Reducing the daylight between Government and Central Bank

In a break with tradition, newly-appointed Banco de México Governor Agustín Carstens invited Finance Secretary Ernesto Cordero and Undersecretary Alejandro Werner to attend the Bank’s first policy meeting of the year.  In addition, the Bank and Ministry of Finance jointly announced a decision to start accumulating international reserves. Noted columnist José Yuste, “This would be the first large scale joint operation between the Bank and Hacienda, inaugurating a new relationship between Carstens and Cordero, together with President Felipe Calderón himself. People speak of an understanding which remembers that the central bank is an institution of the federal government.” (Excelsior 1/27)

Cordero and Carstens draw similar pictures of the economy

The key economic policymakers, in their new roles, gave similar perspectives on the economy in back-to-back presentations at the ITAM’s annual economic conference. Banco de Mexico governor Agustín Carstens said that the economic recovery that began in the second half of 2009 will continue, and that any increase in inflation that resulted from higher taxes and increased fuel prices was likely to be transitory and not require a policy response from the central bank. Finance Secretary Ernesto Cordero emphasized the positive contribution from the government’s reform initiatives: the liquidation of Luz y Fuerza, the energy reform, the liberalization of investment rules for pension funds, and the modernization of public-private partnership investment rules. The consensus outlook for 2010 is economic growth of about 3%, and inflation of about 5%.

Their presentations may be found on the Hacienda and Banxico websites.

Carstens confirmed

As expected, the Senate confirmed Agustín Carstens as the next governor of the Banco de México. The vote was 81-19, with the PRD, PT, and Convergencia voting against.

Carstens to Banco de México; Cordero to Ministry of Finance

President Felipe Calderón finally made known his decision on economic policy management. This morning, he nominated Finance Secretary Agustín Carstens to be the next Governor of Banco de México, replacing Guillermo Ortiz who has led the central bank for the last 12 years.  Carstens’ nomination to a six year term must be ratified by the Senate. He also named Ernesto Cordero, who has been the Secretary of Social Development since 2008 as the new Secretary of Finance. Cordero, who has an MA in economics from the University of Pennsylvania, has been one of Calderón’s closest associates over the past decade. Cordero was head of legislative studies for the PAN from 2000-2003 when Calderón was the head of the PAN delegation in the Chamber of Deputies. In 2003, he went to Banobras and then the Ministry of Energy when Calderón headed those two agencies, and he was the candidate’s chief adviser on economic affairs during the 2006 presidential campaign and transition.  In his remarks today, President Calderón said the personnel changes:

will allow for a better harmonization of the relation between the federal Government and the Central Bank, in order to reach the twin goals of keeping low rates of inflation and … at the same time promoting the changes and transformations that will enable the acceleration of the rate of growth of our economy.

The President also named Heriberto Félix Guerra as the new Secretary of Social Development. Félix is a senator from the Sinaloa (on leave of absence), and has been the undersecretary for small and medium business at the Ministry of Economy. (Presidencia 12/9)

Deadline approaches for nominating Central Bank governor

Breaking a long silence, Banco de Mexico governor Guillermo Ortiz said he would be willing to serve a third term as head of the bank: “If the President and the Congress think that I can continue to be of service, I will do so with great pleasure; I will never say no to Mexico,” Ortiz said. The President is expected to make his nomination, which must be ratified by the Senate, this week.  Calderón has been believed to have a clear preference for putting Agustín Carstens in the central bank, with Ernesto Cordero taking over at the Ministry of Finance. However, as columnist Salvador García Soto noted, the trial balloon of Cordero’s name “was not well viewed by Congress—particularly by the PRI Senate delegation—or by influential Wall Street voices who lack knowledge of the current Minister of Social Development.” (Universal 12/3, 12/5)

Carstens responds to critique of economic policy

Finance Minister Agustín Carstens responded vigorously to the comments made earlier in the week by Nobel prize winning economist Joseph Stiglitz.  Speaking at a conference in Mexico, Stiglitz said that Mexico’s response to the global financial crisis had been “unusual” with a “relatively weak” fiscal stimulus in contrast to the actions of many other countries. He added that Mexico needed to diversify its exports, and that relying on economic recovery in the U.S. was unlikely to result in a strong recovery since the world’s growth is concentrated in Asia.  Stiglitz also said the government need to invest not only in infrastructure but also in technology, education, and programs for improving economic opportunity. Carstens responded by noting that the government had to respond to the twin crises that hit Mexico­–the global recession and the 800,000 b/d decline in oil production. “We did not have the option of contracting more debt. One has to act responsibly, and this is what President Calderón decided and did,” Carstens said. Economy Secretary Ernesto Cordero said that Stiglitz “needed to read a bit more on Mexico” before making comments. The Templo Mayor column observed: “Wow. Looks like the Minister of Finance has decided to celebrate the anniversary of the Revolution by shooting at Nobel Prize winners.” (Universal 11/19, 11/20, Reforma 11/20)

Revenue bills pass Chamber

After stopping the clock at midnight of the statutory deadline, the Chamber of Deputies passed the five revenue bills. The key vote was 415 to 24, with all parties voting in favor except the PT and Convergencia. The Chamber rejected the government’s proposed 2% anti-poverty sales tax and instead raised the value added tax rate by 1% to 16%, leaving food and medicine exempt. The Chamber approved the government’s other tax proposals: a temporary increase in the income tax rate to 30%, a 3% tax on Internet and other telecoms services; a 1.5% increase in excise taxes on tobacco and alcohol; a 1% hike in the tax on large cash deposits in banks; and an increase in tax on gambling earnings.  The Chamber’s bills increase the target deficit by 0.2% to 0.7% of GDP. Finance Secretary Agustín Carstens estimated the package would raise Ps. 136 billion in tax revenues. He called it “a good package” and added, “given the circumstances, it is the best agreement possible.” (Reforma 10/22).

Quick move to offer generous indemnities to workers

Finance Secretary Agustín Carstens and Labor Secretary Javier Lozano announced that the government would offer redundant LFC workers up to Ps. 20 billion in indemnities, about 25% more than the law requires. (LFC’s annual deficit, which is covered by the government, is more than Ps. 40 billion.) The average worker would get a payment equal to 2-1/2 years’ salary and benefits. Workers have one month to decide if they will accept the government’s offer. Carstens estimated that about 10,000 of LFC’s 43,000 active workers could be re-contracted to work at the new company. The 20,000 retirees will continue to receive their current pensions. (Reforma 10/12)

Carstens defends new taxes

Finance Minister Agustin Carstens defended the 2010 budget plan, with its tax increases, before a hostile Chamber of Deputies. Carstens said that the financial markets would not finance a higher deficit, given the permanent reduction in oil export volumes. He said the proposed 2% anti-poverty tax would enable a major expansion of anti-poverty programs such as Oportunidades and food assistance, and said that for every peso the poor paid in higher taxes, they would receive back ten in social program benefits. Congressmen from the PRD, PT, and Convergencia unveiled a massive 12-meter banner while Carstens spoke that read, “No to the 2% Value Added Tax.” (Reforma 9/16)

Budget blends new taxes, spending cuts, and deficit financing

Finance Minister Agustín Carstens presented the government’s budget for 2010. The highlight was a new 2% “Contribution to Alleviate Poverty,” assessed on the value of all goods and services, with the proceeds dedicated to increased funding of anti-poverty programs.  Other tax increases, including a 2% increase in the maximum income tax rate, a new 4% tax on telecommunications services, an increase in the tax on cash bank deposits, and higher excises are intended to offset the permanent decline in expected oil revenues. Total government programmable spending would be reduced by 3.4%, including the absorption of the Ministries of Tourism, Agrarian Reform, and Public Function by other agencies. The Public Sector Borrowing Requirement was pegged at 3.1% of GDP for 2010, with plans to return to balance by 2012. (Hacienda 9/8)