Argentina's next finance minister faces daunting to-do list
October 31, 2019 |
President-elect's finance team must first fix sovereign debt crisis
Argentina's President-elect Alberto Fernández choice for taking on the finance ministry role will have one of the toughest to-do lists of any cabinet minister as the new government moves to lift Latin America's No. 3 economy out of an economic tailspin.
To start, the individual will be leading yet another restructuring of the nation's sovereign debt while renegotiating an International Monetary Fund loan deal that was suspended by the latest debt default. At the same time they will also need to outline an economic recovery plan while also cutting back a stubborn fiscal deficit.
When the cabinet posts will be named is anyone's guess. Fernandez takes over on December 10th, having defeated the incumbent and pro-business candidate Mauricio Macri in Sunday's election.
Most urgent among the finance minister's tasks is to restructure debt repayments so Argentina "can recover access to credit as soon as possible," Javier Salvucci, head of research at Silver Cloud Advisors, an investment advisory in Buenos Aires, told LatinFinance.
"This is going to be what is first on the agenda of the next finance minister," he said.
Fernández, both before and after the election, has provided few details on what his finance policies would be, except that he would seek a quick and friendly restructuring of the debt with private creditors. That, he said, would give the nation time to restore economic growth, shore up tax revenues and provide a source of stable funding to once again pay off its debt.
However, most analysts now say a large cut to the face value of the creditors' bonds is inevitable because of a worsening in the public finances since.
No matter what the strategy is, Fernández and his economic team will have to convince not only creditors but the electorate, said Ezequiel Zambaglione, head of strategy at Balanz Capital Valores, a broker in Buenos Aires.
"It's not question of what Fernández wants to do, but a question of whether society will support him and whether his team will have the capacity to do it," he said.
The analysts and economists LatinFinance spoke with point to three contenders for the critical position. They include Matías Kulfas, an economist who previously worked as general manager of the Argentine central bank and as a director of Banco de la Nación Argentina, a big state bank; Cecilia Todesca, another economist who worked with Kulfas at the central bank; and Guillermo Nielsen, who as finance secretary from 2002 to 2005 helped restructure the country’s $100 billion debt after a default in 2001.
Kulfas and Todesca may be the favorites because they have been advising Fernández over the past few years, and they also would likely get the nod from the rest of the coalition, which has factions on the left and right.
Indeed, Fernández, a moderate, may not be able to name just anybody without first getting the approval of his vice president, the former two-term President Cristina Fernández de Kirchner, said Miguel Zielonka, an economist and associate director of Econviews, a consultancy in Buenos Aires.
For that reason, Zielonka expects Nielsen, the most orthodox of the three, could get picked for a lower post to handle the negotiations with the bondholders because of his past experience.
"He is probably the best person to handle this task," he said.
However, creditors may not like to deal with Nielsen, given that he negotiated a 76% reduction to the face value of $82 billion worth of defaulted bonds in 2005.
"The market is worried about how tough he may be," Zielonka said.
The next finance minister will also have to negotiate a new deal with the IMF as a prerequisite to a bond restructuring, a task that will require putting in place a credible fiscal plan that will convince bondholders that they will eventually get paid back, he added.
But any fiscal plan may also have to get approved by the coalition, potentially setting up another political battle, he added. That is because the plan will cause some pain on the populace, including spending cuts to eventually achieve a fiscal surplus as a key for servicing the debt.
The fiscal plan likely will include a hike on export taxes and the wealth tax on individuals, boosting revenue, Zielonka said. But more important will be efforts to cut spending, in particular on pension payments, which by law rise with inflation and account for about 60% of primary spending. As inflation has been running above 50%, that is making it harder to keep up, and so the economist expects the next administration will relink pension increases to salary or tax collection growth. The fiscal deficit was 3.8% of GDP in 2017, 2.7% in 2018, and the target is to reach a balance this year, followed by a 1% of GDP surplus in 2020, according to Argentina's Economy Ministry.
Ray Zucaro, chief investment officer at RVX Asset Management in Aventura, Florida, said there’s little time for Fernández to dawdle on regaining access to credit markets.
The central bank's international reserves dropped by $4 billion last week alone, and have fallen 35% over the past three months in an unsuccessful effort to contain the exchange rate, which has dropped nearly 40% over the same period. The exchange rate weakened to ARS63.43 per U.S. dollar on Wednesday from ARS 45.55 per U.S. dollar at the start of August.
"They are in need of something soon," Zucaro said. "They are pretty much running out of cash."