Finance Ministry Scorecard 2018

Finance Ministry Scorecard 2018

Capital Markets Economy & Policy Special Reports Brazil Colombia Argentina Ecuador Mexico

A toss up: That was the consensus of most analysts and economists when considering which finance ministries performed the best in Latin America and the Caribbean last year.

It was a question of “who was the less bad,” says Pedro Tuesta, senior Latin America economist at the research firm Continuum Economics.

Most countries overshot their deficit targets, but few finance ministers seemed bothered by that. With low global interest rates last year, capital markets sought higher yields in emerging markets regardless of fiscal imprudence, says Walter Molano, head of research at BCP Securities.

“The ministers could miss their targets by wide margins and it didn’t really matter because they were going to have pretty easy financing anyway,” he says.

Of course, there were headwinds in 2017. Observers worried about the impact that US President Donald Trump’s often-bombastic rhetoric had on the region’s economic outlook. The Odebrecht bribery scandal took down politicians, while low commodity prices, slow economic growth, weak consumer confidence and high inflation made the job harder for finance ministers, says Andrés Abadia, senior international economist at the research firm Pantheon Macroeconomics.

With so much stacked against the region, finance ministers had to stand their ground. In that regard, Brazil and Mexico fared the best. After sounding the market and crunching the numbers, LatinFinance has chosen Mexico as the finance ministry to lead the scorecard.

The ministry, led by José Antonio Meade, got inflation and the current account under control. It also strengthened the peso after the currency tumbled early in the year when Trump threatened to pull out of NAFTA, a major driver of Mexico’s economic growth for more than two decades.

“Mexico continues to deliver on the fiscal accounts, despite very aggressive rhetoric against the country from Washington,” says Alberto Bernal, chief strategist at the brokerage firm XP Securities.

Some argued that Mexico’s dwindling fiscal deficit resulted largely from one-off factors, such as the weak peso and central bank transfers.

Even so, the ministry was recognized for shoring up the country’s fiscal accounts. It cut spending, increased revenues and added to a stabilization fund, partially by streamlining its controls on transfers to the states. Last year was the first time in more than a decade that Mexico cut its public debt to GDP ratio. It also shaved the country’s reliance on oil — a sector that accounts for 5% of GDP — to around 15% of the total budget from roughly 33%.

"Meade steered the economy in the right direction using good criteria and good timing," and helped stave off an expected ratings downgrade, one analyst says.

While GDP growth slowed to 1.9% in 2017 from 2.9% the previous year, it was stronger than previously anticipated, despite two powerful earthquakes in September, according to the World Bank. “Mexico is one of the better managed countries in the region,” Molano says.

Meade left the job in November to run for president, leaving his replacement, José Antonio González Anaya, the former CEO of the state-owned energy company Pemex, to manage the economy in an election year when added political pressure to spend could weigh on the fiscal accounts, an analyst says.

Weak president, strong minister
The runner-up, Brazil’s finance ministry, drew praise for soldiering it out despite political scandals that rocked the weak president, Michel Temer.

“Keeping the whole country together has been monumental,” says Diego Ferro, co-chief investment officer at Greylock Capital Management. “A lot of that has been on the shoulders of [Finance Minister Henrique] Meirelles.”

Meirelles led Brazil’s economy out of a two-year recession and implemented a series of reforms to narrow the deficit and improve competitiveness. The moves have “improved business and investor confidence,” Abadia says.

But efforts to cut social security spending, aimed at improving Brazil’s fiscal accounts in the long-term, fell short. The failure does not rest solely on Meirelles, observers say, but it mars his team’s record.

Social security aside, inflation fell last year, and the economy grew by a faster-than-expected 1.1%, according to the World Bank.

Meirelles helped get the national development bank BNDES to take a market-based approach to lending. The new policy will likely reduce distortions in interest rates and allow BNDES to make regular transfers to the treasury as a new source of income.

“Brazil is taking a comprehensive approach to become more financially prudent despite all of the political tension,” one analyst says.

More must be done, and Abadia believes that Meirelles’ successor “will face formidable challenges, especially in advancing structural reforms, making sure the fiscal accounts are in order and promoting long-term sustainable growth.”

Ecuador, really?
A surprise on the scorecard is Ecuador. Molano says the Finance Minister Carlos de la Torre has run the economy efficiently. Ecuador was one of the few countries in the region to narrow its deficit, which fell to 5% of GDP from 6.5% a year earlier.

De la Torre’s successes bucked expectations, too. The markets had assumed President Lenín Moreno, who took office in May, would follow the populist approach of his predecessor, Rafael Correa. Instead, Moreno has been more market friendly, a strategy seen as trying to set himself apart as “his own man,” Molano says.

It also makes sense. Ecuador needs investment to increase oil production. De la Torre has been “much more responsible on the fiscal side” by reducing capital spending and public-sector investments, Molano says.

Indeed, Ecuador “could be one to watch,” says Edward Glossop, an emerging markets economist at Capital Economics, specializing in Latin America.

While the economy grew only 1.4% in 2017, Ecuador was in recession the year before, according to the World Bank.

The challenge this year is to keep cutting the deficit, Glossop says. “Ecuador has a legacy of loosening fiscal policy when oil prices rise.”

Close, but not quite
Argentina made the scorecard again this year, but with a mix of praise and criticism. The cabinet duo — Nicolás Dujovne as treasury minister and Luis Caputo as finance minister — helped to pull the economy out of recession, with GDP expanding 2.7% last year, according to the World Bank.

Even so, the team failed to meet what one analyst called an “unambitious” inflation target of 12% to 17% in 2017 and ended the year with nearly 25% price rises. Argentina did narrow the primary fiscal deficit (which does not include debt service payments) to 3.9% of GDP last year, better than the 4.2% target and the 4.6% posted in 2016.

Some analysts say the struggles to contain inflation may in part stem from a division of powers between President Mauricio Macri’s top two economic officials. Further confusion was caused by meddling in economic policy from other Macri aides such as Chief of Cabinet Marcos Peña, says Juan Cruz Díaz, managing director at the advisory firm Cefeidas Group.

The confusion over who is in control could be behind a move in December to relax Argentina’s inflation targets to 15% this year and 10% in 2019, about twice the level previously sought. The government also eased deficit reduction targets to reach 1.2% in 2020. The moves, aimed at bringing down lofty interest rates and weakening the peso in a bid to spur economic growth, left many economists disgruntled.

Lowering fiscal targets “was the worst mistake of this administration,” says one analyst. “It makes you doubt the whole policy strategy of Argentina. We still haven’t seen the total consequences of that measure.”

On the bright side, Argentina deftly met its financing needs, through measures such as the sale of a 100-year bond, the region’s second after Mexico. “Caputo has helped take Argentina from a market outlier to a darling,” Bernal says.

Slow and steady
Colombia came in last in the ranking, but not because of a lack of progress: it succeeded last year in boosting revenue with a VAT hike.

The mark against Finance Minister Mauricio Cárdenas was that the oil producing-country reacted slowly to cut public spending following the plunge in crude prices.

While the cuts and increased tax revenue helped to shave the budget deficit by one percentage point of GDP, this wasn’t enough to avoid a December downgrade by S&P Global Ratings to one notch above junk.

Add in a slowdown in the economy to 1.8% last year from 2% in 2016, and the difficulties mounted for Colombia.

Despite this, Cárdenas was able to keep the country heading in the right direction. “The commodity crisis hit Colombia really hard, and it is a country with a lot of private debt, so it had a lot of headwinds,” Ferro says. “But it is emerging nicely.”

The deficit has fallen to 3% of GDP from a peak of 4.5%, Glossop says, and Colombia’s economy is poised to recover to 2.9% growth this year and move faster in 2019, according to the World Bank. LF