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The governor of Mexico’s central bank has dismissed any apparent similarity between the recent rise in global interest rates and the 1994 rate rise that helped trigger the financial crash known as the Tequila crisis.
“The situation today is very, very different,” Guillermo Ortiz told the Financial Times.
While no one is predicting a 1994-style crash, several observers have drawn parallels between the two interest rate moves and noted that the recent shift has had a negative impact on Mexico’s leading financial indicators.
And, as in 1994, the rise in rates is taking place against a backdrop of presidential elections marked by increasing uncertainty.
According to the most recent polls, the once significant margin separating frontrunner Andrés Manuel López Obrador, the country’s leftwing presidential candidate, and Felipe Calderón of the centre-right National Action party (PAN) has narrowed to a technical tie ahead of the July 2 vote.
But Mr Ortiz said that both the nature of the rate rise and Mexico’s economic and institutional setting made any attempt at a comparison between the two years misleading.
First, he said, the US Federal Reserve this time had taken pains to “telegraph” the decision to raise rates long before it acted. “It tried to guide the markets,” he said, which contrasted significantly with the “unexpected” rates rise in 1994, which “really rocked financial markets, triggered a reassessment of risks and contributed to the Mexico crisis”.
In addition, interest rates doubled from 3 per cent to 6 per cent in the space of a year in 1994, whereas today the upward track is expected to be much shorter. “I think that financial markets are pretty much convinced the Fed will stop at 5 per cent or, at the most, 5.25.”
Even so, Mr Ortiz admitted that the continuing low spreads of emerging market and corporate debt and abundant global liquidity were possible signs that not enough attention was being paid to risk assessment.
He also predicted tougher times ahead. “It is not unthinkable, of course, that there will be some corrections going forward and I doubt very much that, in the next couple of years, we are going to be enjoying the same type of financial atmosphere that we have enjoyed over the last couple of years.”
He stressed, however, that emerging markets, including Mexico, were now much better prepared to deal with changing circumstances. “They have accumulated reserves, [and] pegged exchange rates have been largely abandoned so central banks do not have to commit to certain exchange rates.”
This greater exchange-rate flexibility was “perhaps the single most important outcome of the series of debt crises that we had in the past and this, of course, facilitates enormously the adjustments to changes in perceptions”, said Mr Ortiz.
One clear example of this is Mexico itself, where the peso has lost about 5 per cent of its value against the dollar in recent weeks – largely the result of the narrowing gap between Mexican and US interest rates rather than volatility from political uncertainties.
In fact, Mr Ortiz said, a clear sign of stability and confidence came at the end of March, when the central bank lowered short-term interest rates 25 basis points to 7.25 per cent in the almost certain knowledge that the Fed was going to raise rates several days later. The move continued the downward trend that started last August, when Mexican rates stood at 9.75 per cent.
Mexico had much stronger institutions now than it did in 1994, said Mr Ortiz, which helped to assuage any fears of instability stemming from the elections.
When asked whether he believed Mexico’s institutions were strong enough to guarantee stability whatever the outcome of the presidential race, Mr Ortiz said: “Yes, I think so.”
Mexico’s macroeconomic stability over the past five years or more, particularly its single-digit inflation, had produced sweeping changes, he said.
These included a significant growth in the country’s middle class, the development of mortgage markets, domestic capital markets through which companies could access long-term credit and a boom in consumer credit.
The implication of all this, he said, was beginning to feed into – and influence – the political classes and the candidates themselves, all of whom had pledged to defend macroeconomic stability.
“We are starting to be in a virtuous circle where people perceive that low inflation and stability are in their interests and that is transmitted to the political parties, which is picked up by the campaign platforms and programmes going forward.”