Jonathan Heath
"In 2020 the Mexican economy will surprise everyone by growing over 2 percent"
Exclusive interview with Jonathan Heath, Deputy Governor of the central Bank of Mexico (Banxico).

The seat left open by then Deputy Governor of the Bank of Mexico Manuel Ramos Francia at the end of 2018, created a perfect opportunity for the incoming López Obrador administration to move its cards and send a message of peace. This is how independent economist Jonathan Heath arrived at the central Bank of Mexico.

Heath was promoted by the group of former Treasury Secretary Carlos Urzúa. A man well known in the financial markets, and although he had some agreements with López Obrador's economic team, there was not a radical criticism of neoliberalism.

The arrival of Heath at the Central Bank, alongside Gerardo Esquivel, introduced new issues to the discussions within the Governing Board: the debate over the recession and a less restrictive position. The two last meetings in November reflect this: two votes in favour of a stronger cut in the interest rate.

Back in October you voted for a 50 basis point interest rate cut - and I suspect in November as well - what motivated this vote?

We can see monetary policy in two ways. In absolute terms, how is our rate and its comparison with inflation and with other rates across the curve. The rate in real terms, excluding inflation, is the highest we have had in the last 11 years (since 2018 we have the current operational scheme of setting a target in the rate).

Right now, the inflation rate is at 3%, which is the target, the economy is totally stagnant - although there are people who have other data - and most of the risks we could list are minor compared to other periods.

Perhaps it still requires a restrictive policy because the underlying rate has not come down and there are a number of risks out there, although it has improved a bit, but they are still latent.

It may not be advisable either to go to the other extreme and have an expansive policy, but such a high level of restraint is not warranted either. The idea is to go down to a level where maybe the monetary position is slightly tight and stay there until we make sure that the underlying inflation is converging more towards the goal so that it is something more permanent.

One important thing: somehow I think the whole Governing Board agrees on this. Because we have all voted to lower the rate.

The other way of looking at it is in relative terms in relation to the United States. Right now we have 575 basis points of difference, taking the upper limit in the US. We have never had such a high differential in the same eleven years of history.

In my particular way of looking at it, the three declines we have had so far have been in full sync with the U.S. Federal Reserve. So we haven't changed the relative position. From my point of view, not only do we have to be less restrictive from the point of view of the absolute position, we also have to be less restrictive from the point of view of the relative position, and we have not yet begun to do that because the three departures have been in complete synchrony with the U.S. So the 50 points.

Considering that this is not the mandate of the Central Bank, but it does have an indirect impact, how much can you promote this rate cut in the economy?

For this reason, it is very important to understand the scope and limits of monetary policy. Suddenly we think that monetary policy is magical and has much more power than it has.

I believe that, on the margin, [the Central Bank] can help through various channels that are channels of credit, pricing of other assets. But that impact is less effective compared to that of industrialized countries. Why? Because our financial inclusion is much lower. And, on top of that, we have an even bigger informal sector. Obviously the mechanisms that operate are not as effective.

Many people claim that we have a unique mandate. That's not true. We have a priority mandate, but it doesn't mean we don't have others. We explicitly have a mandate to contribute to financial stability.

If people see that we are lowering the rates, despite all the risks and what is happening, they will probably think that the risks are not so profound. Then maybe it can have a positive psychological impact. It sends a message.

What is your position on the proposal that Banxico should be in charge of economic growth?

Indirectly it does, but we should not attribute it to a monetary policy that cannot work. That is what lawmakers sometimes fail to understand: what are the scope and limits of monetary policy. It is very important to understand that we do have to indirectly support economic growth through the ways in which we can contribute. How? Creating an environment of financial and economic stability so that it lends itself to more accurate decision-making. And it is a more propitious environment for investment. That will contribute to economic growth.

So we are always looking to ensure that stability through different mechanisms: one, obviously price stability, but also economic financial stability seen in other types of variables such as the exchange rate, financial soundness, a payment system that is working perfectly well. We contribute with the stability part.

SCENARIOS

The market is concerned that Mexico could lose its investment grade. What could happen under that scenario and how much could Banxico intervene?

I find it very unlikely for Mexico to lose its investment grade because Moody's is now in A3 and it would have to be downgraded by four grades. And the other, which is Standard and Poor's, would also have to be lowered by three points. That's not going to happen. The only thing that is possible is that they lower us one level, but it doesn't mean that they lower our investment grade.

The other is Pemex. We could lose the investment grade there because if one of the two (Moody's or Standard and Poor's), if they go down one level we would already be in speculative grade.

I don't think the impact here is so serious because the market has already anticipated it. And it also depends on each investment fund, it has different mechanisms.

As the rating is very likely to be downgraded, many funds have already anticipated it. They have already sold their bonds or are in the process of selling them. By the time this happens, the effect could be in the moment, we could see the exchange rate rise two, three days or a week, and then return to the way it was before.

Because the possibility of Pemex bonds not being paid is practically zero. The Mexican government is never going to let anything happen to these bonds. So even if the market doesn't recognize Pemex, it is implicitly backed by the federal government. What the market wants is for it to be explicit.

Also, this is going to be a great opportunity for funds that invest in sovereign bonds but are looking for high yield. What does that mean? That they can have speculative bonds and for them buying Pemex bonds is going to be one of the best investments. Because the possibility of Pemex bonds not being paid is practically zero. The Mexican government is never going to let anything happen to these bonds. So even if the market doesn't recognize Pemex, it is implicitly backed by the federal government. What the market wants is for it to be explicit.

Recently you mentioned that the Mexican economy is about to recover. What did you mean by that?

I would say that it is on the verge of recovering starting in Q1 of next year, simply for the sake of arithmetic and comparability. The engines of growth that are subtracting the most are public and private investment.

The main component of investment is construction, which accounts for about two-thirds. If we subdivide at the regional level, the two states with the most negative rates are the State of Mexico and Mexico City.

The State of Mexico had a very large infrastructure project that was cancelled. Although there are many small projects, we are comparing ourselves to something high. But in January we are going to compare ourselves with something smaller.

The same thing happens in Mexico City, where we have a sudden collapse in the construction sector because the government has found a permit and building license structure full of corruption and is looking to clean it up. And it is very necessary. This whole process takes time.

According to what I've heard, this purge, this cleanup should be ready by the end of this year. Licensing and permits will resume in January. We will then see the beginning of the end of corruption.

Simply with those two states we are going to see a sharp difference. Because in other states not everyone is reporting negative figures. The sector can then grow, I think, up to 2 or 3%.

Precisely, the market estimates that the economy will grow around 1.3% by comparison basis. Then, what happens with the projects that the government is pushing, such as the Infrastructure Plan. Will they be insufficient?

I believe that they will be sufficient to provide for greater growth. First, these base comparison effects that I'm talking about; second, the infrastructure plan is going to kick in; and third, it's going to be a determining factor that the U.S. doesn't go into recession, and the approval of the USMCA. If that happens, our exports must continue to grow at a very good rate and there will also be a reactivation of private investment. All of this will happen in 2020.

Consumer spending is growing, albeit by 1%. I think this is due to several factors: one is that the government cancelled many of the social programs in order to fund the new ones, implying a loss of income for those who were in those programs.

Personally, I can see growth that will surprise everyone, it will be above 2%, easy. My personal projection is 2.1%

But if you look at income indicators, I don't see why household consumption shouldn't grow up again close to 2%. We have increases in salaries, remittances are growing all the time, there is a whole series of income indicators that when you look at them separately reads: "consumption should be growing more".

Personally, I can see growth that will surprise everyone, it will be above 2%, easy. My personal projection is 2.1%.

Currently, the economy is far from the original projections of the López Obrador administration, which was 2%. How can we explain this stagnation? Is it only the transition?

No. It is very important to clarify because I have heard many analysts say that this stagnation can only be explained by internal factors. I don't agree at all, because it is explained by external factors as well.

Private investment has been stagnant for three years. It has fallen slightly now, but it has not grown since 2015. To a large extent this has been due to the arrival of Trump, who we knew we were going to have to renegotiate NAFTA and now it has been renegotiated, but it has not been adopted yet. It is an external factor.

Another thing we've seen is that exports have been slowing down and are mainly a reflection of the U.S. manufacturing sector, not GDP. If you look at that sector, it has hardly grown in the last few years. This is an external factor.

We have two main engines of growth in the last 25 years. If either one or both are off, we don't grow: private investment and exports. Private investment has been subdued for some time now due to external factors and exports are not growing because U.S. manufacturing is not growing. So, we can't say that everything is due to internal factors. Not at all. 

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