by Greg Brosnan

When former Mexican president Ernesto Zedillo named finance minister Guillermo Ortiz to head the country’s central bank 10 years ago, many economists were up in arms. True, Ortiz was a respected Stanford-trained economist and had proved his worth in deftly handling the aftermath of the 1994 peso crisis. But they worried that having the president’s chief money man and long-time member of the dominant PRI party at the helm of Banxico threatened its recently hard won autonomy.

There were murmurs of inflationary danger and a central bank credibility crisis. Those fears could not have been further-fetched. Ortiz brought annual inflation down to 9.5% in 2000 from 16.0% in 1998. Price stability helped the country reach investment grade in 2000 and 10 years on, Ortiz’s policies are celebrated as a cornerstone of LatAm’s newfound economic stability.

“Prudent management of the Mexican economy by the Calderon Administration is [a] reason why the country is averting the fallout from the meltdown on its northern border,” says BCP Securities in a research note. “Finance minister Agustin Carstens and central bank president Guillermo Ortiz are a virtual dream team of Latin American policymaking.”

But with Mexican 12-month inflation edging towards 6% and a US slowdown threatening growth, the godfather of modern LatAm monetary policy calls the current maelstrom of global food and energy inflation, combined with slowing growth due to the US financial debacle, the toughest test of his career.

“We haven’t seen such a mix of inflationary pressures and downside risk to growth for a long time,” Ortiz tells LatinFinance in an exclusive interview late July at his downtown Mexico City office. “These are the most complicated global conditions I’ve seen during my working life . . . I’ve lived through many difficult periods, but this time the epicenter of the crisis is the world’s most important financial center,” adds Ortiz, our Central Banker of the Year.

Emerging markets were still recovering from the Asian financial crisis when Ortiz first took the reigns of the central bank. But the official points out that its effects on LatAm were far more short-lived than the current tempest.

Supply Shock Inflation
Mexican annualized inflation had risen to 5.26% in June, well above the bank’s long-term target of 3.00%. At the same time growth expectations were falling, with the central bank estimating 2008 expansion of 2.25%-2.75% by July, down from a previous range of 2.40%-2.90%. The IMF meanwhile expects Mexican growth to reach 2.40% this year, after revising its forecast up by 0.40% versus an April estimate. The fund also anticipates 2.40% next year.

Banxico hiked benchmark overnight rates by a quarter percentage point in both June and July, bringing it to 8.00%. Analysts widely expected a move to 8.25% mid-August. While both rises surprised the market to varying degrees, the decision to attack inflation even at the cost of growth makes sense.

“He perceives the risk of high inflation as being just way to high,” Alonso Cervera, Mexico economist at Credit Suisse, tells LatinFinance. “That’s why I think he’s pulling the trigger.” But with hawkishness having a mostly psychological effect in Mexico given that the inflation is largely imported, the decision to hike rates is by no means a no-brainer, Ortiz points out.

“Every country faces a different challenge,” he says. “Some have runaway internal demand as well as commodity price inflation and are eating into installed capacity. Things are simpler in such cases because you use monetary policy to reel in demand. It’s a bit more complicated in Mexico’s case because we don’t have a problem with aggregate demand,” adds the official. “All the inflation we’re seeing comes from supply shocks and the only thing we can do is try to anchor down inflation expectations.”

“Of course we’re not going to stop soy and wheat prices rising by hiking interest rates, but we show the people moving the economy that the central bank will do whatever it needs to stop inflation getting out of hand.”

Political Pressure Cooker
Ortiz is more often seen in public speaking from a podium or trapped in a swarm of reporters brandishing tape recorders. He relaxes, sipping a glass of iced Coke during this interview in his plush art deco office building, where original paintings by legendary Mexican artists like David Alfaro Siqueiros line the walls. But life for any LatAm central banker is far from calm these days, and Ortiz has recently experienced some of the most intense political pressure of his career.

All across LatAm, central bankers are navigating a political minefield, well aware that hawkish policy could crimp vital growth. When Ortiz used rate hikes to bring inflation under target in 2001 and 2002, some in the business community – especially exporters – demonized him for pushing up the value of the peso. This time around, political pressure comes from the very highest level. During public remarks in early June that took market-watchers by surprise, president Felipe Calderón essentially told Ortiz not to hike.

“Our inflation rate is nearly the same as in the United States, but our interest rates are higher,” Calderón said. “Hopefully our independent monetary authorities here, like the Bank of Mexico, will someday take this into consideration when setting monetary policy.”

Subsequent rate rises June 20 and July 18 more than smoothed any renewed concerns about central bank autonomy, and although Ortiz acknowledges that worries about growth are valid, he gives no impression of being swayed by Calderón. “The best thing the central bank can do to promote prosperity, growth and job creation in the country is to provide long-term stability,” he says. “Sometimes when that stability is threatened we have to take action.”

“There are some unavoidable, undesirable side effects that inspire very legitimate criticism, but that’s part of the job,” he says. “You can’t keep everyone happy all the time.”

Ortiz believes medium-term inflation expectations are still well anchored in Mexico, and says it is essential to keep them that way until the global food and energy crisis dissipates. He sees an end in sight, adding that cooling growth in the US, Europe and Japan and already visible falls in some commodities should aid the process.

But the bank also drastically revised up its inflation estimates at the end of July, saying inflation could climb as high as 6% by the end of 2008, and that the long-term target of 3% would probably not be met until at least 2010.

Bolsa Blues
Ortiz cherishes many of the advances that have happened in Mexico’s markets during his tenure at the bank and marvels at progress made in debt and FX markets. The peso is now among one of the world’s highest traded currencies, and a government debt curve stretching out to 30 years underpins a modestly expanding set of corporate bonds that includes a promising fledgling RMBS market.

But Ortiz has no kind words for Mexico’s stock exchange, noting that of 11,000 businesses that the finance ministry considers large-scale tax contributors – many of which have hefty sales volumes – hardly any are listed. “This part of the capital markets is constantly ignored and underdeveloped. Much more attention needs to be paid to it,” he says.

“There are a bunch of obstacles to new company listings related to fiscal matters and administrative costs that have to be eliminated.” Indeed, of just two companies to IPO locally so far this year, one was the Mexican Bolsa itself.

Ortiz urges the Bolsa’s directors to take advantage of its new status to make changes that could bring new dynamism. “I hope that now the stock exchange is a publicly listed company . . . we see better results,” he says.

The Ortiz era may well be drawing to a close, since his term finishes at the end of 2009. He would not be too old to serve again, but recent comments from Calderón on inflation and interest rates fuel speculation that Ortiz may not be the president’s first choice.

But if he has another shot at the job, would he take on the daunting responsibility of Mexico’s top monetary post for another six years? Choosing his words as carefully as for a monthly monetary policy statement, Ortiz leaves the possibility dangling. “Ask me that question next year,” the official concludes. LF