Latinvex selects presidents of Brazil and Argentina as leaders of the year for 2016.

BY LATINVEX EDITORS

As the United States prepares for a new administration led by a president who espouses protectionism, two major economies of Latin America have gone the opposite direction: Brazil (the largest economy in Latin America, second-largest in the Western Hemisphere and 9th-largest in the world) and Argentina (the third-largest in Latin America).

Since assuming power, Presidents Michel Temer of Brazil and Mauricio Macri of Argentina have wasted no time in trying to revert their predecessors’ populist mismanagement of their economies and have been able to regain confidence among local and foreign investors.

Both inherited very difficult situations thanks to their predecessors’ irresponsible fiscal policies. As a result the recovery will be gradual. In Brazil, the economy will likely see a modest recovery next year (0.5 percent) after suffering from declines of 3.8 percent and 3.2 percent the past two years, according to projections from the International Monetary Fund (IMF). Argentina should see a quicker recovery – from an estimated 1.7 percent decline this year to 2.7 percent growth next year, the IMF predicts.

Michel Temer: The Accidental President

On Tuesday, Brazil’s Senate passed a 20-year public spending ceiling proposed by Temer to control a ballooning budget deficit, a crucial step in an austerity drive to rescue Brazil's stalled economy, Reuters reports. The Senate approved the cap by a 53-16 margin, though leftist opponents sought to delay the vote as long as possible.

Temer said the move to limit spending by constitutional amendment was unprecedented and will be followed by an equally unpopular reform of Brazil's generous pension system. "You need courage to govern and we have courage," he said.

During his seven months in power, Temer has managed to dramatically change the mood among foreign investors who had grown exasperated by the economic freefall during Temer’s predecessor Dilma Rousseff.

"The business community's reaction to the 'change' in government has been dramatic, going from a state of deep pessimism to a wave of relief and enthusiasm about the future,” Paul Schnell, Chair of the Latin America practice at Skadden, told Latinvex earlier this year.

His first move was to name a hugely respected finance minister, Henriqe Meirelles, and send clear signals that the populist policies of Rousseff would be replaced by responsible fiscal policies. He also named Ilan Goldfajn, a well respected economist, as Central Bank chief.

“The appointment of a well-respected finance minister and central bank president, together with the starkly different pro-business attitude of the current administration has done much to help stock prices in the short-term,” Michael Fitzgerald, chairman of the Latin America practice at Paul Hastings, told Latinvex.

In addition to saving Brazil’s beleaguered economy, Temer had to revamp state oil giant Petrobras, which had suffered from years of political mismanagement and being used as a piggybank for Rousseff’s Workers Party in a scheme that became the largest corruption scandal in Latin American history.

Shortly after becoming interim president – in late May -- Temer appointed Pedro Parente as president of Petrobras, a move warmly welcomed by the oil sector and institutional investors. A former Chairman of the Board of Petrobras, Parente served as Minister of Planning and Deputy Minister of Finance of Brazil and most recently as President and CEO of Bunge Brazil.

Parente’s turnaround is paying off. Petrobras is now once again the country's most valuable company based on market capitalization after losing that position to beverage company Ambev in October 2014, Valor Economico reported Tuesday.

"On taking over the presidency, we had a mission, to inoculate Brazil with a vaccine to make it immune to fiscal populism," Temer told a business forum in Sao Paulo in September, according to Reuters.

Temer assumed Brazil’s presidency in May when the Brazilian Senate voted to suspend Rousseff for six months on allegations she illegally doctored fiscal accounts to mask the size of the budget deficit. Temer, as her vice president, then became acting president until Rousseff was formally impeached on August 31, making Temer the president until Rousseff’s mandate ends in January 2019.

Unlike Rousseff, Temer has a close relationship with Brazilian lawmakers, which has made it possible for him to get Brazil’s Congress to pass key reforms aimed at turning around Brazil’s economy.

In addition to the spending cap, Temer’s key achievements include getting lawmakers to approve reforms opening up the oil sector and start looking at liberalizing the aviation sector.

Brazil’s Congress in October voted to open up its pre-salt oil fields to foreign investors by scrapping Petrobras’s obligation to be the area’s sole operator – a measure imposed by the Workers Party.

“The change will allow new investments,” Itau Unibanco Holding SA analysts Diego Mendes and Andre Hachem said in a research report quoted by Bloomberg. The modification has “been at the forefront of the sector’s demands from the government because it gives companies, both local and foreign, greater flexibility to participate in future pre-salt auctions as operators.”

The previous rule both deterred many private oil companies and put a further financial burden on Petrobras, which became the most indebted oil company in the world.

Meanwhile, Brazil is considering raising the maximum foreign investment in a Brazilian airline from 20 to 49 percent.

“Many Brazilian carriers in general would welcome the ability to raise additional capital, as the drop in the Brazilian economy has hurt the local airlines and flights by foreign airlines have also been cut in the last year as well (the Rio Olympics were a brief welcomed respite),” Larry Pascal, Chair of the Americas Practice Group and Co-Chair of the International Practice Group for Haynes and Boone, wrote in Latinvex recently. 

The government is also working on a new masterplan for privatizing airports, Valor Economico reports.

Meanwhile, it has started to focus on selling off energy assets. Petrobras itself is selling non-key assets to reduce its debt burden. The government expects to raise between $10 billion and $20 billion from the sale of state assets the next two years, officials told Reuters.

Temer has positively surprised investors. A typical career politician who had served as Rousseff’s “silent partner,” he had given no indication of his willingness to implement such an about face in economic policies. Even more welcome, is the fact that he has been able to form winning coalitions after Rousseff gradually lost more and more authority.

Mauricio Macri: Cleaning Up the Mess

Macri, who assumed office in December a year ago, inherited 12 years of economic mismanagement by his predecessor, Cristina Kirchner and her late husband Nestor Kirchner.

His key and immediate goal after becoming president was to reach an agreement with the holdouts from the 2011 debt default, a move that would enable Argentina to return to international capital markets.

Such an agreement was reached in February and in April Argentina managed to raise a whopping $16.5 billion in international capital markets, with demand almost reaching $70 billion. That was the largest sale of debt by any developing nation and one of the biggest order books ever recorded, according to the Financial Times. 

"He came in and ripped the band-aid right off," Ray Zucaro, chief investment officer at RVX Asset Management, told Bloomberg in January.

Another pressing challenge was to get inflation under control. Not only had it jumped under Cristina Kirchner but her government also lied about it after her husband intervened the national statistics agency Indec in 2007

Although experts predict inflation will reach 40 percent this year, it should fall to 23 percent next year, the IMF predicts. Meanwhile, Indec has again started publishing reliable inflation data.

Part of the challenge in getting inflation down was that Macri lifted the price controls implemented by the Kirchners, resulting in a hike on utility prices. The price controls had led to massive losses for the utility companies and an unprecedented wave of lawsuits at The World Bank’s International Center for Settlement of Investment Disputes (ICSID). Argentina leads all cases at ICSID, with 53 pending or concluded cases, according to a Latinvex analysis.

Macri also had to deal with systematic mismanagement at state companies, often led by loyalists of Cristina Kirchner who lacked the necessary qualifications to run the firms even remotely professionally.

Flag carrier Aerolineas Argentina became the piggybank for La Campora, a political youth group led by Cristina’s son Maximo Kirchner. In January, the airline had 11,584 employees, up 28 percent since 2009 when Cristina loyalist Mariano Recalde became CEO. The result? Aerolineas was losing some $500 million a year and depending on state subsidies of $1 million a day.

Recalde was replaced on January 4 by Isela Costantini, a former General Motors executive who is overhauling the airline through cost cuts and boosting efficiency.

However, Macri represents more than a change in economic policies. He has also brought back professionalism and civility to Argentina after years of bullying, intolerance, corruption and mismanagement under the Kirchners.

Case in point: Contrast Cristina Kirchner’s finance minister Axel Kicillof with Macri’s finance minister Alfonso Prat-Gay. Kicillof, a former radical student leader,  frequently attacked investors and managed to lead a circus during US court mediated talks with holdouts in 2014 (See Argentina’s Debt Farce).

He also played a key role in convincing Cristina Kirchner to renationalize oil company YPF (for a price tag of $5 billion).

Prat-Gay immediately calmed investors with his insights to the markets and qualifications to do the job at hand. He had served as Argentina’s youngest central bank president in 2002-04 but resigned in protest against Nestor Kirchner’s fiscal policies and lack of central bank independence. Previously, he worked at JP Morgan in Argentina and London for seven years.  

Just like Temer, Macri faces a splintered Congress and has to get approval on a case-by-case basis, hardly an ideal situation.  But he is using the presidency to the fullest to forward a largely pro-business agenda.

Macri’s relative success so far should be no surprise. He had a solid track record as mayor of Buenos Aires and also a successful turnaround of soccer club Boca Juniors (which became a Harvard case study). He also worked at both for Citibank and various companies that formed part of the conglomerate founded by his father, Italian immigrant Francisco Macri. That includes heading up Sevel Argentina (which manufactured Fiat and Peugeot automobiles under license in Argentina). 

Despite the slow recovery, local and foreign investors alike are relieved Brazil and Argentina have managed to stop the previous direction and will start to see a stronger and healthier economies, with clear rules of the game and investor friendly policies.

For that Presidents Michel Temer and Mauricio Macri have been selected as Leaders of the Year by Latinvex.

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