BUENOS AIRES — The abrupt departure of Argentina’s economy minister and lack of a clear successor could threaten to further destabilize an economy already shaken by sky-high inflation, rising energy costs and growing fears over possible new defaults on debt.
Martin Guzman, the architect of the South American country’s recent $44 billion deal with the International Monetary Fund (IMF), resigned on Saturday as tensions within the government boiled over as to how to handle the economic crisis in one of the world’s top grain producers.
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A relative moderate, he had clashed with the more militant wing of the ruling Peronist coalition around powerful Vice President Cristina Fernandez de Kirchner, who had publicly criticized Guzman and called for more public spending.
The resignation, the highest profile since President Alberto Fernandez took office in late 2019, has uncovered deep cracks in the government, which threaten to throw into disarray the country’s economic management.
“The resignation of Minister Guzman really uncovers the internal rupture in the government,” said Eugenio Mari, chief economist at Fundacion Libertad y Progreso, adding he had been an “anchor” for economic policy despite his struggles.
“From the economic side, it amplifies the dynamic of uncertainty which Argentina was already in.”
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On the table now are policies around the country’s peso currency, which is shielded by strict capital controls that have stemmed parallel exchange rates double the official one. Guzman also oversaw tax regimes around grains and energy policy.
Inflation is running above 60% and is set to rise further, while high energy import costs have shackled the country’s ability to increase depleted foreign currency reserves. Sovereign bonds have plunged toward 20 cents on the dollar.
Guzman has been set to travel to France for July 6 talks to restructure some $2 billion in debt with the Paris Club of sovereign lenders, seen as key to reopening access to foreign direct investment needed for infrastructure and energy.
ECONOMIC ‘VOID’
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Daniel Marx, former finance secretary and debt negotiator, said it had become untenable for Guzman amid strong opposition within the government. The key now: Who replaces him?
“It seems important to me to see how the void is filled,” said Marx. “Not only the person but the economic policy direction to get out from all the skepticism and the problems that have been dragging on for quite some time.”
On Sunday morning there was no news on a successor and President Fernandez was yet to publicly address the departure, suggesting the government had been caught off guard by the exit.
Some investors were concerned about how the departure would impact the country’s ability to meet its obligations with the IMF, which include targets for inflation, reserve levels and the fiscal balance – all already under pressure.
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“This is not good and confirms that there is a political problem,” said Maria Castiglioni, economist at C&T Asesores, adding it raised questions if the government would be able to take the necessary measures to exit the crisis.
Inside the Economy Ministry, where a large part of Guzman’s team also resigned, the feeling was it had become hard to get things done effectively.
“When things were moving at pace, decisions had to be made quickly. When you have no decision at the money table, it is tough,” a ministry source said.
Horacio Larghi, economist and director of consultancy Invenomica, said what mattered most was whether the new economy minister was a lame duck or had license to act.
“As for who replaces him, the name doesn’t matter so much. What matters is whether or not the person will have the power to do anything,” he said.
(Reporting by Jorge Otaola, Eliana Raszewksi, Jorgelina do Rosario; Writing by Adam Jourdan; Editing by Lisa Shumaker)
As Joe Biden this week hailed America’s booming economy as the strongest in the world during a reelection campaign tour of battleground-state Pennsylvania, global finance chiefs convening in Washington had a different message: cool it.
The push-back from central bank governors and finance ministers gathering for the International Monetary Fund-World Bank spring meetings highlight how the sting from a surging US economy — manifested through high interest rates and a strong dollar — is ricocheting around the world by forcing other currencies lower and complicating plans to bring down borrowing costs.
Canada’s Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland hold the 2024-25 budget, on Parliament Hill in Ottawa, on April 16.Patrick Doyle/Reuters
Alex Whalen and Jake Fuss are analysts at the Fraser Institute.
Amid a federal budget riddled with red ink and tax hikes, the Trudeau government has increased capital gains taxes. The move will be disastrous for Canada’s growth prospects and its already-lagging investment climate, and to make matters worse, research suggests it won’t work as planned.
Currently, individuals and businesses who sell a capital asset in Canada incur capital gains taxes at a 50-per-cent inclusion rate, which means that 50 per cent of the gain in the asset’s value is subject to taxation at the individual or business’s marginal tax rate. The Trudeau government is raising this inclusion rate to 66.6 per cent for all businesses, trusts and individuals with capital gains over $250,000.
The problems with hiking capital gains taxes are numerous.
First, capital gains are taxed on a “realization” basis, which means the investor does not incur capital gains taxes until the asset is sold. According to empirical evidence, this creates a “lock-in” effect where investors have an incentive to keep their capital invested in a particular asset when they might otherwise sell.
For example, investors may delay selling capital assets because they anticipate a change in government and a reversal back to the previous inclusion rate. This means the Trudeau government is likely overestimating the potential revenue gains from its capital gains tax hike, given that individual investors will adjust the timing of their asset sales in response to the tax hike.
Second, the lock-in effect creates a drag on economic growth as it incentivizes investors to hold off selling their assets when they otherwise might, preventing capital from being deployed to its most productive use and therefore reducing growth.
And Canada’s growth prospects and investment climate have both been in decline. Canada currently faces the lowest growth prospects among all OECD countries in terms of GDP per person. Further, between 2014 and 2021, business investment (adjusted for inflation) in Canada declined by $43.7-billion. Hiking taxes on capital will make both pressing issues worse.
Contrary to the government’s framing – that this move only affects the wealthy – lagging business investment and slow growth affect all Canadians through lower incomes and living standards. Capital taxes are among the most economically damaging forms of taxation precisely because they reduce the incentive to innovate and invest. And while taxes on capital gainsdo raise revenue, the economic costs exceed the amount of tax collected.
Previous governments in Canada understood these facts. In the 2000 federal budget, then-finance minister Paul Martin said a “key factor contributing to the difficulty of raising capital by new startups is the fact that individuals who sell existing investments and reinvest in others must pay tax on any realized capital gains,” an explicit acknowledgment of the lock-in effect and costs of capital gains taxes. Further, that Liberal government reduced the capital gains inclusion rate, acknowledging the importance of a strong investment climate.
At a time when Canada badly needs to improve the incentives to invest, the Trudeau government’s 2024 budget has introduced a damaging tax hike. In delivering the budget, Finance Minister Chrystia Freeland said “Canada, a growing country, needs to make investments in our country and in Canadians right now.” Individuals and businesses across the country likely agree on the importance of investment. Hiking capital gains taxes will achieve the exact opposite effect.
Nigeria’s economy, which ranked as Africa’s largest in 2022, is set to slip to fourth place this year and Egypt, which held the top position in 2023, is projected to fall to second behind South Africa after a series of currency devaluations, International Monetary Fund forecasts show.
The IMF’s World Economic Outlook estimates Nigeria’s gross domestic product at $253 billion based on current prices this year, lagging energy-rich Algeria at $267 billion, Egypt at $348 billion and South Africa at $373 billion.
