Argentina’s Prat-Gay becomes Macri’s fall guy

The surprise resignation of Argentina’s finance minister Alfonso Prat-Gay at the end of December is a sign of president Mauricio Macri’s increasing nervousness ahead of this year’s crucial mid-term elections.

The president asked Prat-Gay to leave and has split the finance ministry into two parts. Luis Caputo becomes finance minister with responsibility for state financing, public debt and the budget. His continued presence (he was previously Prat-Gay’s finance secretary) will reassure international markets; he took a central role in negotiating with the bond holdouts and last year’s subsequent return to the bond markets.

Meanwhile Macri has separated out a treasury ministry, to be headed by Nicolas Dujovne, ex-chief economist at Banco Galicia and previously part of Macri’s economic think tank Fundacion Pensar.

The new treasury ministry will focus on increasing economic growth and reducing a persistent fiscal deficit. However, while Dujovne has a reputation as a fiscal hawk and has openly considered the benefits of applying for an IMF loan in his weekly column in the La Nacion newspaper, there is little prospect of any change in policy in the short term.

Itaú, which operates a large retail bank in Argentina, says: “We do not expect significant changes following [Dujovne’s] appointment”. It adds that the main challenge is the same as the one that faced Prat-Gay: how to finance an estimated $40 billion due to the country’s fiscal deficit of 6% of GDP and scheduled debt amortizations for 2017.

The chief of Macri’s cabinet, Marcos Pena, says the president requested Prat-Gay’s resignation because differences between the finance minister and other ministers, officials and the governor of the central bank threatened the “coherence” of the economic team. He says the decision was based on “disagreements regarding the structure and functioning of the team and not because of economic policies.”

However, some observers argue that the Macri’s policy of increasing the number of ministries – the former ‘super’ economy ministry was split into three (finance and economy; energy and mining; and production) was a greater threat to coherence; the creation of another ministry will do nothing to address this issue. Macri now has 21 ministries, rather than the previous 16, just when a coordinated economic strategy to reduce the fiscal deficit becomes vital.

While there may be subtle policy changes, Prat-Gay’s resignation is being seen as a political move to appease a growing opposition movement after 2016’s economic recession. Macri’s Cambiemos (Let’s Change) coalition has a minority share of seats in both congress and the senate but had been able to govern because of the opposition’s disarray and the public mandate from his presidential victory.  As the economic recession extends into a second year, the opposition and the unions are regrouping to oppose the implementation of an orthodox economic agenda.

Should Macri’s candidates perform badly in the mid-term elections this October, there would be a challenge governability and a threat to the president’s attempts to place the country on a path of economic orthodoxy. The decision also reflects the political damage Prat-Gay took personally through the Supreme Court’s decision to overrule his increase in tariffs, a defeat in congress regarding income tax reform and from a semi-public falling out with the president of the central bank, Federico Sturzenegger, after the bank suspended interest rate cuts in December because of a spike in inflation. Prat-Gay was also arguably unlucky in that the expected recovery in the Brazilian economy didn’t materialise as predicted in the second half of 2016.

However, despite these political hits, the decision to replace Prat-Gay still took domestic and international observers by surprise. His early successes – such as re-accessing international markets, floating the Argentine Peso, reforming the data agencies and introducing a tax amnesty on the repatriation of Argentine assets held offshore – led to Prat-Gay winning Euromoney’s Finance minister of year award for 2016. As we noted at the time, re-igniting the economy and reducing the fiscal deficit were always going to be his biggest challenges – ones that he wasn’t likely to be given time to achieve.

While Prat-Gay was removed at the end of 2016, his reforms will remain in place: consensus forecasts are for economic growth to return, at around 3% of GDP, and the fiscal deficit to narrow over the course of the Macri administration.

Edward Glossop of Capital Economics says that the shallow 0.2% quarter-on-quarter contraction in third-quarter GDP supports his view that the recession is close to an end and that the economy will return to positive growth in 2017.

Ultimately, Prat-Gay’s fall proves that the stakes in Argentina remain high and suggests that the president may have taken the gamble that the political space provided by sacrificing Prat-Gay could keep the whole reform agenda on track.

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