Flash Report /

Mexico: Central bank governor Diaz de Leon – an oasis of stability

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    17 July 2019
    Published by

    Why has the Mexican peso remained stable even when most economic indicators show a weakening economy, some even arguing that Mexico has entered a technical recession? The answer lies with central bank Banco de Mexico (or Banxico) Governor Alejandro Diaz de Leon Carrillo.

    Diaz de Leon has provided the markets with a sound and orthodox monetary policy that focuses on maintaining the attractive spread between Mexican government notes (in pesos) and US treasuries.

    Given the recent turmoil caused by the resignation of Carlos Urzua as finance minister, and what we believe was a bad choice by President Lopez Obrador (AMLO) when he appointed Arturo Herrera as his replacement, we emphasise the importance of having at least one economic institution in Mexico that is sensitive and responsive to market dynamics. This is especially so in keeping the peso exchange rate within stable parameters to avoid capital flight, which, given the increasingly evident weakening of the Mexican economy, could have taken place under a different monetary policy.

    There will be more challenges ahead when Mexico reports its Q2 19 GDP, inflation and investment numbers (among others) as well as if and when the US Fed cuts rates. In the most recent Board of Governors’ meeting, two (out of five) Deputy Governors at Banxico voted to lower rates, but Diaz de Leon and the rest of the Board voted to keep them unchanged, arguing against the evidence of deteriorating economic metrics and political uncertainty.

    We believe this was the right decision, and are also of the view that even if the Fed cuts rates, Banxico will still maintain its 8.25% reference rate steady for at least a few more meetings, until some of the worsening economic variables begin to stabilise. Banxico might then decide to cut rates, to stimulate growth without risking a run on the MXN.

    What is encouraging now is that the highly qualified and competent Diaz de Leon has a mandate that expires on 2021. This means that although he was appointed by former President Enrique Peña Nieto, his responsibilities as governor will extend for two more years, with the possibility of being reaffirmed by AMLO at the end of his tenure.

    The bad news is that we don’t believe AMLO will do this, as it is widely believed that he appointed Gerardo Esquivel as Deputy Governor earlier this year, with the intention of replacing Diaz de Leon. After all, we believe AMLO has made most decisions in his first seven months in power for political reasons, as was made clear recently in Urzua’s resignation letter.

    Nevertheless, we believe that Diaz de Leon is an oasis of stability in an environment that is looking increasingly uncertain and fragile. We believe his decisions have helped steady the peso and kept investors feeling comfortable being long on Mexico. Had it not been for his decisions, we might have seen a steep decline in Mexican investments.