A year ago the coffers at Argentina’s central bank were empty as the country teetered on the brink of a currency crisis. Now banks are scrambling to fly dollars back to the US as their vaults fill to bursting with piles of cash.
That would sound like good news for Alfonso Prat-Gay, who as finance minister this week boasted that his tax amnesty had already repatriated $90bn hidden in safe-deposit boxes and overseas havens.
But the bonanza was not enough to save him. He was sacked by President Mauricio Macri after battling with other officials over his push for more control over economic policy. Named by Euromoney as its finance minister of 2016 for masterminding a record-breaking $16.5bn bond issue, Mr Prat-Gay nevertheless took the fall for the failure of Argentina to rebound as quickly as he promised. After inheriting an economy in recession, it has struggled to bounce back. Its economy contracted by 3.8 per cent in the third quarter from a year earlier. Although more progress has been made in tackling inflation, it will still end the year at close to 40 per cent.
“Alfonso is absolutely brilliant from a technical point of view, and has healthy political ambitions, but he just isn’t a team player. He had rocky relations with the rest of the economic cabinet, and there were constant arguments. Eventually the president decided he had to go,” said one member of Mr Macri’s economic team.
The question now is whether Argentina’s new economic stewards can do what Mr Prat-Gay failed to — push through painful austerity measures in an election year.
“Prat-Gay did an excellent job bringing Argentina back to the world,” said Federico Tomasevich, president of Puente, an investment bank in Buenos Aires. He pointed to the scrapping of currency controls and the resolution of a debt default that had isolated Argentina from the international capital markets since its crippling 2001 crash. “Now we are entering a new phase, more focused on internal issues, like making public spending more efficient,” he adds.
That task falls to Nicolás Dujovne, a respected macroeconomist and former chief economist at Banco Galicia, one of Argentina’s biggest private banks. He takes over as treasury minister after Mr Macri split Mr Prat-Gay’s treasury and finance ministry into two. Luis Caputo, Mr Prat-Gay’s finance secretary, was promoted to finance minister.
Eduardo Amadeo, a lawmaker for Mr Macri’s Republican Proposal party who heads the finance committee in congress, sees a “more orthodox” approach to economic policy under Mr Dujovne, who is regarded as a fiscal hawk.
But that will not make it any easier politically to reduce Argentina’s bulging fiscal deficit, which experts say is the root cause of recurrent economic crises in the country over the past half century.
“I would never have given 30bn pesos to the ‘piqueteros’, but they were threatening to shut the country down for the next six months,” he said, referring to Argentina’s activists to whom the government has agreed to pay almost $2bn in social programmes and welfare payments after congress passed a “social emergency” law last month.
With important midterm legislative elections in October, most observers believe it will be hard to make significant headway in reducing the fiscal deficit next year either.
“Prat-Gay’s major failing was on fiscal consolidation, which will in turn be Dujovne’s principal challenge,” says Nicholas Watson, an analyst at Teneo Intelligence in London.
Although the government’s 2017 fiscal deficit target of 4.2 per cent of gross domestic product is “modest”, Mr Watson argues that “it is difficult to see how Dujovne can significantly hasten Prat-Gay’s policy of fiscal gradualism without harming the governing coalition’s chances” in the elections.
Indeed, Juan Germano, director of Isonomia, a local pollster, says it would be unprecedented for an Argentine government to implement austerity measures during an election year, describing it as “political suicide”.
Although both Mr Macri and his government’s approval ratings remain close to 60 per cent, that support is “fragile”, says Mr Germano. Some 70 per cent of Argentines remain undecided over how they will vote in the midterm elections, which will determine whether Mr Macri can push his market-orientated reform programme through congress.
Counting strongly in Mr Macri’s favour is the disarray of the Peronist opposition, with former president Cristina Fernández de Kirchner this week indicted on corruption allegations involving public works projects.
“For as long as ‘Kirchnerism’ remains alive, this will help to differentiate Macri,” says Mr Germano, who says that most Argentines believe that the only alternative to Mr Macri is a return to the past.
Therefore, the majority remain hopeful that he represents the best chance of solving their country’s problems, and is willing to keep allowing him time. “The great question is: how long will they wait?”
Tax amnesty: fearful savers run out of places to hide
Fear may be getting the better of avarice in Argentina. Not only is the allure of a tax amnesty coaxing citizens to declare much of the up to $400bn they are estimated to hold abroad, but many savers long reluctant to keep their money in Argentina’s volatile economy are also being compelled to act by a global crackdown on tax evasion.
With new OECD tax rules including the automatic exchange of financial information coming into force next year, Argentina’s initiative is set to become one of the most successful of a raft of tax amnesties around the world, from Indonesia to Italy, France and Fiji.
Although $90bn has already been declared in Argentina, some observers expect this to increase to as much as $130bn by the March deadline of the amnesty, which is part of a global transparency drive aimed at legitimising almost $10tn of funds held offshore.
As Mr Macri’s business-friendly government takes strides to restore macroeconomic stability, Argentines scarred by a long history of hyperinflation, debt defaults and expropriations of savings are now more concerned that former bastions of secrecy from Switzerland to Panama are no longer the best place for their money.
“The world has changed,” says Alan Lips, a tax expert at Miami-based accounting firm Gerson Preston, who argues that there is “a very clear fear factor” driving Argentina’s tax amnesty. “It’s dangerous if you’ve got money out there and you think it’s hidden. It may be for a while, but in the long term it’s going to be discovered.”
Philipp Zuend, a tax expert at KPMG in Switzerland, underlines how important it is that countries like Argentina offer tax amnesties, with other countries in the region like Brazil and Colombia doing the same. “If there was no amnesty in Argentina people would be a bit lost. What would they do, as they can’t hide any more? This gives them an option,” he says.
With both local and global dynamics working in the Argentine tax amnesty’s favour, new funds entering the formal economy will bolster growth that is expected to measure around 3 per cent next year.
As well as widening and improving the quality of its tax base, the government could also receive a fiscal windfall of as much as $10bn, depending on how many investors prefer to pay a 10-15 per cent penalty to normalise funds over buying three or six-year government bonds, or making long-term investments in infrastructure projects, housing, mortgages or small and medium-size businesses.
The windfall will mostly go towards a “historic reparation” for pensioners that the state failed to pay or short-changed over the past decade, which economists expect to provide a strong boost to consumption in 2017.
Furthermore, the tax amnesty will provide a much-needed boost to Argentina’s emaciated capital markets, which never recovered from a major economic crisis in 2001. Credit in Argentina represents just 15 per cent of gross domestic product, compared with 120 per cent in neighbouring Chile, while the market value of Argentina’s once-booming stock market, at just $56bn, is dwarfed by Brazil’s $490bn bourse.
“Everybody wins,” says one affluent Argentine who is taking advantage of the tax amnesty. He is hopeful that dodging taxes might finally stop being a “national pastime”.
Benedict Mander
