By Taimur Ahmad
Memories of financial crises run deep in Mexico –
perhaps for no one more so than Guillermo Ortiz.
Barely four weeks into his job as minister for
communications and transport, Ortiz was given an unenviable
task: to save Mexico from default.
It was December 1994. The peso had just collapsed, following
a decision by the government to devalue the currency and let it
float. Jaime Serra, the finance minister, promptly resigned.
Mexico’s so-called 'tequila crisis’
was now in full swing, as capital fled the country.
Then-president Ernesto Zedillo tapped Ortiz for the finance
portfolio in a bid to calm markets. In that role, he would, in
the months ahead, help pull Mexico back from the brink,
securing and coordinating a $50 billion US-led bailout that
eventually succeeded in restoring confidence.
The roots of the crisis are often attributed to policy
blunders during the prior administration of Carlos Salinas,
although the devaluation – and a miscalculation of its
effects – proved to be the immediate trigger.
But the crisis also unfolded against a backdrop of sharply
rising US interest rates, which exacerbated the outflow of
capital from Mexico and which, according to Ortiz, were "a very
important part" of that episode.
That year, US Federal Reserve chairman Alan Greenspan had
embarked on an aggressive tightening cycle, raising the federal
funds rate by more than 300 basis points over the year, in a
bid to thwart inflation. The move triggered a bond market rout
– and also upended the nascent emerging markets asset
That was then
Two decades later, as global financial markets brace for an
inevitable rise in US interest rates, Ortiz, now chairman of
Mexico’s Grupo Financiero Banorte, reflects on the
rising market volatility with a degree of unease.
In an interview with LatinFinance, Ortiz says that developed
world interest rates will inevitably edge higher – and
when they do, that emerging markets will be in for a tough and
prolonged slog as they compete for capital with their developed
"What we face now is an episode of a normalization of
interest rates that will last for sure for several years,
starting with the Fed," he says. This, adds Ortiz, will
inevitably mean "a pullback of resources from emerging
The "violent market reaction" in the early weeks of the
summer is evidence that vast capital flows chasing yield make
emerging markets vulnerable, he says.
While he doesn’t expect the worst, he says that
Latin America, and Mexico in particular, would this time
nevertheless be ready to withstand a sharp rise in US interest
rates, should it occur. "Obviously we’re very
prepared to confront volatility and a repetition of an episode
like 1994/1995," he says.
Whatever the case, he is clear that "central banks cannot
keep the world flooded with money forever".
But he warns that although markets stabilized following a
sharp sell-off in emerging market assets in May and June on
fears of an earlier-than-expected end to the US Federal
Reserve’s bond buying program, that respite could
"The markets are calmer today but the trigger can come at
any point," he says. "Emerging markets and Latin American
countries will be well advised to prepare themselves for a
difficult period in the next years."
Fire with fire
Ortiz’s expertise as a crisis manager extended
well beyond the finance ministry: he left that job in 1998 to
take the helm at the Bank of Mexico, which he ran for 12 years,
successfully banishing hyperinflation and bringing Mexico into
a new era of financial stability.
During that time, he steered the emerging
world’s first freely floating currency through the
fallout of financial crises in Asia, Brazil and, most recently,
the US. Indeed, during the global financial crisis, the central
bank’s timely injection of dollars into the
currency markets was credited with halting a potentially
disastrous slide in the peso.
Mexico was not alone in adopting sound macro-policies over
the past two decades. Ortiz says that the impact of any
reversal in capital flows to Latin American economies should be
milder than previous episodes, in large part because the
macroeconomic conditions are much sounder across the
Of critical importance is the fact that many countries in
Latin America "have adopted flexible exchange rates and
inflation targeting which gives you a framework to deal with
volatility," he says.
Exchange rate flexibility will act as a partial buffer to
external shock, minimizing the extent of domestic contraction.
"The emerging markets, and Latin America in particular, are
well prepared to face this period of a withdrawal of
resources," he says. "As long as they are not very violent, the
consequences should be very manageable."
Not all sound
Although Latin America is by and large "very well prepared"
to face tighter liquidity conditions, Ortiz warns that
economies and companies that require external financing are now
"more vulnerable" to a reversal in capital flows.
Moreover, poor fiscal dynamics in some Latin American
countries since the 2008 crisis means policymakers there will
have less room for maneuver.
"The fiscal situation in several Latin American economies
has deteriorated and so there’s not a lot of room
there. Current account balances have also worsened. If you are
a country today with a large current account deficit, with
fiscal vulnerabilities and with the prospect of a change in
world conditions implied by central banks’ gradual
withdrawal of liquidity, you probably will suffer," he
"It’s important for emerging markets and Latin
American countries which are vulnerable in this respect to take
the appropriate measures to mitigate these vulnerabilities and
make them better able to cope with the volatility which
I’m sure is going to be with us for a long
Such countries are better advised to review their fiscal
buffers and to be prepared for more volatility.
"It’s never the case that when you have a change
in liquidity conditions, that things are smooth," he says. "The
process of adjustment is never smooth, it’s always
disruptive. One has to be prepared for that."
Yet in the wake of the global financial crisis, a belief has
taken hold that Latin America is better insulated than ever
before against crisis. For a veteran crisis manager like Ortiz,
such beliefs portend disaster. "The worst thing that you could
do would be to become overly complacent," he says.
"Latin America did very well during the 2008 crisis:
counter-cyclical policies were used, which was not the case in
previous episodes of financial turbulence. But
it’s also true that a lot of ammunition was used,"
he says. "During the crisis they had buffers. The difference
today is that in some cases these buffers are gone. Latin
America has to focus on these buffers."
Ultimately, though, emerging markets have learned not just
resilience through crises but also the ability to find
opportunities in them. In this light, says Ortiz, a new world
of slower growth in the big emerging markets, including China
and Brazil, may not be such a bad thing.
"This is not a tragedy, to the extent that the emerging
market world is able to cope with this new state of the world,
with commodity prices that are not rising and with capital
flows that are not so easily available," he says. "We will
One way to adapt, says Ortiz, is to focus on structural
reforms to make economies more competitive. In Mexico, the
government of president Enrique Peña Nieto, for example,
has embarked on an ambitious program of economic reforms, which
includes an overhaul of the infrastructure, financial and
energy sectors. "Mexico’s overall prospects are
quite good within the emerging markets sphere," says Ortiz.
"Things are much better aligned than they have been in a decade
and a half."
But even still, the main risk facing the country is in
actually carrying out the reforms, he says."It’s a
huge accomplishment" to reach political agreement on reforms,
he says. "But the risk for Mexico now is to implement them,"
says Ortiz. "That is the main risk." LF