For Mauricio Macri, there may be a silver lining to the Panama Papers scandal that has dogged Argentina’s new president since he was accused of ties with offshore shell companies earlier this year.
Mr Macri is hoping that his plan for a massive tax amnesty will be helped by increasingly tough conditions globally for tax dodgers, as he attempts to restore normality to what is one of the world’s most financially volatile countries.
With as much as $400bn estimated to be stashed in foreign bank accounts owned by Argentine nationals — almost equivalent to the country’s gross domestic product — a mass repatriation of funds could play a big role in stabilising the struggling economy, in particular reducing pressure on the government to resort to issuing foreign debt.
In legislation being debated in congress, Argentines can choose between a penalty of between zero and 15 per cent, depending on the amount and how soon their funds are repatriated, or invest in Treasury bills. The government needs to raise $3.4bn to pay a one-off debt to pensioners, and another $5.4bn annually for higher pensions in the future.
Politically, the move could shore up popular support as austerity measures begin to bite, although it could also expand an already bulging fiscal deficit.
The government’s decision to boost demand in Argentina’s stagnating economy by injecting fresh funds could — if successful — put Mr Macri in a strong position ahead of midterm legislative elections in 2017, in which his coalition needs to perform well to consolidate power, argued Nicolás Dujovne, an economist in Buenos Aires.
Mr Macri is struggling to balance the nation’s books — given a fiscal deficit of almost 7 per cent of gross domestic product in 2015 — without losing political support for his macroeconomic stabilisation plan, which so far includes currency liberalisation and sixfold rises in utility tariffs. Similar problems have undermined most Argentine governments in living memory.
“What is worrying is that Macri is making spending commitments with money that the government does not have,” said Nicholas Watson, an analyst at Teneo Intelligence in London, pointing out that past tax amnesties have fallen short of expectations.
What is worrying is that Macri is making spending commitments with money that the government does not have
“The administration’s weakness in congress, combined with rising public concern over inflation and job losses, appears to have persuaded Macri that now is the time to dabble in the sort of populism that he once criticised his predecessor for,” added Mr Watson.
Oscar Muiño, a local political analyst, applauded Mr Macri for “regaining the initiative” after coming under fire for unpopular increases in utility tariffs. This led to his first big political defeat last month when the opposition in congress succeeding in passing a law — subsequently vetoed by Mr Macri — that would have banned lay-offs for six months and established a double severance payment.
“Macri has learnt that he has to improve the lot of the less fortunate,” said Mr Muiño, who argues that until now the government’s reforms have tended to benefit corporate interests, such as oil and mining companies, and the financial sector. “Macri is showing for the first time that politics is in charge, rather than CEO-style management.”
Most analysts expect the bill to be approved by congress. But Mr Dujovne warned that if the tax amnesty is as successful as he expects it to be — possibly attracting as much as $40bn — the capital inflows will put upward pressure on the exchange rate, which is already strengthening at a time when most emerging market currencies are depreciating.
The previous government’s amnesty only brought in $2.6bn, but regulatory changes in the OECD to be implemented in 2017 now provide a strong incentive for participation.
Mr Dujovne also cited “an enormous question mark” over the government’s ability to reduce the fiscal deficit, as it included a permanent increase in pension spending of more than 1 per cent of GDP.
“Evidently, Macri is more concerned about his fate in the 2017 midterm elections,” said Ignacio Labaqui, an analyst at Medley Global Advisers, a macro research service owned by the Financial Times. He argued that the government needed to deliver results in its battle to extinguish inflation and reactivate growth well before the elections.
With a third of the senate and half of the lower house up for renewal, Mr Macri has an opportunity to convert his congressional minority into a majority, making possible further structural changes.
It would also help Mr Macri avoid the fate of so many other non-Peronist governments before him, said Mr Labaqui: “Considering that no single non-Peronist head of state has been able to complete his term since the advent of Peronism in 1945, Macri’s concern over the midterm elections seems well-placed.”