Change at the top – the knock-on effects


Mexico is so deeply in Investment Grade territory that it can take a notch or two. But … any perceived missteps will carry disproportionate risk of downgrades


I wouldn’t normally feel compelled to comment on a resignation from government, but this one is important. Carlos Urzúa, Mexican Minister of Hacienda (Finance) resigned yesterday, after only seven months in the job. He worked for President Andrés Manuel Lopez Obrador (AMLO) when he was governor of Mexico City, so he shares the vision of addressing inequalities, but he is a US-trained establishment economist, with a strong reputation as an orthodox steward of Hacienda’s independence.

Blow to credibility

His resignation is a big blow to the credibility of the AMLO project. His letter of resignation, which was posted on Twitter, represents an even more serious blow: he outlines his reasons for the resignation, referring to policy decisions taken by the government without deliberating the consequences and the imposition of unsuitable (not credible) officials and the influence of characters with a clear conflict of interest. For foreign investors, this is the realisation of precisely what they had feared from an AMLO administration. Mexico does not have many strong institutions, now it remains to be seen how far the credibility of Hacienda will be eroded.

Investors are struggling to assess the knock-on effects for the Mexican Inland Revenue, or IRS, for the pension fund reform and for the Federal Electricity Commission. But with immediate effect, this raises the risk premium on all Mexican assets, as the integrity and independence of Hacienda has been questioned. Furthermore, this comes at a time of unprecedented uncertainty on trade relations with the US, low economic growth and weakening business confidence.

Risk of downgrades

The result may be one or even a series of downgrades by the rating companies, with the consequent rise in the cost of financing. We should expect a sovereign downgrade or two in the next 6–9 months – Mexico is so deeply in Investment Grade territory that it can take a notch or two. But the ratings agencies already have the country on negative outlook, so any perceived missteps will carry disproportionate risk of downgrades.

The timing is unhelpful, as the 2020 Budget discussion was ongoing, and a key component is the budget for Pemex, the state oil company, which is an important source of government revenues, but requires significant financing of its own.


Sadly, sticking with the theme of integrity and independence of public office, President Erdogan allegedly fired his governor of the country’s central bank, Murat Cetinkaya, because he refused to cut interest rates. Anyone who has read his speeches and interviews has known for many years that Erdogan believes that high interest rates actually cause high inflation, so it explains his repeated clashes with the central bank, especially during the currency crisis on 2018.

Rate cuts imminent?

The Treasury and the Finance Ministry were merged recently and put under the control of Erdogan’s son in law, Berat Albayrak, so investors should not have been exactly taken by surprise by the departure from the norms of independence of public office, although this is the first time a Central Bank governor is terminated. It seems clear that his replacement, Murat Uysal, is likely to cut rates at the earliest opportunity.

In a sign of increasing rifts in the ruling AK party, former economy minister and founding member of AKP Ali Babacan has resigned from the party and is setting up a new political party, possibly with Abdullah Gul, a former president.

US sanctions

Meanwhile, the S-400 Russian anti-aircraft missiles are due to arrive this month, probably sparking sanctions from the US, under the Countering America’s Adversaries Through Sanctions Act (CAATSA). Turkey does depend on foreign investment flows and all of this is less than helpful.

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