Argentina’s economy is caught in a trap. It’s still unclear if voters will give President Mauricio Macri a chance to try and fix the serious structural economic problems he inherited from his predecessors. Argentina is a commodity dependent emerging market where for decades governments have tried to build a middle class society without ever fully modernizing the country’s economy. Macri’s immediate predecessor, Cristina Fernandez de Kirchner, is mostly remembered for her administration’s problems with corruption and gross economic mismanagement. Venezuela is clearly the worst-managed economy in Latin America, but under Fernandez de Kirchner, Argentina bumbled it’s way into the ignominious position of being the second most problematic economy in the region.
Macri is a pro-business pragmatist who has promised to unwind cumbersome government subsidies and other market distortions and attract a new wave of foreign direct investment. Macri is already campaigning for Argentina to join the OECD. Around the world he’s viewed favorably, but within Argentina voters are living through the pain of his corrective measures and are growing frustrated with Macri’s failure to catalyze a boom in investment and economic growth. In 2017 GM and VW announced plans to invest over $1.1 billion in expanding production in Argentina. Macri has also promised that he’ll save the country’s obsolete and over-burdened electricity sector and attract billions of dollars of new private investment in renewable energy and infrastructure projects. He has succeeded in attracting the attention of companies such as Enel Green Power, Acciona and Technict. On a less positive note, mid-way through 2018 Macri has sparked protests by reaching out to the International Monetary Fund for a $50 billion emergency loan. Right now companies and investors considering projects in Argentina need to include political risk analysis as part of their due diligence.
To discuss what’s ahead for Argentina I reached out to Jimena Blanco, Head of Americas Politics Research at Verisk Maplecroft, a political risk consultancy.
Nathaniel Parish Flannery: What went wrong in Argentina? Why was it necessary for Macri to reach back out to the IMF?
Jimena Blanco: Macri was forced to take the radical decision to seek a preventative ‘umbrella’ from the IMF after a major run on the Peso in late April. While there has been general exodus from global emerging markets back to the dollar – in line with the rising US Fed rate and recovering US economy. Argentina was particularly exposed as markets and investors simultaneously lost confidence in Macri’s ‘gradualist’ fiscal reform, which is being financed by international capital markets but has not yet delivered, either economically or politically.
After two years of unpalatable government measures focused on the removal of utility tariffs and other longstanding subsidies, the fiscal deficit is still structurally too high, and public debt has risen exponentially, both external bond debt and internal debt including central bank deficit financing. Inflation remains stubbornly stuck in double digits, 28% currently, and public tolerance of the situation is fast fading as the ‘gradual’ adjustment -in theory designed to shield them – in fact appeared to do no more than entrench the country in a lengthier period of extended pain.
Added to the mix news that this year’s commodity export harvest and fiscal earnings and economic growth are at risk of being much weaker than expected, and the markets began to take fright. But the final straw, in fact, was the behavior of Argentines themselves, who, burned by successive crises, rush en masse into dollars at the slightest peso volatility.
Macri’s cabinet chief, Marcos Pena, said the government was looking for an umbrella to protect the country from global storms – the large tent delivered by the IMF, which was accompanied by a very strong statement of support by Christine Lagarde, is very clearly designed to reassure investors – and deter speculators. The conditions attached – notably including a commitment to formally strengthening central bank autonomy and an end to BCRA deficit financing – and tighter fiscal targets from 2019 – signal the Fund’s again after a decade in the so-called “wilderness” of radical left-wing heterodoxy since 2007.
Parish Flannery: When Macri was first elected it seemed like voters were ready to give him a real chance to try and address the economic problems he inherited. Are people starting to grow impatient with Macri now? Is there a chance he won’t win re-election when his term ends in 2019?
Blanco: Macri’s party performed well in the October 2017 congressional elections, seen as a pragmatic vote in favor of his ongoing efforts to recover macroeconomic stability. But people certainly are getting concerned and want to see some light at the end of the tunnel.
To date, it’s largely been all pain and no gain domestically – despite international investor perceptions that the country is fully back on its feet. Unions, especially those allied to the now-opposition Peronist party are persistently agitating and pushing back against Macri. Yet Macri has proven himself a consummate political operator, latterly securing a deal with opposition governors to approve the 2019 election year budget – which now will be more austere.
The question now is whether Macri can sell this deal and take most voters with him for one more big push to ‘right’ the economy. Neither global nor regional economic winds are entirely in his favour – Brazil, Argentina’s main commercial partner, remains mired in deep structural economic and political crisis, while China’s economic outlook is also uncertain, against the backdrop of the US-instigated global trade turbulence.
Parish Flannery: What’s your outlook? Are you optimistic that Macri is still going to help get Argentina’s economy back on track?
Blanco: Three big problems include the fact that straight away Macri will have to find some $8.9 billion in further cuts this year alone to meet the revised fiscal deficit target of 2.7% of GDP, down from 3.2% previously. Inflation targets have been relaxed out to 2020. The target is now 17% for 2019, 13% for 2020 and 9% for 2021 meaning not only continued pressure on consumer incomes, but also a longer period of eye-wateringly high interest rates. Tight financing conditions, in turn, will weigh on private investment – and overall growth. Dujovne now expects real GDP growth of 1.4% this year and 1.5%-2.5% for 2019, down from initial expectations of over 3%.
Getting Argentina into a virtuous circle of growth – and avoiding a vicious cycle of ever -decreasing circles – is far from guaranteed at this point.
Parish Flannery: How successful do you think he will be in addressing these issues?
Blanco: The $50 billion three-year Stand-By Agreement was larger than expected, and Buenos Aires expects immediate disbursement of 30% of the SBA, or about $15 billion.
With other multilateral funds added in, including $5.65 billion in the coming year from the Inter-American Development Bank, the World Bank and the CAF and potentially also a currency swap from China, Argentina should not have to rely on international capital markets for almost two years, insulating it from further market turbulence (likely emanating from further US interest rate rises and dollar appreciation).
The Peronists are already on the attack, accusing Macri of mortgaging the future. But memories are still bitterly raw of the legacy left by Cristina Kirchner – and Macri has sufficient time – 18 months – to demonstrate to the population that his IMF- and G7-backed policy track is the correct one. This deal will be sold as a ‘preventative measure – and it would have been a lot more serious had Macri been forced to go cap in hand to Lagarde in June 2019.
With the president’s popularity ratings still at 40%, moreover, Macri – incredibly, given the drubbing he has taken many quarters – still has some political capital to spare.