Carstens Proposed to Lead Banxico; Cordero Goes to Hacienda; Changes Do Not Improve the Status Quo; Political Appointments Prevail at Hacienda and Sedesol

President Calderon has finally sent a recommendation to the Senate, proposing Finance Minister Agustin Carstens to become Banxico’s Chairman. Current Minister of Social Development, Ernesto Cordero will replace Agustin Carstens at the Ministry of Finance (Hacienda). Cordero will be replaced by Heriberto Felix, who was serving as Deputy Secretary at the Ministry of Economy. The appointments of Cordero and Felix do not require the Senate’s approval.

Because of the delay in submitting the proposal, the Congressional decision about Carstens will have to be discussed during the Congressional permanent session (winter break), which will begin on December 16th. As anticipated in our special report from December 4th, the Senate’s vote on Carstens will not be a frictionless decision. The majority of Senators from different parties—including the PAN—are unhappy about the late recommendation.

Profile: Agustin Carstens

Agustin Carstens has a BA in Economics from Mexico’s ITAM and a Ph.D. in Economics from the University of Chicago. Carstens has had a prominent career in public finance and banking. Prior to becoming the Finance Minister, Carstens was a Deputy Managing Director at the IMF. He also held the post of Under-Secretary of Finance and Director of Economic Research at Banxico, where he was also Treasurer.

Hacienda

While the PRI in the Senate might not necessarily object the appointment of Carstens in itself (unlike the PRD), they could make this process a difficult one as a means to express their rejection of Ernesto Cordero becoming the next Finance Minister, and of Heriberto Felix becoming the next minister of Social Development, since the Senate cannot interfere in these appointments. In the end, we foresee the Senate approving Carstens’ appointment.

The widespread perception among the political class and within the public sector is that Cordero lacks the necessary expertise and credentials to become the Finance Minister. Ultimately, his best merit is being one of the President’s closest advisors, a status he has earned through his unconditional loyalty to Calderon.

Profile: Ernesto Cordero

Cordero has a BA in Actuarial Science and a MA in Economics from Mexico’s ITAM. He also holds a MA in Economics from the University of Pennsylvania. During the Fox administration, Cordero held posts at Mexico’s Bank of Public Works and Services (Banobras) and subsequently at the Ministry of Energy, when Calderon led these agencies. During the Calderon administration, Cordero was appointed Under-Secretary of Finance (Dec. 2006 – Jan. 2008) and subsequently Minister of Social Development.

Cordero’s appointment to lead the Ministry of Social Development (Sedesol) in early 2008 was subjected to widespread criticism by the PRI and the PRD, who demanded President Calderon appoint a development expert instead of an economist with no experience whatsoever in social policy.

Caveats

The appointment of Cordero will not necessarily result in changes in the management of macro-economic policy as it is expected that key officials will stay at Hacienda to advise him. The risk however of his appointment remains in the prospect of reforms.

Even considering his experience as Minister of Social Development where he had to negotiate intensively with the PRI governors, he has done so from a highly privileged position (i.e. distributing resources). While this experience can prove to be useful in the discussions of the budget for 2010 and 2011, it might not be the case in the upcoming negotiation of the fiscal reform, where it is expected that the PRI will take a leading role. His strong affiliation to the PAN could be an important obstacle in this process.

Sedesol

Although Heriberto Felix has relevant experience and stature to the post in question, we foresee the PRI questioning his appointment on the same grounds they objected Cordero to this post back in 2008.

Heriberto Felix has a B.A. in Economics from the Instituto Tecnologico de Monterrey (ITESM). Felix is asuccessful businessman and a PAN politician from the state of Sinaloa. In 2004 he competed unsuccessfully to the governorship of the state. In 2006 he was elected Senator but requested a licence to join the Ministry of Economy.

Final considerations

Although we believe the Executive’s delay in submitting the appointment is strategic in nature (i.e. forcing a decision by the Permanent session in the winter recess), it might also reflect resistance by a number of actors within the Ministry of Finance to have Cordero take over at Hacienda. It is also known that Carstens himself lobbied for the candidacy of Alonso Garcia Tames to this post.

Carstens and Banxico’s Independence

While it is true that Carstens is a good candidate to lead Banxico, his appointment raises doubts that Banxico will be steered by the same independence that it enjoyed under Ortiz, particularly during the remainder of Calderon’s term.

Carstens’ relationship with Calderon shows important differences in comparison to the relationship that former Finance Minister Gil Diaz had with President Fox, not to mention the relationship that Ortiz and Gurria previously had with President Zedillo. In addition, given that Carstens had allegedly asked Calderon to place him at Banxico, it would seem that Carstens would end up owing Calderon a favor. The latter is important in understanding Calderon’s insistence for Banxico to reduce the lending rates earlier in 2008, which was ultimately denied by Ortiz.

Conclusions

Overall, the reality is that the proposed changes at Banxico and Hacienda do not represent an improvement in the status quo. Carstens will need to prove himself by truly enforcing the independence of the Bank. For Cordero the challenge remains more complicated.