New Finance Minister will boast oil for Mexico

Mexican President Felipe Calderon’s decision to appoint Social Development Minister Ernesto Cordero as finance minister may hinder the government’s ability to cut its dependence on oil revenue because he lacks the experience to build support in Congress, according to Barclays Capital.

Cordero, 41, may struggle to persuade Congress to pass laws broadening Mexico’s tax base, Barclays analysts Roberto Melzi and Jimena Zuniga said. Fitch Ratings last month cut Mexico’s rating to BBB, the second-lowest investment grade, citing a need for fiscal changes. Standard & Poor’s may decide on whether to lower it this month.

Calderon yesterday named Cordero to replace Agustin Carstens, who in turn he nominated central bank chief.

“Cordero’s nomination may bode ill for the passage of reforms, as Carstens’s ability to build consensus behind the scenes will be hard to match,” Melzi said in a note to clients.

Calderon, half-way through a six-year term, is seeking to reduce Mexico’s dependence on oil funds, which account for about 40 percent of the budget, after Congress raised taxes this year less than the president wanted. Calderon’s National Action Party, known as PAN, holds 143 of the lower house’s 500 seats.

‘Not the Best Man’

“We believe Cordero is not the best man for the finance minister post: he is a PAN loyalist and will be a less effective negotiator with Congress,” Nick Chamie, head of emerging-market research at RBC Capital Markets, said yesterday.

The peso fell as much as 0.8 percent after Calderon announced his decision to replace Carstens. The currency erased its decline and rose 0.2 percent by the end of the day to 12.8941 per dollar.

The yield on Mexico’s benchmark bond fell one basis point, or 0.01 percentage pmoint, to 8.13 percent. The price of the 10 percent security due in December 2024 rose 0.10 centavo to 116.17 centavos per peso, according to Banco Santander SA.

“Markets would prefer Carstens stay as finance minister, as the next year will be very challenging in terms of budgetary and overall economic policy,” said Win Thin, senior currency strategist at Brown Brothers Harriman & Co. in New York. “Such a move is not a good one for the peso.”

Carstens led Mexico’s response to the global financial crisis in 2008 and efforts to win approval this year for the tax increases aimed at offsetting falling oil revenue. If ratified, he’ll guide policies amid inflationary pressures from those tax increases and an economy recovering from a recession.

Deputy Minister

Cordero, who earned a masters degree in economics from the University of Pennsylvania, was deputy finance minister for spending from December 2006 to January 2008, when he was named to his current post, according to the presidential Web site.

Before joining the finance ministry, he served in 2003 as deputy energy minister responsible for planning and technology development.

Cordero’s advantage in the post will be the personal relationship he has built with Calderon, Allyson Benton, a Latin America analyst with the Eurasia Group in New York, wrote in a report yesterday.

The new minister will have to contend with quickening inflation and a budget deficit forecast to grow to 2.75 percent of GDP in 2010, the widest since 1989, according to JPMorgan. The deficit was 2.1 percent of GDP in 2009. Latin America’s second-biggest economy is forecast to grow as much as 3.5 percent next year and may shrink 7 percent this year, outgoing Central Bank Governor Guillermo Ortiz said Dec. 2.

‘Accentuated Weaknesses’

“The global economic and financial crisis and falling oil production have accentuated weaknesses in the sovereign’s fiscal profile,” Fitch Ratings said in a Nov. 23 statement.

The central bank on Dec. 2 raised its inflation forecasts for 2010 and said that consumer prices may rise as much as 5.25 percent on an annual basis in the third and fourth quarters of 2010, exceeding policy makers’ 3 percent target.

Mexico spent $1.17 billion to buy oil hedges for 2010 to protect against lower-than-expected production and a decline in prices. Mexico purchased put options that give it the option, not the obligation, to sell its oil for $57 a barrel next year, the Finance Ministry said in a Dec. 8 statement.

Carstens, who was chief economist at the bank from 1994 to 1999, said yesterday that his mandate at the central bank will be to promote a stable currency. He said Dec. 8 in New York that S&P will probably decide against lowering the rating on Mexico.

The bank will raise its 4.5 percent key lending rate in May, according to the median forecast of economists in a survey released Nov. 19 by Citigroup Inc.’s Banamex unit. The bank paused in August, September and October after cutting borrowing costs by 3.75 percentage points during the first seven meetings of this year.

Source: bloomberg.com