Mexico to Increase Funding for IMF, Bank’s Ortiz Says

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Mexico may join Russia, Brazil and China in increasing financing for the Washington-based International Monetary Fund, Mexican central bank Governor Guillermo Ortiz said.

Russia and Brazil unveiled plans this week to buy $20 billion of bonds from the IMF and diversify foreign-currency reserves. China may purchase $50 billion and India may announce similar funding. Ortiz’s comments signal countries outside the so-called BRICs, the largest emerging economies, may be willing to contribute more to the IMF.

“We, in Mexico, will also participate in this effort to raise money either by purchasing the bonds or directly lending,” Ortiz said in an interview in Montreal.

The IMF, which has rescued economies from Pakistan to Iceland in the past year, has never issued bonds and is seeking more cash to finance loans and aid to member countries during the worst economic slump in its 64-year history. Emerging markets should have more influence at the IMF and need to increase their contributions, Ortiz said.

“The IMF has to be re-energized and revitalized and that of course involves changes in the governing structure, and at the center of those changes is a greater participation from the emerging markets.” Ortiz, 60, said. “The other side of the coin is that they also have to contribute.”

IMF Bonds

Mexico’s decision and details will be announced by the currency commission, which is comprised of officials from the central bank and finance ministry, Ortiz said.

“We will participate in a manner that is proportional to our quota share and also will depend on what other countries are doing,” Ortiz said.

China’s State Administration of Foreign Exchange said last week that it’s “actively” considering buying as much as $50 billion of IMF bonds. India would be “perfectly capable of contributing” to an IMF bond program, Montek Singh Ahluwalia, deputy chairman of the nation’s Planning Commission, said in April.

The IMF board may consider late this month or in July the proposal to sell the notes, which would be the fund’s first issue, IMF spokeswoman Conny Lotze said yesterday.

The debt will pay a yield similar to U.S. Treasuries and will be denominated in the fund’s basket of currencies, known as Special Drawing Rights, Brazil’s Finance Minister Guido Mantega said this week. The IMF calculates the value of SDRs daily, with 44 percent weighted toward the dollar, 34 percent to the euro and the remainder split between the yen and the pound.

Dollar Confidence

Mexico could also increase its contribution by joining what’s known as the New Arrangements to Borrow program, which consists of credit arrangements between the IMF and 26 members and institutions. The IMF in April approved a $47 billion credit line for Mexico, which said it didn’t intend to draw on it.

Moves by emerging markets to buy IMF bonds don’t signal a lack of confidence in the U.S. dollar, said Ortiz, who in January was elected chairman of the board of directors of the Bank of International Settlements.

“The dollar will remain the central reserve currency probably for some time,” he said. “I am not really worried about the status of the dollar at the present time.”

Ortiz also said there is a general misunderstanding by markets, investors and ratings companies that Mexico’s dependence on oil revenue and low tax collection mean the country will have more trouble paying debts. “I don’t think that has been impaired at all,” he said.

Credit Outlook

Mexico’s ability to withstand the global financial crisis, the U.S. recession and the outbreak of swine flu should send a good signal to markets, Ortiz said.

Standard and Poor’s cut Mexico’s credit outlook to negative from stable last month, citing greater “underlying structural fiscal vulnerabilities, such as a budgetary dependence on oil revenue, the absence of significant fiscal savings and a low non-oil tax base.” New York-based S&P rates Mexico BBB+, the second-highest among major Latin American countries after Chile.

“The fact that the economy has been able to withstand this huge shock with a financial system that is still in good shape, without a financial crisis, tells you something positive,” Ortiz said. “That should be taken into account by investors, and rating agencies and everybody else.”

Ortiz said this month the country must approve laws to improve tax collection to avoid having its credit rating cut.

“We need a medium-term framework to really tackle the vulnerabilities that we have on the fiscal side,” he said.

Experience, Judgment

Ortiz, who has a Ph.D. in economics from Stanford University, was nominated for his job in 1998 and is the longest-serving central bank chief of Latin America’s eight largest economies. He second six-year term expires this year. He is eligible for a third term if President Felipe Calderon nominates him.

As deputy finance minister under President Carlos Salinas de Gortari, Ortiz played a key role in Mexico’s effort to sell state-owned banks. During the peso crisis of 1995, when soaring interest rates caused defaults on loans and put banks on the verge of collapse, President Ernesto Zedillo tapped Ortiz, by then finance minister, to be in charge of a bailout.

Ortiz said a recent rise in global commodities prices is “less threatening” than when those costs reached their peak. Gross domestic product will shrink in the second quarter by about the same amount as it did in the first quarter, when it contracted 8.2 percent, he said.

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