Guillermo Ortiz looks thoroughly at home in his opulent offices at the Central Bank of Mexico. But, as he points out, in the early 1980s he was already ensconced in the Bank’s economic research bureau.

Familiarity has not bred contempt, judging by his passion when speaking about inflation targets and more esoteric bank matters. Mr Ortiz has undoubtedly had an easier time here than when he was finance minister during the Tequila crisis, which exploded in 1994. He has certainly been criticised less.

Admittedly, the economy is forging ahead with annual GDP growth of almost 8 per cent in the first quarter. As a result, the bank has been forced to revise its target for growth in 2000 up to 6 per cent, while inflation looks to be well under the bank’s 10 per cent ceiling for the year, perhaps as low as 9 per cent, as long as demand slows in the second quarter.

Assuming a clear-cut victory for either the governing PRI party or the opposition PAN – elections were taking place as The Banker went to press – Mexico should avoid the financial crises that have plagued each of the last few handovers.

One thing, though, has not changed. “The biggest risk for Mexico is what happens to the US economy,’’ says Mr Ortiz. This dependence is even more pronounced than for the rest of the world economy, which is busily hoping for a soft landing. Local wags point out that the monument to Mexico’s Independence, near the Central Bank, is next to the US embassy, “a monument to our never-ending dependence”.

“If the soft landing does not materialise, there is a sharp depreciation of the dollar and a sharp correction [of the stock market], it could lead to some problems for Mexico,’’ he says, in a classic central banker understatement.

If the US Federal Reserve cannot deliver, Mexico will be affected through its financial markets and the peso, while its export-led growth – boosted by the North American Free Trade Association – will slow down radically. Mexico, however, is in a much healthier state than in 1994, and it is doubtful Mr Ortiz will again have to negotiate with the IMF and the US.

“It was a frightful time, ‘’ he says, his face clouding over. Although virtually no-one criticises Mr Ortiz for his handling of the macroeconomy during the peso crisis, he has been fiercely attacked by both foreign and domestic critics for his role in the bank rescue at the time. “Many of the existing shareholders were favoured despite having gotten their banks into trouble. Unwritten guarantees were given to some foreign banks for their help, and Ortiz waited too long to take action, so that the whole business cost the Mexican tax payer much more than it should have,’’ says one domestic fund manager.

Raúl Muñoz, president of DuPont in Mexico and a long-time acquaintance of the Governor, disputes this. “It is like criticising a firefighter who saves a building for a lack of efficiency in putting out the fire,’’ he says. Some of the reproaches ring true. The estimated cost of the bank rescue is an astonishing 18 per cent of GDP, and even as late as January 2000, it was announced that one of the intervened banks would cost an extra $1bn to clean up.

A well-known local commentator is not alone in believing the current court case brought by Citibank against IPAB, the successor body to Fobaproa, the government body that first intervened in the banks, may reveal the existence of a secret document – or an unwritten agreement – by the Mexican negotiators, promising the US bank something extra in order to have it buy a troubled local bank, Banco Confía.

However, beggars cannot be choosers. “Government support for the private sector banks was inevitable. It has been an expensive rescue for public finances, but no other sector of the economy could have absorbed it,’’ says Isaac Tabor, chief economist for emerging markets at WestLB. Mr Ortiz did pay a political cost for the bank rescue, having been lambasted for his role by the opposition parties in Congress: he was moved from the Finance Ministry to his current role.

In an interview with The Banker, he displayed relief that the task of sanitising the Mexican financial system was almost over, bar a few smaller banks yet to be tidied up. The larger ones which ran into problems, Bancomer and Serfin, have both been sold this year to the two biggest Spanish banks, BBVA and BSCH, which are injecting enough capital to get them on their feet. New laws and regulations should help avoid a repeat of the bank debacle, he says. “One of the lessons from both the Asian and the Tequila crises is that weak legal and regulatory infrastructures amplified the magnitude of the problems,’’ he says. Mexico now has a modern bankruptcy law, allowing banks to collect monies or collateral owed when a firm gets into difficulties.

In addition, banks will have to meet the Basel capital adequacy rules over the next three years – Bancomer just announced it already will meet the criteria this year through the funds injected by its controlling shareholder BBVA. Also, a limited deposit insurance scheme similar to the US one is being implemented over the next few years, taking away what amounted to an all-out government guarantee, which helped foster incautious lending policies. Nonetheless, rating agency Moody’s says the Mexican banking system is still weak.

About one quarter of interest revenue still derives from government instruments used in the bank rescue and the financial system “resembles a special purpose vehicle that channels savings into funding the bail-out’’. But this is all changing with the latest foreign takeovers and the new laws and regulations. What is needed next is for banks to start lending. It is happening on the consumer front, but on the corporate side, credit figures are still negative.

Mr Ortiz sees these figures moving on to positive ground soon, although most analysts think it will not happen until after the political uncertainty associated with a long handover to a new government in early December. Bank loans are a sine qua non for the underlying health of the economy because small and medium sized companies have been surviving on supplier credit, “not an ideal situation”, admits the governor.

Larger companies have had access to international capital markets and have borrowed at lower interest rates in other currencies. A number of them have been pushing for Mexico to abandon the peso and dollarise, saying this would help stabilise the economy. It is true that the peso depreciated a more-than-expected 15 per cent in 1998 and it did see a bout of volatility prior to July’s election, after a relatively strong and stable performance in the year to date.

But so far, this does not worry Mr Ortiz. “We are not looking for a specific level for the peso. But excessive volatility over a long time can influence inflation expectations and if necessary there is always the possibility of raising interest rates,’’ he says. As for inflation, the central bank’s aim is to lower it to that of its main trading partners, the US and Canada.

The rather ambitious target is 3 per cent within 3 years. This, says Mr Ortiz, will make the issue of dollarisation recede, although “in the longer term it is always a possibility”. The 52-year old father of three girls has been accused of arrogance, a trait many would say is intrinsic to a central banker’s make-up. “He has had to maintain firm positions on a number of issues and his style could be confused with arrogance,’’ argues Mr Muñoz.

It has to be said that during his reign at the ministry of finance, analysts received calls asking them to abstain from publishing negative reports, not really something a government should be involved in. His former staff at the ministry are said to have been less than impressed by his successor José Ángel Gurría. “Mr Ortiz was more respected as a technocrat. As a result, they have not been as co-operative with the current guy,’’ says one analyst.

Hearsay has it that relations between the two financial top dogs are frosty but this has not affected the running of the economy. Mr Ortiz has presided over a booming recovery in his short stint as governor of the central bank, including Mexico’s graduation to investment grade by US agency Moody’s in March. However credit must also be given to a favourable external environment and a president, Ernesto Zedillo, with whom he worked closely, one who has been called by some “the superminister of the economy”.

Wearing the central banker uniform of a white shirt and a grey suit – with the investment banker note of a Hermes tie – the former Stanford University professor with a PhD in monetary theory surprisingly admits the job he has most liked in government was his four-week stint as minister of telecommunications and transport at the outset of Mr Zedillo’s administration.

Perhaps when his term ends in 2003, Mr Ortiz will confound expectations and head somewhere other than the IMF or academia.

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