BRAVO: Financier of the Year-AgustIn Carstens, Governor of the Bank of Mexico

Courtesy of Banco de México

AgustIn Carstens
Mexico’s well-respected central banker

MEXICO CITY — Bank of Mexico Governor Agustin Carstens vaulted to worldwide fame over the summer with his run for director-general of the International Monetary Fund. He called on the fund to break with the tradition of selecting a European — and instead select a candidate from an emerging economy.
Carstens ultimately was unsuccessful, but he expresses no regrets.
“I think it was a successful process … it was positive that pretty much everywhere a Mexican was considered a creditable candidate for that position,” Carstens tells Latin Trade during an interview from his fifth floor of the Bank of Mexico office in the Mexico City’s Centro Historico. “We won by losing.”
That a Mexican financial official would be considered for the top IMF job shows just how far Mexico has come since the peso crises and economic calamities of past decades.
And Carstens’ candidacy won positive exposure for a country beset by drug-war violence in certain regions, but one that has emerged as an unlikely standard bearer of macroeconomic prudence. GDP growth in Mexico should measure 4.5 percent in 2011, the financial system is solid, the peso is stable, and exports are booming.
Carstens’ candidacy also won exposure for an agenda of change in the IMF, which he considered necessary given the changing state of world economic affairs. Emerging economies have performed strongly, while those of the United States and Europe have sunk into debt and dysfunction. Electing a European, Carstens says, made little sense.
“In a situation where Europe is in crisis … where Europe has lost a tremendous amount of weight in the world economy … Europe is overrepresented in the fund,” Carstens says. “My perception is that it … undermines the legitimacy of the fund.”
Carstens knows of what he speaks. An avid baseball fan with a Ph.D. in economics from the University of Chicago, he was a deputy managing director at the IMF before returning to Mexico as finance secretary in late 2006 and moving to the central bank three years later.
He started his career at Mexico’s central bank and learned the pain of a financial crisis and downgrade through experience: Mexico was considered so risky in the mid-1990s that it could issue only seven-day bonds.
Carstens saw a crisis stirring again after returning to Mexico — and this time he got ready. Mexico approved a fiscal reform in 2007, made sure its banking system was sound and “took advantage” of low interest rates to refinance debt.
The crisis hit Mexico hard as the peso dropped and the economy — made worse by the H1N1 viral outbreak — contracted nearly 7 percent in 2009. Carstens discovered the level of popular discontent when throwing out the first pitch at the World Baseball Classic that year in Mexico City, where he was booed.
The actions have paid off, however.
“We don’t have any of the structural macroeconomic problems [of other countries], and we have a strong base to start growing faster from today on,” Carstens says.
The Mexican economy is expected to grow 4.5 percent in 2011 and 4 percent in 2012. The financial system is solid and banks are well capitalized, he says.
Exports boomed, especially in the manufacturing and automotive sectors — something Carstens credits to solid finances in Mexico and external factors.
“The adjustment the peso has had … has hedged the economy against the important external shocks,” Carstens explains. After depreciating, “we have since seen an important appreciation [in the peso], but this appreciation has been moderate, been orderly, has helped us bring inflation down, and at the same time it has allowed our exports to continue growing at an extremely fast pace.”
Rising wages in China, along with higher shipping costs and property-rights issues there, also have brought manufacturing back to Mexico. “Some sectors in the U.S. really needed to readdress their strategic decisions, and to relocate production to Mexico has been part of the solution,” Carstens says.
Mexico’s economic prospects in the coming years also appear to be better than regional rival Brazil and some of the so-called Bric countries.
“Brazil is overheated,” Carstens says flatly, and needs to tighten monetary policy and fiscal policy. “They have experienced a very sharp appreciation of their currency … to the point where they have to impose capital controls and their industry is really being impacted by trade with China. The same thing is happening with China. China is in the process of putting on the brakes, of reducing credit. There is uncertainty that credit will be granted if all the states have solid finances.”
Although Mexico is compared with other emerging economies, it depends heavily on the United States, where attention has focused on raising the debt ceiling.
Carstens says, “I was not that concerned about the debt ceiling issue,” and he even seemed heartened by Congress actually debating a serious issue. “The main debate was not whether they should do it or not. The debate was how it should be done. I think this is a good step forward,” he says.
Carstens sees some promising signs in the United States, too. “Corporations are still strong. The U.S. still has a strong capacity to grow, so I think that it will be a matter of time before the U.S. economy grows again,” he says.
How the current problems in the U.S. economy affect Mexico remains to be seen. The Bank of Mexico is predicting growth of closer to 4.5 percent this year, instead of closer to 5 percent. Consumer confidence remains soft in Mexico, although it is moving upward. Violence continues flaring in some regions, and Carstens readily acknowledges that it likely has had an impact on foreign investment.
But the overhaul picture remains positive, he says.
“For the next two years, Mexico will be a very solid economy, and it will be noticed.”
editorial@latintrade.com

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