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InterviewsJune 1 2016

Argentina's minister of economy relishes return to international stage

Argentina’s minister of economy and public finance, Alfonso Prat-Gay, talks to Silvia Pavoni about mending fences between his country and the international economic community, and how he plans to lower its poverty levels.
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Alfonso Prat-Gay

Since Argentina chose orthodoxy over populism in the presidential elections of November 2015, the country has seemingly changed overnight in the way it relates to the international community and manages its economy.

The new government, led by Mauricio Macri, finally settled the long-standing and bitter dispute with investors who refused the sovereign’s restructured terms on its 2001 defaulted debt, and has embarked on a series of wide-reaching, market-friendly reforms. Mr Macri is the first non-Perónist president in Argentina in 12 years, after the consecutive terms of the late Néstor Kirchner and then his wife, Cristina Fernández de Kirchner. To follow through on his pledge to bring about change, Mr Macri made sure to appoint a well-prepared, internationally respected group of professionals to government. 

A marquee signing

Economy and public finance minister Alfonso Prat-Gay is arguably the headline name of this new administration. Once the head of Argentina’s central bank and an economist at JPMorgan, Mr Prat-Gay now leads what one investor colourfully described, in a football analogy, as the Real Madrid of economic cabinets.

But Mr Prat-Gay's authority stems less from his job title and more from results: during his tenure at the central bank, inflation fell from 40% to 5%. He also successfully unified the peso after it had splintered into an array of quasi-currencies because hard-pressed regional administrations had been forced to issue IOUs, or informal documents acknowledging debt, to pay their bills during the economic meltdown in the first few years of the century. His two-year term was not extended at the end of 2004 because of differences with Mr Kirchner. Since then, he co-founded asset manager Tilton Capital and was elected to Congress in 2009.

Investor confidence in Mr Prat-Gay explains much of the success of Argentina’s mammoth $16.5bn bond this April, the country's first in 15 years. The bond was the largest ever by a developing country and its 10-year tranche secured an impressive 7.5% yield. This is compared with Brazil’s 12.59% on the same type of paper, Colombia’s 8.12% and Peru’s 6.25%.

Settling affairs

The Banker met with Mr Prat-Gay days before the bond roadshow began, at the annual meeting of the Inter-American Development Bank (IDB) in the Bahamas in April. Judging by how quickly rooms filled when he took the stage at the event, the success of the bond felt assured even before discussions with investors officially began. “[The settlement with the holdouts] means we can regain access to international markets. It will allow us to plan and put in place infrastructure projects throughout the country. It will allow us to finance the fiscal deficit, and, more importantly, it means that Argentina is back in the international arena,” says Mr Prat-Gay, before adding that he hopes to re-open dialogue with the International Monetary Fund (IMF), which, for the past decade, had been frustrated in its efforts to assess Argentina’s economic progress.

At the Institute of International Finance event running alongside the IDB's annual meeting, Mr Prat-Gay talked openly of finally setting up a plan for the so-called Article IV evaluation, under which the IMF would talk to Argentinian lawmakers, business leaders and unions. The evaluation is due to take place in September. The revamp of its discredited national statistics agency is further indication of Argentina’s intention to re-engage with the international community.

“It didn’t make any sense for Argentina to claim that we were part of something [the international community] that we were rejecting by our actions,” says Mr Prat-Gay. “It was important for us to draw a line under it, put it behind us – and that’s what we have done.” 

His tone could not be more different to that of his predecessor, Axel Kicillof, whose inflammatory rehetoric branded the holdout creditors buitres (vultures)

Paper money

Thanks to the credibility of the new government, international investors are queueing up for their fix of Argentine paper. Not only did offers on the $16.5bn bond reach $70bn, after buying into the sovereign, investors have their eyes on provinces too, in the hope that they will choose to replenish their funds through debt issuances. Resorting to capital markets is unusual for such administrations, but might be about to become palatable: the success of the Province of Chubut’s second ever bond in 2015 is a positive sign that others may follow.

Hopes are high among investors, but not to the point of losing sight of Argentina’s many challenges, which include double-digit inflation, flat economic growth and conditions outside the government’s control which are affecting growth. Unfortunately, the front-loaded reform package has further weakened short-term prospects. The unification of the foreign exchange market, which had traditionally been running on a dual system of official and unofficial rates, and the removal of utility subsidies have contributed to a sharp rise in consumer prices.

“When you unify the exchange rate market and you start hiking utility prices because you let go of subsidies that were given out by the previous administration to everyone, not just the poor, this has an impact on price indices,” says Mr Prat-Gay. “Our main concern [is] how to contain inflation and how to protect the poor and most vulnerable [in society] who are most exposed to some of those consequences. We’ve inherited a 28% [inflation rate]; the measures we’ve taken have had an impact of about 5% or 6% annual points on the price index, but these are mainly transitory movements. Once these are out of the system, we hope inflation will fall.”

The government’s aim is to halve inflation in 2017 and to lower it to 5% by 2019, by which time Mr Prat-Gay wants to crush the fiscal deficit too. “It’s the most we can do,” he says. “We would like to do more but we have quite a lot of constraints on the political and social fronts, we need to be careful and strike a balance.”

Leaving a legacy

These targets do sound ambitious, but they are, at least theoretically, within the government’s power. Other factors are not, such as the recession afflicting Argentina’s most important trade partner, Brazil, where the economy is set to slump further this year. This is costing Argentina the equivalent of two percentage points of gross domestic product (GDP), says Mr Prat-Gay. He is hopeful, however, that regular dialogue with the neighbouring government will help, at least when it comes to planning infrastructure investments that would benefit both countries. He is also keen on kick-starting negotiations among the Mercosur trading bloc, to which both Argentina and Brazil belong, and the EU, so that a trade agreement can be reached in the medium term.

Argentina’s natural riches, from agriculture to energy, make it a desirable trading and investment partner for developed countries in Europe and beyond. Creating the right environment for such trade and investment deals could go a long way to lifting the country’s growth prospects and rescuing its most vulnerable people from poverty.

“Argentina has massive potential. The world is aware of that; sometimes we [Argentineans] are not,” says Mr Prat-Gay. “The most important thing we’re working on is to make sure that, with time, our fight against poverty is eventually won. It’s unacceptable that a country such as Argentina has more than 30% of its population below the poverty line. This is the evaluation we would like to have on our administration once it’s over.” 

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Silvia Pavoni is editor in chief of The Banker. Silvia also serves as an advisory board member for the Women of the Future Programme and for the European Risk Management Council, and is part of the London council of non-profit WILL, Women in Leadership in Latin America. In 2019, she was awarded an honorary fellowship by City University of London.
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