VZCZCXRO3691
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #3486/01 3451342
ZNR UUUUU ZZH
P 111342Z DEC 09
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 9354
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE

UNCLAS SECTION 01 OF 03 MEXICO 003486 
 
SIPDIS 
SENSITIVE 
 
STATE FOR WHA/MEX, WHA/EPSC, EEB 
NSC FOR RESTREPO, FROMAN 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD 
TREASURY FOR NANCY LEE, IA 
ENERGY FOR WARD, LOCKWOOD AND DAVIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD ENRG ELTN EAIR PGOV SENV MX
 
SUBJECT:  BANK GOVERNOR APPOINTMENT SPARKS CABINET RESHUFFLE 
 
¶1.  Summary. (U) On December 9, President Calderon nominated Finance 
Secretary Agustin Carstens as the country's new central bank 
governor (Banxico).   Carstens, whose nomination still needs to be 
ratified by the Senate, will replace Guillermo Ortiz who finishes 
his second six-year term at the end of 2009. Taking Carsten's place 
as Finance Secretary (Hacienda) is the Secretary of Social 
Development (SEDESOL) and Calderon's close associate Ernesto 
Cordero. Heriberto Felix, former Under Secretary for Small and 
Medium Enterprises (SMEs) in the Secretariat of the Economy, 
replaces Cordero at SEDESOL. Following the news, the stock market 
was down 0.2% from the day before and the peso was down 0.3%.  Most 
analysts attribute this reaction to the market's skittishness over 
Cordero's new position at Hacienda, as as well as some concern over 
the autonomy of the central bank under Carstens.  End Summary. 
 
Banxico Governor: Carstens to Replace Ortiz 
--------------------------------------- 
 
2.(U)  After considerable uncertainty, President Calderon nominated 
Finance Secretary Agustin Carstens as the country's central bank 
governor on December 9.   Carstens will replace Guillermo Ortiz who 
finishes his second six-year term as governor at the end of this 
year.  Since becoming autonomous in 1994, the Bank of Mexico 
(Banxico) has strengthened its economic policy-making role and 
credibility. The president appoints the BOM's governor, with Senate 
confirmation, for a six-year period, with no term limits. The 
appointment is timed deliberately at the mid-point of the government 
to avoid electoral pressure. The president cannot remove the 
governor. 
 
3.(U)  Carstens holds a doctorate in economics from the University 
of Chicago and an undergraduate degree from the Mexico City-based 
Autonomous Technological Institute of Mexico (ITAM). Carstens is not 
new to Banxico.  He joined the Bank in 1982 after completing his 
economics degree. He completed his doctorate at the University of 
Chicago on a Banxico scholarship.  Within the BOM he occupied top 
positions such as treasurer, head of economic research, and chief of 
the governor's cabinet.  As the BOM's chief economist, Carstens was 
a key player at the BOM during its most difficult era, helping 
Mexico to mitigate the effects of the 1995 peso crisis, when soaring 
interest rates caused defaults on loans and put banks on the verge 
of collapse.  According to chief economist at JP Morgan Chase 
Gabriel Casillas, Carstens also formed plans in the late 1990s to 
create the rainy-day oil fund and to hedge oil exports, strategies 
that were first implemented early this decade.   Before returning to 
Mexico to become Calderon's Finance Secretary following Calderon's 
2006 election, Carstens was Deputy Management Director at the IMF 
and prior to that he was Undersecretary of Finance under Francisco 
Gil Diaz during the Fox Administration (2000-2006). 
 
¶4. (SBU) While Carstens performed generally well at the Finance 
Secretariat in recent months, particularly his work on the 2010 
budget, his domestic prestige was damaged early on when he forecast 
that the U.S. crisis would have little impact on Mexico.  Instead, 
the crisis caused GDP to contract by about 7% this year. 
Nonetheless, Carstens leaves Hacienda on a high note, announcing on 
December 8 that the GOM had hedged the 2010 Mexican oil price at 
US$57 per barrel, almost the same as what was approved in the 
budget. A similar 2009 hedge averted a more serious budgetary 
crisis. Carstens recently expressed confidence that sustainable 
fiscal accounts would mean Standard & Poor's would not downgrade 
Mexico's sovereign rating, despite a negative outlook since May -- 
Fitch Ratings last month cut the rating one notch to BBB.  He also 
led efforts this year to win approval for the tax increases aimed at 
offsetting falling oil revenue.  If ratified as Banxico governor, he 
will guide policies amid inflationary pressures from those tax 
increases he proposed and an economy recovering from recession.  At 
a press conference yesterday, Carstens said his mandate will be to 
promote a stable peso. He said "My commitment will be to make sure 
that this constitutional mandate is carried out faithfully.". 
 
¶5. (SBU) The media reported pressure in recent weeks for Calderon to 
reappoint the departing governor, Guillermo Ortiz -- in the post 
since 1998. Observers noted that Ortiz's performance was excellent, 
and that change during a financial crisis was inadvisable. 
Nonetheless, Ortiz will end on a high, with inflation within 
Banxico's 2-4% target range, and the peso stabilizing in recent 
months. According to BOM information released December 9, 
twelve-month inflation in November reached 3.86% -- its lowest since 
March 2008.  However, Calderon and Ortiz have had a tense 
 
MEXICO 00003486  002 OF 003 
 
 
relationship since 1999, when the former (who then led the PAN) made 
the latter's resignation a condition for approving legislation 
concluding the post-1995 crisis banking. Ortiz refused to step down, 
arguing that Banxico was autonomous. 
 
GOM-BOM Policy Coordination Raises Eyebrows 
------------------------------------------- 
 
¶6. (SBU) Although analysts are supportive of Carstens' 
qualifications and understanding of monetary policy, some are 
concerned that the BOM will lose some of its autonomy based on 
previous comments made by Carstens as well as remarks made by both 
Carstens and Calderon during the December 9 press conference. 
Calderon said the GOM "will work in close coordination with the Bank 
of Mexico, without diminishing its complete autonomy, and in 
particular in designing and putting into practice public policies of 
a monetary, fiscal or currency nature."  Calderon also referenced 
the law when he said that as governor Carstens would be "a close and 
constant adviser for the federal government's most important 
decisions on economic policy." Carstens said he would continue to 
fight inflation, which is the central mandate of the central bank, 
"but that does not preclude that we can exploit much more 
effectively opportunities to coordinate between Banxico and the 
federal government on achieving broader goals."   While these 
remarks may signal a more accommodating monetary policy, earlier 
this week Carstens said that the autonomy of the BOM was safe since 
the vote of the Governor was only one of five on the Board of 
Governors. 
 
Hacienda: Cordero Replaces Carstens 
----------------------------------- 
 
¶7. (SBU) Ernesto Cordero, the current Secretary of Social 
Development, will replace Carstens as Finance Secretary.  He studied 
to be an actuary at ITAM and holds a Master's in Economics from the 
University of Pennsylvania.  Cordero's closeness to Calderon has 
raised issues for many observers.   Cordero has limited economic 
experience in the Secretariat as Undersecretary for Expenditures 
during the first year of the Calderon administration. In January 
2008, he was promoted to head the Social Development Secretariat. 
This short tenure at Hacienda makes him the most inexperienced 
Finance Secretary since the late 1970s.  Many observers speculate 
that Calderon chose Cordero to groom him as a potential PAN nominee 
for 2012. Comment:  While serving as Finance Secretary offers him 
potential to gain name recognition and wider confidence, it also 
carries risk of assuming the blame for continued economic troubles. 
End Comment. 
 
¶8. (SBU) Econoff's conversations with contacts revealed lack of 
enthusiasm over the prospect of Cordero becoming the next Finance 
Secretary.  Economists Ramirez de la O said he would be "a 
disaster,"  Jonathan Heath said he would be Calderon's "yes man," 
and Luis Rubio said he wasn't a smart pick.  Observers also note 
that he is a close friend of Calderon's, owes his political career 
to him and is virtually unknown in international financial circles. 
On the other hand, others think that Cordero could be effective if 
he keeps the cadre of technocrats in place, namely powerhouse 
Finance Under Secretary Alejandro Werner.  Comment:  Cordero may 
well have time to prove himself, with Congress having approved the 
2010 budget, and the oil hedge providing public finances breathing 
space. Nonetheless, Calderon continues to appoint close allies to 
the cabinet, rewarding loyalty rather than seeking expertise, 
especially in a Secretariat that was the preserve of proven 
technocrats.  The 'bunker mentality' that has tainted the Calderon 
government for some time remains in place. This also was apparent 
with Cordero's successor at Sedesol. End Comment. 
 
 
Social Development:  Jesus Heriberto Felix Guerra 
--------------------------------------------- ---- 
 
¶9. (SBU)  Jesus Heriberto Felix Guerra was named Secretary of Social 
Development (Sedesol), replacing Cordero.  He moves to Sedesol from 
his position as Undersecretary of SMEs in the Economy Secretariat, 
where he served since 2006. Prior to joining the federal government, 
Felix Guerra served in the government of Sinaloa, first as Secretary 
for Economic Development for PRI governor Juan S. Millan from 1998 - 
2003 and then as senator for a short period in 2006. Felix Guerra 
ran as the PAN candidate for governor of Sinaloa in 2004 and lost by 
a very small margin. In 2006, shortly after winning his senatorial 
race, Felix Guerra accepted the job as Undersecretary of SMEs.  In 
 
MEXICO 00003486  003 OF 003 
 
 
his private life, Felix Guerra has founded and runs industrial 
businesses. He holds a master's degree in economics from the 
Instituto Tecnologico y Estudios Superiores de Monterrey. Comment: 
His appointment comes with some criticism for lacking relevant 
experience, particularly with anti-poverty programs.  His 
appointment may signal a presidential desire to give the Sedesol 
budget and programs a more political orientation. Poverty is 
increasing due to the deep recession, and Felix may struggle to 
address this given his lack of familiarity with the Secretariat. 
End Comment. 
 
 
Comment 
------- 
 
¶10. (SBU) Following the news on Calderon's appointments, the stock 
market was down 0.2% from the day before and the peso was down 0.3%. 
 Most analysts attribute this reaction to the market's skittishness 
over Cordero as new Finance Secretary, who may be seen as yet 
another close personal and political associate of President 
Calderon's. There are also some concerns that a central bank under 
Carstens may lose some of its autonomy.  Although significant market 
reaction in not expected short term, it will still be important to 
assess the market's reaction following the Senate's ratification of 
Carstens as Banxico's new Governor.  While the Senate is virtually 
certain to confirm him, the markets will scrutinize his early 
actions, particularly on interest rates.  His views on exchange rate 
policy are unclear as yet.  He will probably continue intervening in 
markets -- heavily if necessary -- if a sudden peso depreciation 
risks increasing inflationary expectations, but will otherwise allow 
the currency to float.  Carstens' strong relationship with the IMF 
might also facilitate activating Mexico's Flexible Credit Line with 
the Fund, if there were sudden currency volatility. Overall, the 
announcement of the new appointments could be positive for local 
markets and other financial variables in the medium term, 
particularly as the announcement removes another source of 
uncertainty.  End Comment. 
PASCUAL