U.S. Markets open in 3 hrs 32 mins

Mexico Peso Falls as Investors Fret Over Finance Minister's Exit

Ben Bartenstein, George Lei and Sydney Maki
1 / 2

AMLO Hits Turbulence as Finance Chief’s Exit Sends Shock Waves

(Bloomberg) -- The decision by a top adviser to the Mexican president to resign while denouncing conflicts of interest in the government stunned the nation and its financial markets.Finance Minister Carlos Urzua’s abrupt decision to quit on Tuesday was the first major cabinet loss since Andres Manuel Lopez Obrador took office in December. The scorching tone of his resignation letter, from a public official known for extreme politeness and addressed to a president who made fighting corruption his central campaign issue, made the departure all the more surprising.“I’m convinced economic policy should be based on evidence, considering the various effects it may have and free from all extremism, whether from the right or left,” Urzua wrote in the letter posted on his Twitter account, adding that decisions by Lopez Obrador’s government on matters of public administration have lacked foundation. “However, during my term, these convictions weren’t shared.”Within an hour, AMLO, as the leftist leader is known, nominated Arturo Herrera, Urzua’s deputy, to replace him. That helped to limit a tumble in the peso, which fell 1.2% at 3:23 pm local time, paring losses of as much as 2.3% that had followed the publication Urzua’s letter. The nation’s main stock index fell as much as 2%.“He is not happy with the decisions we are taking,” Lopez Obrador said of Urzua in a video posted on Facebook, standing alongside Herrera after the minister’s resignation. “As this is a change, a transformation, sometimes people don’t understand we can’t continue with the same strategy. We can’t put new wine in old bottles.”Urzua has been a long-standing ally of Lopez Obrador, having been his finance secretary when AMLO was mayor of Mexico City at the start of the last decade. Herrera is also a former finance minister of AMLO’s in the nation’s capital.Blatant ConflictIn his letter, Urzua also argues that members of AMLO’s administration had forced the finance ministry to employ people without the necessary knowledge for their jobs.“This was motivated by influential personalities from the current government in a blatant conflict of interest,” Urzua wrote, without providing details.Herrera has been the friendly face of AMLO with international investors in the first months of government, often traveling to New York and London to meet them and promote the plans of the administration. He has also been at times overruled by the president: in March, he told the Financial Times that Mexico had put a controversial $8 billion refinery project on hold, only for AMLO to say hours later that was a “misunderstanding” and that the work would continue.Read More: Mexico Peso Falls as Investors Fret Over Finance Minister’s ExitUrzua’s departure is negative because it suggests significant frictions within the AMLO administration and also the possibility that economic decisions may be done by policy makers without the required credentials, according to Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc. in New York.“In light of the unusual content and suggestions made in Urzua’s resignation letter, there will likely remain the question of who in the AMLO administration will ultimately be in charge of defining economic policy," he wrote in a research note.Calling the ShotsThe nomination of Herrera won’t change economic policy in a significant way, according to Barclays Plc.“AMLO was calling the shots and will continue to do so,” said Marco Oviedo, chief Latin America economist for Barclays. “The letter is showing that the administration is not as clean as it is intended to be.”\--With assistance from Cyntia Barrera Diaz and Michael O'Boyle.To contact the reporters on this story: Eric Martin in Mexico City at emartin21@bloomberg.net;Nacha Cattan in Mexico City at ncattan@bloomberg.netTo contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Walter BrandimarteFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

(Bloomberg) -- The Mexican peso plunged by the most since a tariff standoff with the U.S. in late May after Finance Minister Carlos Urzua abruptly resigned, casting doubt on the government’s ability to stave off economic and financial challenges.

Urzua announced his decision on Twitter, citing conflicts of interest and policy disagreements within Andres Manuel Lopez Obrador’s administration. The peso fell by as much as 2.3%, before trimming losses when Arturo Herrera, the deputy finance minister, was named as Urzua’s replacement. The iShares MSCI Mexico ETF tumbled and the yield on the nation’s dollar bonds due in 2026 rose to 3.7%.

“This is a very bad sign,” said Benito Berber, the chief economist at Natixis in New York. Still, Berber said Herrera will help calm markets and offer some continuity: “Urzua and Herrera gave credibility to economic policy.”

Here’s what other investors and analysts had to say:

Ilya Gofshteyn, senior emerging markets macro strategist at Standard Chartered Plc.

“The market is right to take this seriously. Urzua was seen as ‘the adult in the room’ in the AMLO administration, someone who lent credibility to an otherwise economically heterodox administration”“This was unexpected and while MXN is attractive from a carry standpoint, there’s a reason real rates are as high as they are in Mexico”“Tactically bullish MXN views are all good and well, but on any given day a development of this sort can creep up and force position liquidation. Given how heavily subscribed MXN remains among the global investor community, those squeezes tend to be especially painful”

Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc. in New York

“The resignation letter is unconventional and direct: it expresses clear dissatisfaction with internal policy and personnel dynamics within the AMLO administration”“This is an unexpected and negative development for it suggests: (1) significant policy and inter-personal frictions within the AMLO administration and (2) that economic policy decisions may be guided and informed by non-economic/financial criteria and led by policy makers without the required and relevant credentials to define policy and manage the fiscal accounts”

Shamaila Khan, director of emerging-market debt at AllianceBernstein in New York

“Herrera has interacted with investors extensively, so he is not a concern. It’s really the government policies that are a concern and are unlikely to change as a result of the resignation”

Christian Lawrence, a New York-based strategist at Rabobank who was last quarter’s top peso forecaster

“Given that fiscal slippage and Pemex are big concerns, the reaction is not surprising. Remember, Fitch downgraded Mexico to one notch above junk on Pemex concerns and the Moody’s outlook was moved to negative”

Claudia Ceja, a strategist at BBVA in Mexico City

“The Herrera nomination is positive, but even so, the criticism from Urzua is very strong”“Even if the government is able to assign another market friendly minister, the fact that Urzua is openly criticizing the decision making is certainly negative”

--With assistance from Justin Villamil and Karina Montoya.

To contact the reporters on this story: Ben Bartenstein in New York at bbartenstei3@bloomberg.net;George Lei in New York at glei3@bloomberg.net;Sydney Maki in New York at smaki8@bloomberg.net

To contact the editors responsible for this story: Julia Leite at jleite3@bloomberg.net, Alec D.B. McCabe

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.