In profile – Guillermo Nielsen
IN THE PLAZA de Mayo, the grand square that dominates central Buenos Aires, the barricades are being erected. Police are moving into place. Taxis are unable to get through to the presidential pink palace – the most famous building on the plaza. The stage is set for yet another face-off between disillusioned Argentines and the authorities.
Except that there is one element missing – the raucous demonstrators. There are just 20 to 30 people, some holding up placards, others handing out leaflets, demanding better conditions. But their protest is peaceful. No-one is hurling anything at the police; there is no chanting or remonstrating.
It was very different three years ago, following the government’s debt default and the devaluation of the peso. Then riots were commonplace as Argentines, distraught at losing their savings and their jobs, took their anger to the streets. As a reminder of those times, economy minister Roberto Lavagna keeps in his office a small picture of a familiar scene – a fire raging, a crowd enraged.
Argentina has recovered far more quickly than anyone could have imagined possible in 2002. The economy is growing at a solid clip, the government has undertaken the world’s biggest ever restructuring, and investors are once again buying the Latin nation’s assets.
But Argentina is not out of the woods – far from it. Familiar dangers such as inflation and rising debt are beginning to raise anxiety levels. Consumer prices increased 1% in July, bringing the 12-month inflation rate to 9.6%, the highest in two years.
One consequence is that peso-denominated inflation-linked bonds are proving a big hit for investors – so much so that the sovereign’s debt increased by 5.1% in dollar terms in the first quarter. It was little surprise that the government halted further new issuance of these bonds in July.
Important problems remain unresolved. One is whether or not the government will reopen the debt exchange to allow those retail investors who were unable to participate in the original restructuring an opportunity to tender their defaulted bonds.
So far the government’s message on the subject is unclear. Finance secretary Guillermo Nielsen says that a reopening is not inevitable. It will take place, he adds, only if it can be demonstrated that “a critical mass” of bondholders could not participate in the restructuring and are keen to do so. Nielsen, however, is evasive when pushed on what he means by critical mass.
Elsewhere there is more to be done on structural reform. In the area of utilities, for example, private-sector participation depends on a stable regulatory environment and price mechanisms. To this end the government is committed to reaching long-term concession agreements, including tariff adjustments, with 63 regulated utility companies. But so far agreement has been reached with fewer than half of these.
In addition, the government is facing about 30 claims from energy companies in the World Bank’s International Centre for the Settlement of Investment Disputes. The tribunal has already found in favour of one US shareholder in a privatized Argentine firm, CMS Gas Transmission Company. Argentina, it concluded, had violated a bilateral investment treaty with the US following the pesoization and a freeze in gas tariffs. Argentina is appealing against the decision.
These issues lie at the heart of a potential new standby agreement with the IMF. Last month the Fund stated that it was delaying the completion of the agreement until November. With provincial elections due in Argentina in October, that makes sense. But despite comments from Argentina’s policy-makers that relations with the Fund are good, obvious tensions exist.
In its most recent Article IV review, the Fund made a number of recommendations that sit uncomfortably with the country’s top officials. For example, it stated that it would like Argentina to post a primary fiscal surplus nearer 5% than the 3.8% that it has budgeted for this year.
Lavagna balks at the very thought when the suggestion is put to him. “We will try to get the surplus as high as possible but we will not accept putting 4.5% to 5% [of GDP] in an agreement with them [the IMF] – absolutely not,” he says.
Divisions are also apparent between the central bank and the economy ministry. Central bank president Martin Redrado says that deterioration in the fiscal account over the past 12 months has been a key reason for the surge in inflation.
“Clearly there hasn’t been the fiscal restraint needed to keep inflation at [the target level of 8%],” he says. He does, however, commend the government for following the central bank’s advice in freezing planned pensions increases.
If Argentina is to sustain its recovery, further tough action will be needed. Otherwise a country that was once the world’s third richest might get stuck in a trap from which there is no escape.
