NEW YORK — As Mexico’s president Andrés Manuel López Obrador celebrates today a third year leading Latin America’s second-largest economy, Morgan Stanley is echoing concerns about the immediate future of one of the nation’s core institutions: the central bank.
On November 24, López Obrador nominated the undersecretary of finance, Victoria Rodríguez Ceja, to be the first woman to head the nation’s central bank starting in January, replacing Alejandro Diaz de Leon. With the decision, Lopez Obrador changed the nomination of his original candidate, Arturo Herrera, his former finance minister.
“The last-minute shift associated with the nomination of the next Banxico governor increases uncertainty about the monetary policy outlook,” the investment bank said in a report this week.
Seven analysts of the New York-based investment bank, including Alejandra Obregon, Fernando D Sedano, Nikolaj Lippmann and Simon Waever, argue in a report to clients that “the appointment of a president’s long-time policy-maker to a leadership position at an autonomous institution is raising questions among Mexico watchers around policy independence.”
Rodríguez Ceja, who took the undersecretary of finance as AMLO started his administration, needs the due approval of the Senate to assume the helm of the monetary authority, a step for which Morgan Stanley sees no issues. “We think that the ruling coalition will have enough votes in the Senate to confirm the appointment (it requires a simple majority),” they said.
On Tuesday, opposition party Partido Acción Nacional (PAN) questioned Rodríguez Ceja credentials, newspaper Milenio reported on its website, citing comments by Julen Rementeria, the leader of the political organization in the Senate.
“With roughly a month left until a new governor is set to take office, we think that the change suggests an even more dovish Banxico’s reaction function into next year,” the analysts said in the 18-page report dated November 29.
However, the changes on the nominations to lead the nation’s central bank, known as Banxico, do not alter the rates profile for the country and the firm continues to expect a 25bps rate increase in December and then a pause in first half of 2022. Banxico is set to decide on monetary policy on December 16; the bank raised its benchmark policy rate by 25bps to 5% on November 9th, as expected, implementing its fourth consecutive rate increase.
Reducing Mexico Exposure
In the report titled, “Mexico Economics & Strategy: Fueling Uncertainty”, the analysts also reduce their recommendation on Mexico and suggest investors to add to Panama instead in their portfolios
“With risks rising but no underperformance yet, we remove our like stance on Mexico and also suggest hedging Pemex exposures with the sovereign. We suggest buying PEMEX 2047 versus MEX 2047. To replace the LatAm BBB exposure, we suggest adding Panama, with PANAMA 2060 our preferred bond.”
The investment bank remains underweight in Mexican equities. “We see ‘investment limbo’ (no investment growth amid uncertainty) and a ‘slippery slope’ scenario (gradual deterioration) as set to continue” the analysts said in the research note.
After Lopez Obrador announced the nomination ofRodríguez Ceja, the Mexican peso lost as much as 2% of its value to 21.6070/USD, its weakest level since March 8, Reuters reported. The potential for a relatively more dovish Banxico may imply a deterioration outlook for the national currency and suggests that the medium-term bias for Mexican real rates (and implicitly for MXN carry) remains skewed to the downside,” the investment bank said.
At the same time, Morgan Stanley argue that energy politics are “likely” to remain central to the narrative of policymakers. “However, passing of the proposed constitutional electricity reform requires a majority in Congress that looks challenging to achieve. A watered down version of it and the recent infrastructure decree could both get challenged by the judiciary,” according to the report.
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