Argentina’s economy is trapped. It is still unclear whether voters will give President Mauricio Macri a chance to try and tackle the serious structural economic problems he inherited from his predecessors. Argentina is an emerging commodity-dependent 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 best known for her administration’s problems with corruption and blatant economic mismanagement. Venezuela is clearly the least well managed economy in Latin America, but under Fernandez de Kirchner, Argentina found itself in the ignominious position of being the second most problematic economy in the region.
Macri is a pro-business pragmatist who has vowed to remove heavy government subsidies and other market distortions and attract a new wave of foreign direct investment. Macri is already campaign for Argentina to join the OECD. He is viewed favorably around the world, but voters in Argentina are taking the pain of his corrective measures and growing frustrated by Macri’s failure to catalyze a boom in investment and economic growth. In 2017 DG and VW announced plans to invest more than $ 1.1 billion in expanding production in Argentina. Macri also pledged that he would save the country’s obsolete and overloaded power sector and attract billions of dollars in new private investment in renewable energy and infrastructure projects. It has managed to attract the attention of companies such as Green energy Enel, Acciona and Technic. On a less positive note, midway through 2018, Macri sparked protests by reaching out to the International Monetary Fund for a $ 50 billion emergency loan. Currently, companies and investors considering projects in Argentina must include a political risk analysis as part of their due diligence.
To discuss Argentina’s future, I reached out to Jimena Blanco, Americas Policy Research Officer at Verisk Maplecroft, a political risk consultancy firm.
Nathaniel parish flannery: What went wrong in Argentina? Why was it necessary for Macri to contact the IMF again?
Jimena Blanco: Macri was forced to take the drastic decision to ask the IMF for a preventive “umbrella” after a major peso race at the end of April. Although there has been a general exodus from global emerging markets to the dollar – in line with the US Fed’s rate hike and the recovery of the US economy. Argentina has been particularly exposed as markets and investors have simultaneously lost confidence in Macri’s “gradual” tax reform, which is funded by international capital markets but has yet to come to fruition, either in terms of it. economic or political.
After two years of unpleasant government measures focused on removing utility tariffs and other long-standing subsidies, the budget deficit is still structurally too high and public debt has grown exponentially, both external bond debt. and domestic debt, including central bank deficit financing. Inflation remains stubbornly stuck in double digits, currently 28%, and public tolerance for the situation is rapidly fading as the “gradual” adjustment – in theory designed to protect them – in fact seemed to fail. to do that consolidate the country in a longer period of prolonged pain.
Added to the mix of news that this year’s commodity export crop, tax profits and economic growth are likely to be much lower than expected, and the markets have started to fear. But the last straw, in fact, has been the behavior of the Argentines themselves, who, burnt by successive crises, rush to en masse in dollars at the least volatility of the peso.
Macri’s chief of staff 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 from Christine Lagarde, is very clearly designed to reassure investors – and deter speculators. The conditions attached – including a commitment to formally strengthen the autonomy of the central bank and the end of deficit financing by the BCRA – and stricter budgetary targets from 2019 – signal the Fund again after a decade in the se. – saying “desert” of radical left-wing heterodoxy since 2007.
Parish flannery: When Macri was first elected, it looked like voters were ready to give him a real chance to try and solve the economic problems he had inherited. Are people starting to get impatient with Macri now? Is there a chance he won’t be re-elected at the end of his term in 2019?
Blanco: Macri’s party performed well in the October 2017 congressional election, seen as a pragmatic vote in favor of its continued efforts to restore macroeconomic stability. But people are certainly worried and want to see light at the end of the tunnel.
To date, this has been largely a pain and no gain at the national level – despite the perceptions of international investors that the country is completely back on its feet. The unions, especially those who are allied with the Peronist party now in opposition, are constantly agitating and pushing back Macri. Yet Macri has proven to be an accomplished political operator, recently reaching a deal with opposition governors to approve the 2019 election year budget – which will now be more austere.
The question now is whether Macri can sell this deal and take most voters with him on another big push to ‘turn around’ the economy. Neither global nor regional economic winds are fully in its favor – Brazil, Argentina’s main trading partner, remains mired in a deep economic and structural political crisis, while China’s economic outlook is also uncertain, in the context of the global trade turbulence caused by the United States.
Parish flannery: What’s your perspective? Are you optimistic that Macri will always help get Argentina’s economy back on track?
Blanco: Three big problems include the fact that Macri will need to immediately find some $ 8.9 billion in additional cuts this year alone to meet the revised budget deficit target of 2.7% of GDP, down from 3.2% previously. Inflation targets have been relaxed until 2020. The target is now 17% for 2019, 13% for 2020 and 9% for 2021, which means not only continued pressure on consumers’ incomes, but also a longer period of incredibly high interest rates. Strict 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% to 2.5% for 2019, down from initial expectations of more than 3%.
Getting Argentina into a virtuous circle of growth – and avoiding a vicious circle of ever-decreasing circles – is far from guaranteed at this stage.
Parish flannery: How successful do you think he will be in solving these problems?
Blanco: The three-year $ 50 billion standby deal was bigger than expected, and Buenos Aires expects an immediate 30% SBA disbursement, or about $ 15 billion.
With other multilateral funds added, including $ 5.65 billion next year from the Inter-American Development Bank, World Bank and CAF and potentially also a foreign exchange swap from China, Argentina is unlikely to not having to depend on international capital markets for nearly two years, isolating it from further market turmoil (likely stemming from further interest rate hikes in the United States and the appreciation of the dollar).
The Peronists are already on the attack, accusing Macri of mortgaging the future. But memories are still bitter of the legacy left by Cristina Kirchner – and Macri has enough time – 18 months – to demonstrate to the population that his policy supported by the IMF and the G7 is the right one. This deal will be sold as a “preventative measure – and it would have been much more serious if Macri had been forced to switch to Lagarde in June 2019.
Plus, with the president’s popularity still at 40 percent, Macri – unbelievably, given the beatings he has suffered from many neighborhoods – still has political capital to spare.
Further reading: Is Argentina finally cracking down on corruption?