Upcoming Change at Banxico: Some Initial Thoughts

December 15th marks the end of Jose Sidaoui’s second term as a member of the governing board of Banxico, Mexico’s central bank. Although Sidaoui could remain for another eight-year term, most insiders believe he will not seek to retain his current position as he has already held the post for 16 years.

Like other central banks, Banxico is an autonomous, regulatory entity that serves as the country’s monetary authority and lender of last resort. In recent years, Banxico has garnered international praise for maintaining a stable monetary policy, controlling inflation and successfully navigating financial crises.

Banxico’s Board Overview

Banxico’s board is composed of five members—a governor and four deputy governors— who are nominated by the president and confirmed by the Senate. The governor is appointed for a six-year period that starts during the president’s fourth year in office while deputy governors are appointed for eight-year periods that are programmed to expire at different times. Although board members can be re-appointed to the same position, they cannot be appointed after they reach 65 years of age. Traditionally, the president nominates two or three candidates to the Senate, of which one is chosen to fill the post.

Like the majority of the current board members, Sidaoui’s replacement is expected to have an advanced degree (usually a PhD) in economics from a top US institution and to have held important positions in public institutions (usually Banxico or the Finance Ministry) or be a high-level executive in the private finance sector.

Board Dynamics

With regards to monetary policy, Sidaoui is one of two more conservative (hawkish) deputy governors. Governor Agustin Carstens and the other members tend to hold less conservative (dovish) points of view. As a result, financial observers are interested to see whether Sidaoui’s replacement will be willing to assume a similarly independent position.

Potential Candidates

Some sources consulted for this report have suggested that former candidate to the Banxico board, Lorenza Martinez, will be among the potential nominees to replace Sidaoui. As a woman, Martinez would diversify the currently all-male board. Still, her known rivalry with current board member Ramos Francia and her relative political inexperience are obstacles to her potential nomination.

Martinez’s husband and current Chairman of the Mexican Banking and Securities Com- mission (CNBV), Guillermo Babatz, is also mentioned as a potential candidate. Babatz has impressive credentials yet the recent HSBC money laundering scandal in Mexico may affect his candidacy. (The media recently criticized his role as chief banking regulator, saying he was aware of several irregularities surrounding HSBC’s illegal accounts and did not act in a timely manner.)

Another possibility is Miguel Messmacher, who is the head of the Economic Planning Unit at the Ministry of Finance. These three candidates are regarded as favored choices by Governor Carstens.

Other sources, however, believe none of the above candidates will make it to the board, and have instead suggested that the upcoming board member is likely to come from within Banxico. The logic behind an internal hire is that someone who already works at Banxico could play an active role in the bank’s operations and non-monetary affairs, much like Sidaoui has done.

Peña Nieto and Carstens

In recent years President Calderon has relied heavily on Carstens to choose new deputy governors; however, this seems poised to change with incoming president, Enrique Peña Nieto. Although Carstens will remain an influential voice in choosing upcoming board members, Peña Nieto will rely heavily on his closest advisors (i.e. likely Chief of Staff Luis Videgaray) to pick his nominees. For this reason, Peña Nieto may overlook some of the aforementioned candidates who have strong ties to Carstens, such as Martinez, Babatz or Messmacher.

Politics vs. Pragmatism

A central question is whether Peña Nieto’s economic team will aim to achieve a more balanced board—by appointing someone with a more independent/hawkish profile to serve as a counterweight to Carstens—or will try to bring harmony to the board. Another important question is whether Peña Nieto’s team will try to diversify the board by including a member of the private sector; all current members except for Roberto Del Cueto have worked almost exclusively in the public sector.

In the past, the Mexican financial sector has lobbied to preserve some kind of equilibrium between the private and public sector, with two members of the board hailing from the private sector and two others from public financial institutions. Still, some financial analysts disagree about the importance of maintaining this balance.

Other political considerations such as the relationship between the candidates and PRI politicians or the political opposition will undoubtedly come into play. At the same time, it is important to consider that Sidaoui could still reconsider his decision to leave the Board and attempt to stay for another term—a decision that will be supported by former Banxico Governor, Guillermo Ortiz.

Final Remarks

It is still early to say who will become the Banxico board’s newest deputy governor, yet the shortlist will become more clearly defined by early December when the president-elect makes his cabinet appointments as the new Finance Minister could help decide the new Banxico deputy governor.

We anticipate the upcoming selection process to be much smoother than that of the most Board’s recent member, Ramos Francia (Calderon submitted his proposals extremely late and the Banxico Board had to operate with one fewer member for four months). By the same token, we expect Peña Nieto and the PRI-dominated Senate to settle on a non- controversial technocrat with strong academic and professional credentials regardless of whether his or her experience lies in the public or private sector. This is key for Peña Nieto to give certainty to the markets.

With the exception of Ramos Francia, whose term ends in December 2018, Peña Nieto will have the opportunity to replace all of the sitting board members during his presidency.

Regardless, we support the view that an internal candidate with substantial experience in Banxico’s operations and with less exposure to politics would be the most optimal, and perhaps the most politically viable appointment.