Banxico’s Chairman Election Process: Unnecessary Uncertainty

On December 31st, the second term in office will expire for Guillermo Ortiz Martinez as the Chairman of Mexico’s Central Bank (Banxico).

According to the laws governing Banxico, Ortiz can be re-elected. In fact, he is the favorite of the markets given his performance at the helm of the bank, which has been widely praised by national and international financial communities, during his two consecutive terms in office (1998-2003, 2004-2009).

President Calderon can propose the re-election of Ortiz or submit a short list of three candidates to succeed his post. If Calderon doesn’t submit any recommendations by December 15th, then Banxico’s law establishes that its senior member in the Board of Governors, Guillermo Güemez Garcia, would assume the post temporarily until Calderon submits his list of nominees. However, Guillermo Güemez Garcia cannot stay in this post given his age (68) which is beyond the limitation established by Banxico’s law (65).

Initial considerations

Ortiz’s main obstacle to re-election stems from a series of rifts he had with President Calderon throughout the Sexenio, as well as his historic enmity with Calderon which dates back to the controversial government contingency fund (known as the Fobaproa) launched in 1995 to bailout some of Mexico’s largest conglomerates and banks (without a condition to repay their loan). Earlier in 2008, when Mexico’s economy was clearly heading toward recession, Calderon insisted on the convenience for Banxico to lower its lending rates, but Ortiz rejected this notion despite considerable pressure from the Executive who actually referred to Finance Minister Carstens to negotiate—to no avail.

Broader Context: Counterweight to Economic Populism

The election of Banxico’s Chairman is a highly important event. Whoever gets elected and how this is done is extremely relevant to secure the independence of Mexico’s Central Bank from the country’s government and economic policies. Back in 2006, when the markets became increasingly weary about the possibility of Lopez Obrador becoming the country’s next President, the independence of Banxico was often cited as the likely counterweight to economic populism. In fact, the relevance and prestige gained by Ortiz does not reside in his management of monetary policy, but the fact that he has truly enforced and strengthened the autonomy of Banxico.


The fact that Calderon has not yet confirmed the re-appointment of Ortiz or submitted a recommendation for his replacement is already a subject of criticism by the national and international business and financial communities. The Senate’s Fall session will end on December 15th and key actors will not return from their winter recess until February. It would not be ideal to have a permanent session to discuss this topic with Senators obliged to stay during their break. Thus, in the last  few days, Senators from different parties (including the PAN) urged the Executive to announce his decision soon.

Scenarios and Political Considerations

There are four basic scenarios regarding the direction of the process in the coming days. Here is an overview along with a series of possible variations.

1.       Guillermo Ortiz Martinez is re-elected. When we first started writing the draft of this report two weeks ago, we firmly believed that there would be a strong chance of Ortiz being re-elected. Although this is still a possibility, President Calderon’s hesitation could be interpreted negatively. In other words, if Calderon wanted Ortiz re-elected, then he would have already cleared any doubts and confirmed this decision. The reasons for not re-electing Ortiz would be mostly political, the result of his historic grudge against Ortiz. As we will explain below, opting for any other choice would pose a series of problems for the Executive at different levels.

2.       Agustin Carstens is appointed to replace Ortiz. This is now the most probable scenario. Although the selection of Carstens might be welcomed by the markets, it certainly would not be as good a choice as leaving Ortiz in his post. Moreover, moving Carstens from the Ministry of Finance (Hacienda) to Banxico would carry a great deal of problems for Calderon. Beginning at the political level, such a proposal could face considerable political opposition (yet not enough to eliminate Carstens altogether). A large number of legislators will argue that Calderon is rewarding the Finance Minister after a questionable performance during the global financial crisis.

At the operational level, taking Carstens away from Hacienda would carry a number of problems for the President. It would leave Calderon with the difficult task of choosing a new Finance Minister that (a) has the necessary credentials to be reassuring to the markets; (b) is worthy enough to be respected by peers at Hacienda; (c) has a good relationship with Banxico’s new Chairman; and (d) is a skillful political negotiator with a good relationship with the PRI, which has a majority in Congress. A list of potential candidates is discussed below.

3.       Ortiz is replaced by Subgovernor at Banxico; Carstens stays at Hacienda. This is a very unlikely scenario, but it should be considered. President Calderon could recommend one of the other two Subgovernors as the new Banxico Chairman. In this scenario, Roberto del Cueto would have a better chance than Jose Sidaoui.

4.       Calderon does not submit a short list and Güemez becomes Chairman, temporarily. This would be a temporary remedy for Calderon to buy time until he decides to name a successor at some point during the upcoming Winter session in Congress. Although this scenario is very unlikely, Calderon’s message would be that Banxico is a very solid institution and therefore anyone from its Board of Governors is more than capable to manage the Bank. Also, by taking this route, Calderon would have full revenge against Ortiz.

Nevertheless, this scenario would cause a great deal of uncertainty in the markets, particularly in the short-term given the difficult phase which the Mexican economy is still going through. Also, this scenario would reflect Calderon’s urgency to get rid of Ortiz, even before finding an adequate alternative.

Who would go to Hacienda?

Since the basic scenario is now that Carstens will be replaced at Hacienda, the current discussion revolves around who should become the next Finance Minister. Here is an overview of the candidates:

Cordero. In the last few months there have been rumors that the current Minister of Social Development, Ernesto Cordero, could replace Carstens at Hacienda. The underlying thinking behind this argument is that Calderon wants to strengthen Cordero as a viable Presidential candidate in advance of the 2012 elections. Another assumption is that Calderon wants someone he can fully rely on at Hacienda.

The first assumption is faulty on a number of grounds. With growth levels at 3.5% of the GDP in the most optimistic scenarios, paired with persistent high levels of unemployment, Cordero’s image could only deteriorate at the helm of Hacienda. He would become a natural target for criticism as Calderon’s Sexenio draws to an end.

Pragmatically speaking, the reality is that Cordero does not fulfill the requisites outlined above. First of all, Cordero does not have the credentials to become the next Finance Minister (other than existing in President Calderon’s inner-circle). His appointments during the current administration, including his term as Under-Secretary of Expenditures at Hacienda throughout 2007, have been imposed by President Calderon rather than following a more natural path of ascension. Finally, as a Panista it would be difficult for him to build a solid negotiating position like Carstens enjoys with the PRI, and that has been key in negotiations with the party.

Levy or Gurria? There have been other rumors that suggest President Calderon could resort to Jose Angel Gurria, the current Secretary General of the Organization for Economic Cooperation and Development, who already served as Minister of Finance (1999–2000) in the Zedillo administration. Another potential candidate would be Santiago Levy, who is currently one of the vice presidents at the Inter-American Development Bank, and once was the General Director of Mexico’s Social Security Institute (IMSS)—a Cabinet level post.

Without elaborating on their backgrounds, both candidates have a very distinguished career in economic policy and would be far more acceptable than Cordero. Nevertheless, in the case of Gurria, it seems like negotiations were unsuccessful given the lack of incentives offered to him. In the case of Levy, it appears that he doesn’t want anything to do with the PAN. To recall, Levy had a bitter experience when he tried to promote a reform to the public pensions system under Fox, and he became the subject of numerous attacks by the unions. Fox’s administration and the PAN did little or nothing to defend him or provide stability to his post.

Garcia Tames. Alonso Garcia Tames is the current Director General of Mexico’s Bank of Public Works and Services (Banobras). From the perspective of the markets, he is a more viable candidate to replace Carstens at Hacienda, and he is actually being considered by President Calderon. Garcia Tames has extensive experience in the Mexican Public Sector, where he has served in different posts including: Under-Secretary of Finance and Public Credit and Managing Director of Central Banking Operations at Banxico.

Originally, Garcia Tames was mentioned to replace Ortiz at Banxico but since he has often worked under the supervision of Carstens this would not be the ideal decision. In the end, it’s important to remember that his name is out there only because Carstens proposed him.

Political Considerations

The Senate—which is dominated by the PAN—would be the entity in charge of deciding who becomes Banxico’s Chairman. With this in mind, it’s important to note that the PAN’s position regarding the reappointment of Ortiz has changed in the last few weeks. Although it once had mixed feelings regarding the potential re-election of Ortiz (some of the PAN Senators adamantly rejected this notion), the PAN has recently shown signs of leaning towards maintaining the status quo.

The PRI, on the other hand, has always favored Ortiz staying in his post, with Senators from the party becoming more vocal in the last few days. It is also known that the PRI will not challenge the proposal of Carstens going to Banxico, as long as his replacement at Hacienda fulfills to some extent the conditions we outlined above.

The PRD, which has somewhat remained on the sidelines of this process, would strongly protest the proposal of Carstens for Banxico on the grounds outlined above, but the party does not have a relevant vote in the Senate.

Maintaining the Status Quo

While it is true that Carstens is a good candidate to lead Banxico, there are several reasons that suggest Carstens might not necessarily be a better choice than Ortiz.

Despite some opinions that Carstens managed the crisis correctly given the limitations imposed by structural rigidities in the Mexican economy, an alternative view is that Carstens underestimated the magnitude of the crisis and provided poor advice to the President as early as 2008, while many academics were already warning of a full-scale crisis via the US economy. Hedging the oil prices against fluctuations was a fortuitous accident, but his consistently optimistic assessments about the effects of the crisis during 2008 show evidence that he really didn’t know what was coming. Similarly, the highly inflated budget that was passed in 2008, along with the lack of austerity measures that he could have established, did not provide a cushion during the crisis.

Similarly, his 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. But going back to the most recent example, Gil Diaz was never persuaded by President Fox to do or say something he didn’t believe in.

Finally, because he has allegedly requested that Calderon place him at Banxico, then it seems like Carstens would end up owing the Executive a favor. The latter is important when thinking about Calderon’s insistence for Banxico to reduce the lending rates earlier in 2008, which was ultimately dismissed by Ortiz.

Thus Carstens’ relationship with Calderon suggests that under his leadership Banxico might not be steered by the same independence that it enjoyed under Ortiz, at least during the remainder of Calderon’s term in office.

But does Ortiz want to stay?

This is a tricky question. In recent days Ortiz has shown a keen interest to stay at Banxico. Nevertheless, he has used many trips abroad throughout 2009 to criticize Mexico’s economic policy under the Calderon administration.

Thus, as things stand right now, nobody knows with certainty whether Ortiz would really like to repeat another term. In the end, Ortiz has more than a few options. Given his stature, he could easily occupy a prominent post at the IMF or any other international economics organization. He could then head a private bank or corporation in Mexico, or become part of a number of advisory boards.

Other perspectives

Finally, beyond the political considerations discussed throughout this report, there are other peripheral yet important views that concur it’s time for Mexico to get rid of a number of paradigms concerning the profile and credentials of who leads Banxico and Hacienda. These views point at other emerging markets, such as Chile, where change at the helm of Banco Central de Chile was feared, but showed beneficial results. Similarly, there is the example of Brazil, where a career trained physician became the Finance Minister, and he has successfully steered the country’s economy toward growth.

However, despite the validity of these views, it’s still difficult to believe these could be the arguments guiding the ongoing decision process at Presidential Calderon’s office.

Final Considerations

Because Calderon rarely responds to criticism, we do not believe that he will submit the candidacy of Carstens until early next week. No matter what he decides in the end, different business leaders and economists will rightly argue that Calderon’s hesitance very much reflects the predominance of political considerations over what should be a more certain and transparent process.