Mexico's Guillermo Ortiz: The Anti-Greenspan

Includes: EWW, FXM
by: Eddy Elfenbein

Imagine a country whose central bank responded to growing inflation by raising interest rates, strengthening the currency and trying to win investor confidence. This may be shocking to some U.S. investors, but proper monetary policy is still being practiced. Just not here in the United States. I’d give the award for Best Central Banker in the world today to Mexico’s Guillermo Ortiz.

This is a story that truly ought to be better known. Mr. Ortiz has now been at the helm of the Mexican central bank for over ten years, and despite many obstacles (consider that 70% of Mexicans don’t even use banks), he’s emerged as the anti-Greenspan. Mr. Ortiz previously served Finance Minister where he helped clean up the mess surrounding the peso devaluation in 1994.

What impresses me about Ortiz, who earned has a Ph.D. from Stanford, is that he has made it unequivocally clear that the Banco de Mexico (or Banxico) intends to fight inflation until it wins. In the last three months, the bank has raised rates three times. Interest rates now stand at 8.25%, an amazing 625 basis points higher than in the U.S. even though inflation rates are roughly similar.

Make no mistake; the Mexican economy has its shares of problems. Growth is slowing and inflation is on the rise. Of course, much of this is understandable considering their raucous hung-over neighbors to the north—nearly 80% of Mexico’s exports go to the U.S. Still, my money’s on Ortiz. He’s even had the chutzpah to criticize our monetary policy as being “very lax.” Don’t expect to hear anything like that from Senators McCain or Obama.

And what about that hopeless currency, the peso? Well, it’s on a roll this year. The peso is already up 7.5% for the year, and earlier this month, it reached a six-year high. In my opinion, the rate gap between the U.S. and Mexico will only grow. The futures market seems certain that the Fed will hold steady for the rest of the year, but I think Banxico could very well raise rates again. Their next meeting is on September 19.

The most recent report for Mexican GDP showed that Q2 growth came in at 2.8%, which isn’t bad but it was below expectations. The economy isn’t so fragile as to ward off monetary tightening. Retail sales are weak and the stock market is still hurting—the Bolsa is at a seven-month low. Of course, that comes on the heels of an enormous rally, so some consolidation can be expected. Consider that shares of the Mexican ETF (NYSEARCA:EWW) more than quadrupled in five years.


What’s really hurting the economy is that less money is being sent home from workers living abroad. And by abroad, you can probably guess what country I mean. Speaking of which, Ortiz also favors, sit down for this one, stricter immigration controls in the U.S. so Mexico can hold on to its workers. Ortiz said, “I think Mexico needs its people. It would be best to keep its people in Mexico, and it would give incentives for Mexico to create the jobs that are needed.”

I’m guessing Ortiz has some sympathy for Hank Paulson. When the Mexican financial system imploded, Ortiz was called in to clean up the mess. Paulson certainly has a tough task, but look at what Ortiz was facing—inflation reached 52% and investment fell by one-fourth. Things got so bad that the former president basically can’t show his face Mexico and he’s been exiled to Ireland. Greenspan now works at Pimco! Thanks to Ortiz, Mexico righted itself and paid back its bailout money to the United States.

The thing about public finance is that it’s really an issue of establishing confidence. If investors think you’re serious, then they’ll invest with you. So far, Ortiz seems to winning the battle of establishing credibility. The yield on Mexico’s long-term benchmark bond recently fell to its lowest level since June 6.

Mexico is a country with many deep rooted economic problems, however, the country has taken many steps in the right direction. For example, the election of the pro-market government of Felipe Calderon (cue Larry Kudlow) is helping to bring long-overdue reforms. Unlike the United States, the Mexican government seems to be serious about fiscal discipline. The legislature, not so much. One issue in particular that Ortiz wants addressed is reducing the government’s fuel subsidies. Good luck with that one, but at least he’s trying. (Incidentally, Ortiz wants to reduce the subsidies even though he thinks that will increase inflation in the near-term.)

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