Finance minister of the year 2014: Reformer Videgaray transforms Mexico

Mexico’s finance minister is the rarest of breeds in the current global economy. He is delivering reform-driven economic growth

Finance minister of the year 2014, Luis Videgaray, Mexico

JPMorgan selects the venue for the annual meeting of its International Council carefully. The bank likes to think that its choice of host city embodies the financial zeitgeist – that the city and country represent the world’s current greatest potential growth story.

In late October, chairman of the council, former UK prime minister Tony Blair, will bring the meeting to order in Mexico City. It’s not a surprising or controversial choice and Euromoney is in complete agreement with Jamie Dimon and his JPMorgan colleagues that the progress of the reforms of the Peña Nieto administration – of which the central pieces of legislation have been led by finance minister Luis Videgaray – have surpassed already heady expectations.

Videgaray has been a close political confidant of Mexico’s president Enrique Peña Nieto for years: between 2005 and 2009 he was secretary of finance for the State of Mexico while Peña Nieto was governor. Videgaray also headed Peña Nieto’s 2012 presidential campaign. The president-elect then appointed him head of the economic reform agenda in July 2012, and co-head of the team in charge of policy direction in December 2012 (alongside interior minister Miguel Osorio Chong).

 Further reading
Good news. Energy minister Pedro Joaquin Coldwell (L) and Pemex chief executive Emilio Lozoya after signing the Round Zero’ allocation
Mexico CBG interview: Carstens stands by his rate cut
Mexican energy reforms: The test for Pemex

Perhaps significantly, Videgaray’s doctorate in economics is from MIT. His thesis for his bachelor’s degree in Economics from the Mexico Autonomous Institute of Technology was titled Failure of the Market, the regulation and incentives: case of the Mexican ports’ privatization.

He has publicly contrasted his view of the imperfection of the free markets with that of other influential Mexicans in the financial sector who follow the more laissez-faire approach associated with alumni of the University of Chicago – most notably central bank governor Augustín Carstens. He was also prescient in choosing the subject of his doctoral thesis: the fiscal response to oil shocks.

Peña Nieto and Videgaray’s achievements not only create a macroeconomic model that all emerging markets (and more than a handful of developed markets too) should look to, but the political skills shown by the government in building sufficient political consensus to pass reforms, without conceding key aspects that would compromise their effectiveness, also hold lessons for students of politics and diplomacy.

But while his political skills should not be overlooked, it is the financial impact of Videgaray’s accomplishments, of which there are many, that warrants Euromoney’s recognition. The energy reforms are the centrepiece but they have to be seen in a wider context: January’s financial reforms came first and not only provided the fiscal space for the energy reforms to be implemented but were also hugely significant in themselves.

Four pillars

The legislation had four pillars: to enable greater participation of development banks by allowing them to leverage their balance sheets and enter into SPV-financing structures; it strengthens repossession rights for banks, thereby encouraging credit extension into riskier credits; encourages greater competition in products such as credit cards, mortgages and payroll; and governance stability, with the introduction of Basle III.

"The reform agenda has been hectic. We have achieved eight transformation reforms in the first 20 months [of this government] compared with just five in the preceding 20 years," says Ernesto Revilla, senior economist at the Ministry of Finance. "If the financial reform had been done in any other year it would have caused huge discussion and been seen as a great success [but] now it is lost among many others – especially the energy reform which is the big one."

Videgaray’s role in energy reform has been critical too – as it was in the other headline reform of the telecommunications industry. "The reforms were all designed with the common denominator to improve productivity in Mexico," says Revilla. "And the diagnostic was clear: productivity has decreased in the last 30 years – at a rate of 0.4% a year – which is a binding restraint for growth in Mexico. The country has still grown, at 2.4%, which is not a lot by EM standards and has been possible because we have more labour and capital – not productivity."

Many in Mexico think the total of all the reforms will equal the significance to the economy of Mexico joining the North American Free Trade Agreement 20 years ago

Connecting the dots of the reforms is delivering greater productivity through lowering input costs: particularly in telecoms, credit and energy. The reforms to the banking market attempt to shake up a group of stable but conservative lenders to extend greater credit to the economy – especially those who currently only have access to the informal banking sector. Private credit to GDP is one of the lowest in the OECD and Latin America, at 28%.

"There is space to grow that and we would feel comfortable with doubling that rate to between 50% and 60% in the next 10 years," says Revilla.