Mexico: Can Cordero rise to the challenge?

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By:
Chloe Hayward
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Some see finance minister as inexperienced; Reforms face tough path through congress

Ernesto Cordero, Mexico’s new finance minister

"When Cordero came into office he had two choices – to come in guns blazing, claiming he knows everything, or quietly get himself up to speed. He took the latter route and that is good"

Ernesto Cordero, Mexico’s new finance minister, has a difficult year ahead of him. He is facing pressure from the president to push through important political, tax and labour reforms and he also needs to stabilize Mexico’s economy and try to convince sceptics that he is sufficiently experienced.

Interviewed by Euromoney in late March, Cordero says: "I don’t know if I can deliver more than Mr Carstens [Agustin Carstens – the previous finance minister] but what I can deliver is solvency and stability and I think that is very important."

On December 9 president Felipe Calderón moved Carstens to head the central bank, replacing him with Cordero. The move immediately prompted a political backlash because of the close ties between Cordero and Calderón. Among the critics was former foreign minister Jorge Castañeda, who wrote soon after the appointment in the local press: "For the first time since [Luis Echeverria named José López Portillo as minister of finance in 1973] the leadership of the Hacienda [finance ministry] is in the hands of someone nominated for exclusively political motives and without the best evident technical qualifications."

Cordero started working under Calderón in 2000. For three years he was head of legislative studies for the PAN political party when Calderón was the head of the PAN delegation in the chamber of deputies. In 2003 he went to Banobras, a Mexican development bank, and then the ministry of energy, with Calderón his boss at both posts. Cordero was also Calderón’s chief adviser on economic affairs during the 2006 presidential campaign and transition.

Strength of character

Other derogatory comments came from a senior banker who called Cordero the "boy in a big job"; another said he did not have the strength of character needed to push through the critical tax reforms needed if Mexico is to stay solvent.

The reform agenda is a growing concern for investors and rating agencies alike.

In 2010, oil revenues are likely to account for up to one-third of the Mexican government’s income. Even though oil prices have risen from 2009 lows and the rate of oil production in Mexico is now following a stable trend, oil dependence leaves Mexico’s fiscal accounts looking weak. Now Calderón hopes to pick up the oil-revenue slack with improved tax revenues. Mexico has the lowest levels of tax take in Latin America at about 11% and so it not only needs to increase potential tax revenues with reform but also to improve its ability to collect tax at a state level.

Last year Calderón made a small breakthrough when congress approved an increase in the value-added tax rate from 15% to 16%. However, the opposition party, the PRI, is fighting this measure.

The PRI strongly opposes further increases in VAT on food. They say they will disproportionately affect the poor because a relatively high portion of their income is spent on food. This political stalemate is just one example of an issue on which Cordero will have to put together strong, coherent arguments to gain congressional support.

Planned political and labour reforms are also high on the agenda. One change that has gained support on the political reform agenda is the need for re-election of individuals once they are in congress. Today, once a person is voted into congress there is no process of re-election. This removes their accountability to the electorate. Instead the focus shifts to doing what the party wants. Many think this is why reforms are not passing so easily. The political system reform that Calderón proposes would introduce re-election and therefore, in theory, would better align the interests of the economy and the people.

In labour law Calderón has proposed measures that would increase flexibility in the labour market through secret ballots in union elections, enhance union transparency, put time limits on strikes, introduce new rules on outsourcing, allow contracts by the hour to be agreed with workers, and give greater protection for women workers.

But to get any or all of these reforms through Calderón will need congress to vote for him. However, the president’s popularity is waning. Another senior Mexican banker says: "Cordero is very close to the president. This could be a double-edged sword because it could politicize these reforms more than they need to be. These reforms need to get through for Mexico’s future."

Right direction

But Calderón is committed to the reform agenda and clearly thinks Cordero is the man to push it through. Cordero says: "We have to increase revenues from taxes and we are moving in the right direction, probably not as fast as we would like, though. I think we have to keep pushing the structural reforms agenda." In 2006 tax revenues amounted to 9% of GDP, by 2011 this should have risen to 12% on the back of reforms that have already made it through congress.

Cordero says: "I think it is important to take advantage and to pay attention to every window of opportunity that we have to improve the fiscal system in Mexico from regulatory changes and increasing efficiency in the way that we are collecting money. That is important."

Another banker offers Cordero some respite: "When he came into office he had two choices – to come in guns blazing, claiming he knows everything, or quietly get himself up to speed. He took the latter route and that is good. Instead of going in headstrong he has been willing to admit he doesn’t know everything yet and is turning to the good team he is surrounded by to learn."

Another issue that has been raised is the independence of the Mexican central bank. After Calderón announced the personnel changes in December he said: "[These moves] will allow for a better harmonization of the relation between the federal government and the central bank." Also, Carstens invited Cordero and the finance undersecretary, Alejandro Werner, to attend the central bank’s first policy meeting in 2010.

Cordero defends the central bank’s independence: "There has always been very good coordination between the central bank and ministry of finance. This relation and this coordination is not new. According to the legal framework we share responsibilities for the supervision and regulation of the banking system and also in respect to the exchange rate policies. This is not new and certainly this coordination was in place in the past and will continue today. We [the finance ministry] are very respectful of the autonomy and independence of the central bank."

Contradictions

But perhaps the issue of most concern is that even though Cordero’s appointment seems to come on the back of strong political connections that will improve central bank-finance ministry relations, lines of communication are still poor. In Cancún at the Inter-American Development Bank meeting in March, an apparent lack of coordination led to Cordero contradicting Carstens on what they hoped to achieve with the reserves in the year ahead.

When Cordero met Euromoney in Cancún he discussed Mexico’s need to ensure it was well placed to deal with any developments in global markets. "Even though we are on a clear recovery path no one knows for sure what will happen. There are obvious downside risks that we need to pay careful attention to. The exit strategy in the US is very important." Some 80% of Mexico’s exports still go to the US.

Cordero adds: "We believe that the international reserves need to be increased [to protect against another shock]. Even though the reserve levels are already higher than they have ever been before, we believe that it is necessary to have this cushion. Right now there is a lot of investment flowing into Mexico but this could reverse and we need to be prepared." Cordero stated at Cancún that his plans to increase reserves included put option auctions that would therefore put less pressure on the peso.

However, earlier on the same day Carstens announced, quite to the contrary, that the central bank would not be accumulating greater dollar reserves in the coming months.