Doctor of Stability

Appearing at a special, public meeting of History Professor James Wilkie's course on Mexican history since 1982, Mexican Finance and Public Credit Secretary Francisco Gil Díaz lectured Feb. 2 on the benefits of sound fiscal and monetary policy and good fortune. The visit, including a breakfast for Gil Díaz with UCLA professors and administrators, was sponsored by the Latin American Center's Program on Mexico. Gil Díaz is on the visitors' board of the Anderson School of Management.

"I'm not a good finance minister," Gil Díaz smiled. "I'm a lucky finance minister."

Gil Díaz was referring to high oil prices that, he reminded the class, are a boon to Mexico "even if you have to pay more at the pump." Tax receipts from Pemex, the state-owned oil monopoly, amount to between 30% and 40% of federal revenues, he said.

Rogelio Ramírez de la O, who is likely to succeed Gil Díaz if front-runner Andrés Manuel López Obrador wins the July presidential election, has contended that the unusually high revenues, rather than wise policy, have been responsible for sustaining the Mexican economy and staving off a fiscal crisis like those that began in 1976, 1982, and 1994.

But the current, rosy economic picture that Gil Díaz painted on Thursday is hard to discount. Since President Vicente Fox's inauguration in December 2000, Mexico not only has balanced its budget but has shifted its debt markedly from foreign currency into pesos. The country's debt rating has risen, interest rates are down, and the rate curve is remarkably flat, allowing favorable interest rates for borrowers over various time periods. Inflation, which hit the triple digits in the 1980s, stood at a record low 3.2% in 2005, and Gil Díaz said that the figure drops further when volatile food and energy prices are subtracted. (Always deadpan, he remarked that pico de gallo salsa gets too much weight in Mexico's consumer price index, the inflation measure.)

Official unemployment in Mexico is also low, and the economy added 576,000 jobs in 2005—to the disappointment of some observers. The country has a vast informal economy, so good figures on employment and poverty are hard to come by. Still, analysts speak of sustained growth in Mexico's middle class during the past decade.

Dismal Science

Gil Díaz appeared especially proud of his involvement in what he said was a rare if not unique event: a correct prediction by economists. His team argued for legislation to put the federal government in charge of reclaiming foreclosed property, saying that the shift would give banks confidence to make more mortgage loans.

In the three years since the law's passage, and beginning almost immediately thereafter, Mexico has seen a 60% increase in mortgage loans in real terms, according to Gil Díaz. Mexico is enjoying a boom in credit by broader measures as well, he showed.

Later on Thursday, Wilkie described the significance of Gil Díaz's comments to the regular meeting of his Mexican history course. He observed that economic conditions in Mexico depend greatly on those in the United States, by far the largest consumer of goods manufactured there. A key subtext of Gil Díaz's remarks, Wilkie said, is that a shock to the American economy could send Mexico into a new crisis. Put another way, seeing Americans pay more at the gas pump too suddenly would not be a good thing for Mexico. Wilkie alluded to concerns that Mexico's oil reserves will dry up in the short term, within 15 years by some estimates.

Wilkie credited Gil Díaz with keeping the Mexican peso stable during his five-year tenure. The repeated financial crises had led to devaluations of the currency and dire economic consequences.

After joining the Board of Governors of Mexico's Central Bank, Gil Díaz worked on repairing the 1994 crisis. In his talk, he said that the government had been forced to float the peso as part of its response, because at the time it held insufficient foreign currency to do otherwise. However, Mexican technocrats discovered fairly quickly that the move worked better than expected to stabilize the currency.

For Gil Díaz, it was an early and important brush with fiscal good fortune.

In 1995, he went back to Chicago, where he had earned his doctorate in economics, to ring the opening bell on futures and options contracts on the peso at the Chicago Mercantile Exchange.