Mexican Finance Minister Luis Videgaray's best short-term policy move was to hedge the country's contracts on oil. For every year as minister, he paid banks for the option to limit the losses on Mexico's oil contracts if the price of oil dropped. This protected against global volatility and created a level of certainty in the budget. The Mexican Congress could budget with the assumption of oil at a certain price and it would not be hit too hard (in the short term) if oil suddenly fell because Mexico's contracts were protected with a hedge.
Mexico's hedged its 2014 contracts at $81 per barrel
and its 2015 contracts at $74 per barrel
. Given the oil price drop in late 2014 that sustained throughout 2015, when oil was priced below $50 for almost the entire year, Mexico netted over $6 billion dollars from Videgaray's hedges. That hedging policy, started by his predecessors but one that Videgaray aggressively continued, was the difference between bad and worse. While Mexico's growth hasn't lived up to its hype in recent years (and Videgaray deserves some blame for that), hedging oil prevented Mexico from facing massive social spending cuts and potentially recession.
Videgaray's other big hedge didn't work out so well.
Videgaray was apparently the cabinet member responsible for recommending the President Enrique Peña Nieto make a hedge on the global political stage and meet with US presidential candidate Donald Trump. While Hillary Clinton is more likely to win the presidency, wouldn't it make sense to meet with the Republican contender and begin to try to temper some of the worst of his anti-Mexico policies and rhetoric? From an economist's mindset, it's a logical conclusion to pay a small price now to hedge against the worst case outcome and try to soften the potential damage.
Unfortunately for the now former finance minister, this hedge came at a much steeper price than he anticipated. While Trump's visit to Mexico played poorly for him
, it was far worse
for Mexico's president and government. Mexico's public hates Trump and they viewed EPN's meeting as a sign of weakness towards a candidate who has based his campaign on an anti-Mexico platform.
Peña Nieto has been an intensely loyal president, rarely shuffling and only removing one cabinet minister completely from government prior to this week. Videgaray was the closest person in his inner circle. Videgaray's resignation was necessary to stop the president's approval rating from falling even further from its already record lows.
The lesson here is that hedges in politics don't work the same as they do in economics. Videgaray made a mistake in thinking otherwise.