Nov. 23 (Bloomberg) -- Banco de Mexico Governor Guillermo Ortiz will probably keep the benchmark interest rate unchanged this week as investors speculate President Felipe Calderon will replace the region’s longest-serving central bank chief.

Ortiz, 61, has declined as recently as Nov. 5 to say if he would seek a third six-year term, and added that the bank would be able to manage any transition in leadership. Sergio Luna, chief economist at Citigroup Inc.’s Banamex unit, said he expects Ortiz to leave, while Mark Dow, a money manager at Pharo Management LLC, said the bank would benefit from a new chief.

“If you read between the lines of recent statements you get the impression he’s leaving,” said Dow, who helps manage $2 billion at the New York-based hedge fund. “It might be an appropriate time to bring new blood to the central bank.”

Ortiz’s term ends next month as Mexico’s economic recovery from the worst contraction since the 1930s lags behind the rest of Latin America and as concern mounts that measures to close the 2010 budget gap may fuel inflation. Ortiz’s experience, including his role in resolving the 1995 peso crisis when he was finance minister, is helping Mexico weather the recession, said Pablo Cisilino at Stone Harbor Investment Partners in New York.

“It’s good to have a guy who has been through many crises, especially in times like this,” said Cisilino, who manages $10 billion of emerging-market debt. “He’s been a great central bank president and has done many great things for Mexico.”

The bank’s five-member board will probably keep the benchmark interest rate at 4.5 percent for a fourth month this week, according to all 10 economists surveyed by Bloomberg. The bank will announce its decision Nov. 27 at 10 a.m. New York time.

‘Screwed Up’

The frankness of Ortiz’s comments Nov. 13 at an event at Yale University in New Haven, Connecticut, signals he may plan to leave the bank, Dow said. Ortiz said it should be easy to fix Mexico’s economic woes because “things are so screwed up.” Part of the problem was a “horrible political establishment,” he said, adding Mexico needed a “little bit of leadership.”

Dow said it’s time for a new central bank governor because Ortiz has kept an inflation target that is too low and because he hasn’t shown enough “thoughtfulness in his communication to the market,” making it hard to predict future rates.

Calderon, 47, probably won’t nominate Ortiz for another term because he wants to choose someone closer to his inner circle, said Raul Feliz, an economist at the Center of Economic Research and Teaching, a Mexico City- based research institute.

Poor relations between Ortiz and Calderon date back to 1998, when the National Action Party, headed by Calderon at the time, urged then President Ernesto Zedillo to fire Ortiz from the central bank for his role in a bank bailout, Feliz said.

Government Pressure

More recently, Ortiz also came under pressure from the government as he held off on reducing borrowing costs even as the economy began to slow. Calderon urged the bank in June 2008 to consider the cost of loans when making policy decisions so businesses could access cheap credit.

Calderon’s office in Mexico City declined to comment, as did the central bank’s press office.

“Banco de Mexico is prepared,” Ortiz said Nov. 5 about the bank’s ability to manage any transition in leadership. “No special preparation needs to be made.”

Mexico’s economy plummeted as the recession in the U.S., which buys about 80 percent of Mexican exports, sapped demand. The $1.09 trillion economy has been the worst performer in Latin America this year, shrinking 10.1 percent in the second quarter and 6.2 percent in the third quarter from a year earlier.

Inflation Outlook

The bank delayed the release of its quarterly inflation report Oct. 28 to gauge the effect on consumer prices of tax legislation and the 2010 budget passed by lawmakers this month. The bank’s inflation target is 3 percent.

Calderon won’t nominate Ortiz to a third term, according to eight of 10 investors and economists surveyed by Bloomberg News by telephone and e-mail.

Finance Minister Agustin Carstens may be named bank chief should Ortiz leave, said Michael Atkin, who helps oversee $12 billion in fixed-income assets as head of sovereign research at Putnam Investments in Boston. Carstens, 51, was director of economic research for the central bank from 1994 to 1999.

“From Carstens’ perspective it would be perfect,” Atkin said in an interview. “He’s a very plausible candidate.”

Opinion articles in the Mexican press have also suggested Carstens may take over from Ortiz. Under that scenario, the president may name Alonso Garcia Tames, 49, chief executive officer for the development bank Banobras, as finance minister, columnist Samuel Garcia wrote Nov. 19 in the Milenio newspaper.

Other Candidates

Garcia Tames is also a possible candidate for Ortiz’s job, along with Moises Schwartz, president of the pension regulator, said Banamex’s Luna, 43.

The Finance Ministry’s press office declined to comment. Schwartz’s press office also declined to comment.

The Banobras chief denied in a Nov. 19 interview in New York that he was offered the position of central bank governor.

“It’s important that it’s someone talented who is perceived as a technocrat and not perceived as politicized,” Dow said about the possible candidates to replace Ortiz.

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 Zedillo tapped Ortiz, by then finance minister, to be in charge of a bailout.

“Under extremely difficult conditions during the Tequila crisis, he acted very fast,” said Paulo Leme, 54, Goldman Sachs Group Inc.’s chief economist for Latin America. “That was decisive to help bring Mexico to stability.”

Interest Rate

As bank governor, Ortiz boosted the credibility of the institution by implementing a system to target inflation and by overseeing the bank’s transition in 2005 to an interest-rate setting system similar to that used by the U.S. Federal Reserve, Leme said. Ortiz’s efforts to maintain low inflation rates also helped a burgeoning local bond market, he said.

“Mexico would be well served if he were to stay,” said Leme, who predicts Calderon will nominate Ortiz for a third term. “He’s done a very solid job.”

The peso has weakened 38 percent to 12.9955 per U.S. dollar from 8.0500 per dollar when Ortiz took office on Jan. 1, 1998, as competition grew from China to sell exports to the U.S., oil production declined, and economic growth slowed. The currency rose 0.6 percent at 11:25 a.m. New York time from 13.0676 on Nov. 20.

Ortiz helped get inflation under control as the annual rate slowed to 4.5 percent in October of this year from 15.3 percent in January 1998. The key lending rate has fallen to 4.5 percent from 9.5 percent when the bank first implemented it in August 2005.

Markets Last Week

Mexico’s benchmark Bolsa stock index fell 1.1 percent last week to 30,666.51. Axtel SAB, Mexico’s second-largest fixed-line phone carrier, advanced 17 percent on speculation that a change in a foreign-ownership law may make it a takeover candidate. Desarrolladora Homex SAB, Mexico’s largest homebuilder, dropped 8.6 percent as the approval of a share offering heightened concern that investor value will be reduced.

The peso declined 0.2 percent last week to 13.0676 per U.S. dollar. Yields on Mexico’s benchmark peso bonds due 2024 fell 0.06 percentage point to 8.22 percent, according to Banco Santander SA. The bond’s price fell 0.57 centavo to 115.34 centavos per peso.

The following is a list of events in Mexico this week:
Event                             Date           Estimate
Retail sales for September        Nov. 23         -3.5%
Bi-weekly inflation               Nov. 24         0.68%
Bi-weekly inflation (core)        Nov. 24         0.18%
Trade balance for October         Nov. 24       -$1.13 Bln
Unemployment rate for October     Nov. 24          6.2%
Current Account Balance for 3Q    Nov. 25       -$2.49 Bln
Overnight rate                    Nov. 27          4.5%

To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9@bloomberg.net

Last Updated: November 23, 2009 12:12 EST