Euromoney’s Finance Ministers of the Year usually win the award because of their work in government.
Arguably, this year’s winner, Alfonso Prat-Gay of Argentina, won it for his work before joining the ministry, because the success of the country’s $16.5 billion bond transaction – often referred to as its debt re-IPO – was directly related to the trust he (and his team) already commanded in the markets.
The deal’s order book was a record for Latin America, for emerging markets and indeed, high-yield deals anywhere, at very nearly $70 billion of orders. Yes, there were other strong drivers of the deal’s success – and yes – Prat-Gay’s initial actions as finance minister were also hugely important: floating the peso, increasing the credibility of the national statistics agency, signalling orthodox fiscal and monetary policies and addressing energy and transportation subsidies. Settling with the holdouts was, of course, another crucial step to re-entering the international markets.
But time and again those who ran the deal – as well as those who invested in it – referred to the trust investors had in Prat-Gay and the other senior members of his team.
One of the bookrunners referred to a call he had with a very large west-coast investor: “He told me: ‘You don’t need to roadshow this deal. They don’t need to see us – we know these guys and we know what they are about’”.
Another bookrunner described it as less of a roadshow and “more of an opportunity to connect with old friends and talk about objectives”. Another said it felt like “a victory lap before we had even started the roadshow” because “these guys had so much credibility and they were able to tell a very credible story”.
Santiago Bausili, Argentina’s head of public credit and a former investment banker, says it is hard to overstate the impact and influence that Prat-Gay has had on global perception and support for Mauricio Macri’s new administration.
We are building the right economic infrastructure for a medium- to long-term horizon. We are trying to avoid short cuts
- Santiago Bausili
“The first time president Macri went to an event with global profile was the Davos meetings in January – and he took Alfonso with him. The second event was the G20 meetings in China in February. Prat-Gay attended with Federico Sturzenegger, president of Argentina’s central bank,” says Bausili.
“Those were the first two opportunities to make an impression on the world, and the impact [Prat-Gay] makes is not average. He presents in English, and the combination of the clarity of his delivery and the sharpness of his message means that he shines in any company. His performance on the G7 panel was extremely important – he raised Argentina’s profile – people sat up and realised there was something new and important going on here. And then, suddenly, president Obama scheduled a visit.”
Sources close to the US embassy in Buenos Aires confirmed that the US president’s visit was arranged at short notice. “One of the guys at the US embassy told me he had just been assigned to Argentina,” says Bausili. “He thought: ‘Great, it’s a nice country, I’ll stay there for four years and it should be a nice, quiet posting.’ And then suddenly Obama is coming. They never expected it.”
Obama’s visit hasn’t been an isolated occurrence. The president of France and the prime minister of Italy have joined the throng of visitors. Euromoney’s own recent meeting with Pedro Lacoste, Argentina’s vice-minister of treasury and public finances, in Buenos Aires was preceded by an Austrian trade delegation headed by the country’s finance minister.
“The performance of individuals is one of the things that stands out – and that is extremely important for momentum gathering,” says Bausili. “We took office with the mentality of crisis management. But many people in Argentina didn’t perceive the situation as a crisis because they were living in fiction – a well-maintained fiction. The challenge we have is that when we move any policy, even a little, the whole thing can fall apart. We therefore need to stabilise the crisis and at the same time transition out of it – all without the people realising how toxic is our inheritance. So external help is needed – it is very relevant. And so Prat-Gay’s ability to create that external support is also very, very relevant.”
But let's not get too caught up in creating a cult of personality. Prat-Gay’s personal reputation and credibility in the markets may have been vital, and stemmed from his time as a private citizen. But not exclusively so – his first swift and decisive acts as finance minister were also important. Lacoste explains that the administration was clear about the need to deliver swiftly on two aims: the liberalisation of foreign exchange away from the policy of ‘el Cepo’ (the clamp) and an agreement with the holdout creditors.
There was scepticism locally. For example, the economic advisers to Sergio Massa, a prominent candidate in the presidential election, had been vocal, saying it would take six months to disentangle el Cepo and float the currency.
Lacoste says both issues were a means to establish credibility: an end to el Cepo in the first week provided credibility domestically. By the same token, getting an agreement with the holdouts was the key to the new administration winning credibility abroad.
“Because of that, the government has placed $20 billion in bonds in the international market,” says Lacoste. “The regional governments have sold another $6 billion already and the private sector $5 billion, so you have had $30 billion of financing that wouldn’t be have been there if we hadn’t achieved that initial credibility.”
If ending el Cepo and resolving the holdouts came quickly, the next phase will be deliberately slower. The keywords for the transition in the economic model are ‘gradual’ and ‘sustainable’.
“We are building the right economic infrastructure for a medium- to long-term horizon,” says Bausili. “We are trying to avoid short cuts. In this way, if we can withstand the pain in the short term, the model will be sustainable.”
If you look at our history, the big problem for Argentina has been the stop-and-go policies
- Pedro Lacoste
Meanwhile, moving to that sustainable model will be necessarily gradual because of political imperatives. Indeed, Macri chose Prat-Gay to be minister of finance because of the latter’s view that the transition had to be slow. Any thoughts of domestic shocks were discounted. The president’s political base is vulnerable – his party has minority positions in both the Congress and the Senate – and the mid-terms are already looming on the political horizon in October 2017.
“If you look at our history, the big problem for Argentina has been the stop-and-go policies,” says Lacoste. “Everything we do in this administration is linked to fiscal, social and political sustainability. Of course there are some commentators who say we need to be more orthodox and we need to take a tougher approach to reducing the fiscal deficit and reducing inflation. But some people attempted that in the past and they lasted two months. That’s why Macri chose Prat-Gay – as well as being an economist, he’s a politician.”
Prat-Gay has already demonstrated his political edge in the way he personally navigated the approval of the holdout deal in Congress.
“We thought the best strategy was for Alfonso to make a short, 20-minute presentation and then open to Q&A,” says Bausili.
The strategy was based on the assumption that the technical nature of the subject – and the assurance of Prat-Gay – would dissuade challenges of all but a political nature. Those inevitably came, in the form of ex-economy minister Axel Kicillof, who charged Prat-Gay with selling out to the vultures. Prat-Gay witheringly turned the tables, criticising Kicillof’s attempted negotiations with the Paris Club of creditor nations in 2015. In the end, the votes to pay the holdouts were passed with thumping majorities in the Congress and Senate.
In truth, it’s impossible to determine whether it was what Prat-Gay personally brought to the role of finance minister, or whether it is what he has done in the post that has been more important to the story of Argentina’s comeback. That evaluation is further blurred by crossover: Prat-Gay began tackling his toxic legacy from the previous Kirchner administration as a private citizen before Macri had won the election.
He saw the last administration selling forward FX contracts at a hugely overvalued rate as a means to push back the run on central bank reserves until after the election.
“Well before Macri won the first round, Prat-Gay, as a private citizen, used the judicial system to prevent what the previous authorities were doing in the FX market,” says Lacoste. “We knew they were trying to make the inheritance even more complicated and Alfonso was successful in stopping that last October.”
Baptism of fire
It has been a baptism of fire for Prat-Gay as finance minister and he is building a story that will be taught in business schools for decades to come. So far the case study falls squarely into the success category, but many challenges remain and some analysts think the next part – the slower grind to normalising inflation and fiscal accounts and getting GDP well into positive territory – will be difficult.
Lacoste – optimistically perhaps – sees it differently. “I would disagree [with that characterization],” he says. “I think the opposite. We have already set the stage for inflation to go down and for the economy to start picking up. We knew that at the start of the year inflation was going to pick up because of the one-off increases in public utilities and the FX devaluations. That’s exactly what happened – it went up to an annual rate of 40-something-percent. But if you take July – Cordoba and Buenos Aires – the annual CPI inflation rate is already down to 24%.”