helm of the Bank of Mexico for a six-year term, Zedillo assured that he will stamp his view on monetary policy well after his presidential term ends in 2000--even if Zedillo’s Institutional Revolutionary Party loses its first presidential election since the party was founded in 1929.

Some analysts question whether Ortiz, the architect of Mexico’s economic recovery, will prove able to remain independent from the government he has been part of for the last decade.

Others, however, note that the Stanford-educated economist cut his professional teeth serving as chief of economic research for the central bank in the 1970s and early ‘80s, and so fully understands the bank’s crucial role in defending the value of the often-erratic peso.

Zedillo’s appointment of Ortiz came after the duo’s victory a few hours before in winning approval of the 1998 national budget, just ahead of Monday’s legislative adjournment. A deadlock over the budget would have undermined Zedillo’s control over economic policy, and could have upset the broad-based recovery that has brought growth to a sizzling 7% this year.

Opposition parties won a majority of seats in the lower House of Deputies in July elections, thrusting Mexican politics into an uncertain era of democratic competition and compromise. The budget debate was seen as the first real test of the new political order, and it raised concerns that the tight fiscal restraint underlying the recovery could be threatened.

Ortiz, a wiry, intense man regarded more as a technocrat than a political operative, was widely applauded by political analysts for his role in the $106.9-billion budget, which maintains the country’s deficit at a moderate 1.25% of the gross domestic product.

The markets also liked Ortiz’s appointment as successor to retiring Bank of Mexico Gov. Miguel Mancera--as well as the successful outcome of Mexico’s first genuine democratic budget debate. The peso strengthened from the opening of trade, from 8.20 to the dollar to 8.11, and the Bolsa stock index rose 1.1%.

“Ortiz has done a remarkable job,” said Gray Newman, chief Latin American analyst for HSBC Markets in New York. “He played a major role in helping Mexico turn around its perceptions in the international capital markets and bond markets, which improved long before the economy did for the average Mexican.”

Ortiz, 49, has often been described as among the strongest members of Zedillo’s Cabinet, and the president’s willingness to deploy him to the Bank of Mexico, and thus lose him from the Cabinet, was the main reason for analysts’ surprise at the choice. Most pundits had tipped two deputy governors of the central bank, Francisco Gil Diaz and Jose Siddaoui, as the main candidates.

Zedillo, himself a former executive of the central bank, said Gil had resigned from the bank to go into private industry. That means Zedillo will now appoint another deputy governor, and there will be another vacancy in 1998. Under the law that gave the Bank of Mexico autonomy in 1994 from the Finance Ministry, policy decisions are made by the bank’s five-member board.

Jonathan Heath, an independent Mexican economist, criticized Ortiz’s appointment, pointing out that “the central bank has gone to great pains to establish its credibility, and, in that sense, the designation was a key way to consolidate its autonomy. [But] by placing the head of the Finance Ministry as head of the central bank, the concept of autonomy almost goes down the drain.”

Heath said Ortiz and Zedillo were known to have opposed the bank’s move to a floating exchange rate policy in 1995 when its foreign reserves virtually ran out. Heath said Ortiz now might try to move toward a Chilean-style system of targeted exchange rates.

Lacey Gallagher, Standard & Poor’s director of sovereign ratings for Latin America, said Ortiz was a good choice from a pool of candidates all closely linked to the Finance Ministry and central bank.

“I wouldn’t expect a major change from him [on exchange rate policy],” she said. “I think Ortiz has a very firm understanding of the markets and of what is doable and not doable.”

HSBC’s Newman noted that Mexico’s floating exchange rate policy had helped it shrug off the recent worldwide market turmoil that has ravaged economies in Asia, which had tried to defend fixed exchange rates. That very success would constrain Ortiz from any major policy change for at least the next couple of years.

“The float has served Mexico remarkably well,” Newman said. “With Asia fleeing from managed rates, this would be a particularly inappropriate time for Mexico to move back to such a system.”

Ortiz, the son of an Army general, received his doctorate from Stanford in 1977 and then joined the Bank of Mexico. He became a director of the International Monetary Fund in 1984 and was named deputy finance minister in 1988, overseeing the bank privatization program.

He joined Zedillo’s Cabinet on Dec. 1, 1994, as secretary of communication and transport, and 28 days later was named finance minister after the disastrous peso devaluation led to the downfall of his predecessor, Jaime Serra Puche.