06 June 2016, 19:41 / Economics

Argentine President plans large-scale capital amnesty

He wants to return at least part of the $400 billion that citizens keep abroad Benedict Mander

Mauricio Macri needs money to stabilize the budget, stimulate the economy and structural reforms / Victor R. Caivano / AP

The new President of Argentina, Mauricio Macri, pins his hopes for stabilizing the country's economy on plans to repatriate the capital of Argentines. It is estimated that they keep about $400 billion in foreign bank accounts, almost equivalent to the country's GDP. Moreover, after the leak of the Panama Papers earlier this year, it became clear that Macri himself is connected to offshore companies.

According to the bill being discussed in Congress, Argentines will be able to choose between a fine from zero to 15% depending on the size and timing of capital repatriation and investment in government bonds. The government, in particular, hopes that in this way it will be able to compensate for the planned increase in pension payments: they will require $5.4 billion annually, in addition, it needs to raise $3.4 billion to pay off one-time debt to pensioners. The economy is stagnating and the decision to stimulate consumer demand by injecting more money, if successful, could strengthen Macri's position ahead of parliamentary elections in 2017, in which the ruling coalition needs to perform well to consolidate power, says Buenos Aires economist Nicholas Duchovne.

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However, the budget deficit in 2015 was almost 7%. Macri, who took office in December, is struggling to get his budget in order without losing political support for his plan to stabilize the economy, which includes currency liberalization and a six-fold increase in utility tariffs. Similar problems have led to the collapse of most Argentine governments in the recent past. “The worry is that Macri is promising funds that the government does not have,” said Teneo Intelligence analyst Nicholas Watson. Previous tax amnesties did not live up to expectations, he adds. According to Watson, a weak position in Congress and growing public discontent with inflation and unemployment could force Macri to embrace the populism for which he criticized his predecessor Christina Kirchner.

But political scientist Oscar Mouinho praises Macri for being able to “regain the initiative” after criticism for raising utility tariffs. As Mouinho points out, reforms so far have benefited corporations, particularly oil and mining companies, and the financial sector, but Macri realized he had to improve the lot of the less affluent. “For the first time, Macri is demonstrating political concern rather than CEO-style management,” says Mouinho.

Most analysts expect Congress to approve the capital amnesty bill. During the previous amnesty, the government managed to attract only $2.6 billion, but this time a strong incentive will be the global tightening of tax regulations in the Organization for Economic Cooperation and Development in 2017. The president’s initiative can be considered successful if about $40 billion is returned, Duchovne believes. However, he warns: the influx of capital will contribute to the strengthening of the national currency. He also doubts the government's ability to reduce the budget deficit, given that pension costs are rising by more than 1% of GDP.

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Macri's government needs to demonstrate its ability to boost economic growth and slow inflation well before the 2017 elections, said Ignacio Labaki, an analyst at Medley Global Advisers. Then he has a chance to gain a majority in Congress and new structural reforms will become possible. It will also help Macri avoid the fate of many of his predecessors. As Labaki points out, “Macri’s concerns about the elections appear to be justified, given that no non-Peronist president has managed to last a full term since the start in 1945.” Peronism, that is, a policy associated with the name of President Juan Peron, which emphasizes the principles of social justice and self-reliance in the economy.

Translated by Alexey Nevelsky