2017 Finance Ministry Scorecard

2017 Finance Ministry Scorecard

In LatinFinance's annual survey of the performance of finance ministries, Peru stands out amid a tough period for the region.

Nicholas Laursen

Last year was a difficult one for finance ministries across Latin America and the Caribbean. Commodity prices remained depressed and global interest rates began to rise while political upheaval throughout the Americas created a tumultuous backdrop.

The political drama hit the region’s biggest economies. The honeymoon ended for Argentina’s new administration. Impeachment and a subsequent change in economic direction caused chaos in Brazil. And an already slowing Mexican economy was hit by worries about trade relations as the US election cycle advanced.

The turbulence drove a sharp divergence in views about the performance of each country in the region. Indeed, economists and analysts consulted by LatinFinance for our 2017 Finance Ministry Scorecard showed the greatest disparities in their assessments in recent years.

If one theme of this year’s scorecard was little consensus on the best financial managers of 2016, another was that none really excelled. After extensive market consultations and internal data crunching, however,LatinFinance has chosen Peru’s economy and finance ministry to lead the scorecard.

Arguments against the Andean sovereign topping the table were that part of Peru’s success in 2016 stemmed from strong policy in previous years. The other is that the administration is still so new that it is difficult to assess its progress. Alfredo Thorne took over as finance minister in July, replacing Alonso Segura, after Pedro Pablo Kuczynski eked out a win in a closely-fought election.

Yet on balance the government impressed with its quick progress to execute legislation to formalize the economy, increasing the tax base and bringing more Peruvians into the social security framework. Additionally, it worked to speed up investment projects. At the same time, GDP growth increased by 40 basis points to 3.7%, according to the World Bank, and inflation and unemployment rates remained steady.

"Peru is embarking on a new phase with Minister Thorne," says Benito Berber, an analyst at Nomura.

The new finance minister acknowledges he inherited an economy in strong shape.

"We are fortunate in that we have very solid fundamentals in the economy and we have a pretty strong fiscal anchor," Thorne tells LatinFinance.

While the sovereign has loosened its spending somewhat, the counter-cyclical approach has been applauded by economists who saw restraint in recent years.

"They have been prudent in the past, so now when economic growth has slowed following the commodities downturn they’ve been able to loosen fiscal policy," says Edward Glossop, Latin America economist at Capital Economics. 

Thorne says he is "very committed" to fiscal discipline and keeping debt low. He is planning a 2.5% fiscal deficit this year, tightening gradually to 1% by 2021. "We are thinking about our fiscal margin and putting more emphasis on infrastructure investment and formalization as drivers of economic growth," he says.

"Where Peru faces strong challenges are development and new growth, and that is the reason why we look to infrastructure and productivity as new growth drivers."

At the same time, he is targeting GDP growth of 4.8% next year and 5% in 2019.

Meanwhile, under Thorne’s guidance, the country has continued increasing its stock of debt denominated in local currency with a $3 billion liability management exercise in September.

Unraveling Kirchnerism

Placing Argentina second on the scorecard may be controversial. It was a tough year for the country, with many Argentines feeling real economic pain. The economy is believed to have contracted around 1.8% last year. What’s more, Finance Minister Alfonso Prat-Gay was fired in December, and replaced by Nicolás Dujovne.

Yet we deemed the progress made by Prat-Gay over the course of the year commendable. Prat-Gay set about unraveling a decade of economic mismanagement, undoing currency controls and floating the Argentine peso, cutting subsidies and reopening access to the global financial markets.

After a difficult transition, these measures should pass through to lower inflation and stronger economic performance this year: the World Bank forecasts 2.7% growth.

Still, inflation is projected to remain around 25%. The country, like Brazil, is "dealing with the imbalances of previous administrations," says one economist.

Better late than never

Colombia was rare among Latin America's biggest economies last year in that its finance ministry leadership remained stable. Yet it was still a politically difficult period for Minister Mauricio Cárdenas. After Colombians rejected at referendum a peace deal with the FARC, worries grew that that a tax reform package — which had been lined up to sail though Congress on the back of peace-deal euphoria — would falter. 

In the end, the package made it through the legislature in late December. The reform was crucial for Colombia, with the country's sovereign debt rating hanging in the balance. 

The tax reform includes a 3-point increase of VAT and will help stabilize public debt. 

Nonetheless, concerns now linger that the tax hike coupled with high inflation will put the brakes on economic growth this year. Consumer prices rose around 7.6% last year. That is falling, however, with the central bank's February survey indicating economists expect annual inflation of 5.35%. 

LatinFinance ranks Chile's finance ministry fourth on this year's scorecard. Along with Colombia, its management remained stable under Minister Rodrigo Valdés. It also benefits from a long period of responsible and consistent direction.  

Still, it has seen its pace of growth slow, in line with the regional trend. GDP expanded 1.7% last year, from 2.3% in 2015. With production falling, the government has responded prudently to keep the economy on course.

"Even in Chile, a country that has a very low public debt until recently — it was a net creditor — the country is taking measures to preserve the sovereign rating," says an economist. "So they are slashing spending and taking measures to increase revenue."

Chile also turned to international markets in early 2016, with a bold dual-currency transaction that demonstrated its confidence with global investors.  

Political uncertainty clobbered investment in Brazil in the early part of 2016 as the impeachment of Dilma Rousseff ran its course. Her successor, Michel Temer, inherited a country in economic turmoil and deep recession. The country's GDP is estimated to have contracted by 3.3% last year, with inflation running at 9%.

Temer and his finance minister Henrique Meirelles launched immediately into a series of sweeping reforms, including a 20-year cap on spending. Pension reform, which aims at raising the retirement age to 65, and labor reform are next.

"The new administration, even though they have not delivered much in terms of fiscal consolidation in the short term, certainly put forward a couple of important fiscal reforms and other micro reforms," says Goldman Sachs economist Alberto Ramos. 

While most expect hesitant growth this year, concerns from investors and economists over Brazil's economy linger. 

"The rigidity in the budgeting in Brazil is outstanding", says Berber.  He cites the spending cap as a big achievement which will help re-set expectations on the country's budget and inflation. "I think it’s pretty remarkable. And also, the politics involved in that — obviously President Temer has a lot to do with it — but Meirelles is at the center of it."

Ramos also celebrates the quick reforms. 

"[Brazil is] on a very different, much better path than where we were before," he says. "Before, the prevailing view was that things were bad and on that set of policies were going to get worse. And now it’s that things are still quite challenging, they can get slowly/gradually better, but it will take some time."


Mexico, a regular on this scorecard in years past, was hit hard in 2016. As the US election campaign advanced, investors' worries grew about the implications for Mexican trade and the economy. At the same time, Luis Videgaray stood down as finance secretary mid-year, after having taken the lead on an unprecedented and deeply unpopular visit by presidential candidate Donald Trump to Mexico. He was replaced by José Antonio Meade. 

The economy grew but, at just over 2%, it was less than half the rate of earlier in the decade. Mexico's peso slumped against the dollar as investors sweated over the implications of a Trump presidency on the country's economy. 

Berber, at Nomura, says he expects the country's A3/BBB+/BBB+ rating to be cut soon. 

Meanwhile, lower oil prices have taken a toll on the government's financing. "Mexico is going through a tough moment," says one economist. "A large portion of earnings come from oil exports. It’s not that important for the economy as a whole, but it’s very important for revenue." LF


Previous winners: 2015