A common thread running through economists’ observations of how president Mauricio Macri’s economic team has done is that they’ve made the return of Argentina to the forefront of the financial world look easier than it is.
“Argentina was in need of some serious economic leadership when Mauricio Macri won the elections,” says Jan Dehn, head of research at EM investment house Ashmore. “Some of the achievements may appear obvious now, but one should never assume that governments are going to do the obvious thing.”
After inheriting a ticking time bomb, in which the central bank was printing money to finance the fiscal deficit as international reserves ran low, Prat-Gay acted decisively. Dehn says the new minister “carried out more reforms in six months than the previous government did in 16 years”.
Prat-Gay, a former JP Morgan banker who was central bank governor in the early 2000s, realised that access to financing was urgent, and so dispatched finance secretary Luis Caputo to New York to negotiate with holdouts.
“As the process of resolving the holdout dispute and returning to bond markets ended up being very smooth, it perhaps looked easier than it was,” says Alvaro Vivanco, head of Latin America fixed income and macro strategy at BBVA in New York.
“It was a very hard job and they did very well to complete it without hiccups.”
The currency was allowed to float after being kept artificially strong for years by the previous government. Prat-Gay also immediately suspended the publication of inflation data, which the previous government had been manipulating, until credible data could be published.
“Argentina is beginning to live up to international standards for data indices, meaning you can trust the macroeconomic numbers,” says Dehn at Ashmore.
Undoubtedly, litmus tests remain. Second quarter GDP numbers were disappointing, and inflation hit a remarkable level in May as prices increased 4.2% in just one month from April to May. Prat-Gay has opted for a gradualist approach to fixing the fiscal deficit, and much of the hard work is therefore still to come.
But inflation statistics have become more encouraging in the second half of the year, GDP growth is broadly expected to pick up sharply in 2017, and investors continue to believe that Argentina’s gradualist approach to fiscal adjustment will pay dividends.
“The government still has a still a lot to prove, but they have done very well managing expectations,” says Vivanco. “You can see in the way Argentina’s bonds have performed that investors continue to have conviction in the story.”