Argentina Return to Capital Markets Will Fuel Economic Transition
- ftheprofit
- Apr 18, 2016
- 3 min read
WASHINGTON—Argentina's return to the world's capital markets will fuel the new government's ambitious economic overhaul and end the past 15 years of self-imposed isolation, Argentina's finance minister said.
In an interview with The Wall Street Journal, Alfonso Prat-Gay described the March agreement with holdout creditors as an essential step for his country to borrow the money needed to reduce the government budget deficit without making drastic cuts or stoking inflation.
"The only feasible way of finding a gradual reduction in the deficit is by gaining access to the market," he said. " That's the reason why we were quick and we hurried up to get a deal with the holdouts."
With no access to capital markets, Argentina relied on its central bank to print money to pay for programs, Mr. Prat- Gay said, leading to inflation rates that touched 29.3% in 2014, according to the World Bank.
While the country still plans to borrow from the central bank this year, the minister said he expects to move away from the practice as the economy improves.
"As we bring the fiscal deficit down, we will bring along with it the financing needs that we'll require from the central bank," he said.
Mr. Prat-Gay has spent the past few days on a "roadshow" in the U.S., wooing bond buyers as well as international institutions gathered in Washington for the International Monetary Fund's spring meetings.
So far, it seems, his approach is working.
A court-appointed mediator on Friday called the appeals court ruling "an enormously important event for the republic, its 40 million people and, indeed the world financial system." A statement from finance and central bank officials of the top 20 leading economies praised "progress made in Argentina's effort to end a decadelong dispute and regain access to international capital markets."
Mr. Prat-Gay, meanwhile, said he was encouraged by the interest in the country's bonds.
Since the election of President Mauricio Macri last year, Argentina has moved to end its isolation and redraw its fiscal map.
The new government has cut some export and income taxes, abandoned trade restrictions and let its currency float. On Saturday, Mr. Macri unveiled a series of new measures designed to broaden child allowances, alter the country's value- added tax system and help retirees.The government also has lifted utility and public-transportation subsidies and plans budget cuts to bring spending in line, Mr. Prat-Gay said, adding "that includes corruption which is a number we can't quite calculate right now but presumably it is quite big."
Mr. Prat-Gay said the government anticipates the its fiscal deficit will hit 4.8% of the economy this year. But he also expects economic growth will accelerate, which combined with the new fiscal policy should bring the deficit down to 3.3% next year and 1.8% in 2018, he said.Inflation, meanwhile, could hit 35% this year, according to economists. But Mr. Prat-Gay said inflation measurements have been overly focused on prices in Buenos Aires, the capital, where the subsidy cuts are most strongly felt. The cost of those subsidies, he added, amounted to around 4% of the economy.
He targets an inflation rate of 25% this year, drifting down to 17% next year.The government's plan represents a wrenching change for many Argentines, who have seen the poverty rate rise to 34.5% from 29% at the end of last year. That puts pressure on Mr. Macri and his government to deliver. A crucial test will come next year, when midterm elections could reshape the Congress, which has so far gone along with Mr. Macri's initiatives."There's no guarantee," said Mr. Prat-Gay. "This is something that is a cultural change that we'll have to work on pretty much on a daily basis."
Striking a deal with the holdout creditors—derided in Argentina as "the vultures"—was a "cleansing experience," he added, but the hard part is only beginning.
"We've got the structural reform program but we need to get the economy running before we get there," he said. "It's a sequencing game. It's not only that you need to do the right thing but it's also at the right time."
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