Argentina’s prospects after latest political and leadership changes
Mar 18, 2016
In last December Argentina took a large step towards the centre-right (in political and economic terms) by giving a presidential victory to the former Buenos Aires mayor (and former businessman) Mauricio Macri, of the “Cambiemos” alliance.
You may have heard of the fanfare surrounding him. Recently, he created headlines for his presence at the World Economic Forum at Davos. According to the New York Times, Macri was among the big names there due to “His ascension, as well as his goal of bringing his country back to the global markets after years of battling with investors in Argentine government bonds, has been watched closely by the hedge fund moguls who fly to Davos for the forum each year”.
In addition to meeting with other presidents and world leaders, President Mauricio Macri held several talks with a long list of representatives from multinational companies who expressed interest in investing in Argentina, including Total, Shell, Dow Chemical, Mitsubishi, Nissan-Renault, Microsoft, Facebook, Google and Coca-Cola (which acted quickly, vowing a US$1 billion investment over the next four years)
But will he be able to make a big impact so quickly?
Among others, a major economic challenge is the critically low foreign currency reserves. To tackle the issue, Macri’s economic equipment has set the foundations to reach to a definitive settlement (by mid-April) with the bond holdouts in order to regain access to international credit markets. However, he is also approaching the World Bank and the International Monetary Fund (IMF). Both are urging Argentina to resolve its pending arbitration claims, as well as normalizing economic statistics. With reserves at a sufficient level, he will be better equipped to address second major economic challenge: addressing inflation.
During his first 90 days at the Pink House (Argentine´s equivalent to the White House) Macri’s government has made market-oriented changes meant to reinvigorate the economy after poor business investment and growth in recent years. It was able to eliminate most export taxes for agricultural products, unify the exchange rate (Argentines are now finally free to sell their country’s currency, the peso, in exchange for dollars) and is also expected to end bureaucratic procedures that prevented manufacturers from importing needed equipment and parts.
Mr. Macri’s government devalued the peso by nearly 30 percent in mid-December, to more than 13 pesos to the dollar (from the earlier official rate of 9.8). After a short period of stability, the local currency remained its depreciation trend and has reached 15 pesos to the dollar, just recently.
The devaluation and the above mentioned removal of export taxes favored the influential farmers who had speculated about such moves by hoarding their grain harvests. But while these agricultural exports are now more profitable for the farmers, the devaluation is threating to erode salaries, and fuel price increases as imports become more expensive.
This present the danger of further fueling inflation, which is already high at 25 to 30 percent average per year. In turn, if real wages do not keep up, battles could break out between the government and powerful trade union leaders. Political and social organizations are already panicking about some of the president’s moves.
A decision to temporarily appoint Supreme Court judges by decree, bypassing Congress during its summer recess, has been broadly criticized as an overreach of executive power. He is also wading into some tricky waters with media laws, and needs to be wary of pushing things too far.
While for the most prestigious economic research institutes and organizations Argentina has started an important transition to correct macroeconomic imbalances and microeconomic distortion, the IMF said that Argentina will still see a recession this year. The economy is set to decline 1 percent, a drop that is 0.3 percentage points larger than the previous forecast that the IMF had released in October 2015.
Argentina’s forecast is in line with a negative outlook for Latin America as a whole, which would drop 0.3% in 2016, mainly pushed by declines in Brazil (3.5%) and Venezuela (8%). It will be the first time since 1982 the region sees two consecutive years of economic declines. Uncertainties related to the slowdown in China, lower commodity prices, and divergent monetary policies in advanced economies are the reasons behind Latin America’s negative forecast.
The true is that Argentina´s macroeconomic imbalances still persist: inflation is high, the government runs budget deficits and the current account balance is negative. To revive the Argentine economy, Macri needs to act fast to mobilize sizeable external financial assistance, generate additional domestic resources, and implement deeper structural reforms.
While the end of the bond holdouts nightmare seems to be around the corner (the due date for the Argentinean Congress to approve the initial settlement made by the Pink House negotiators is April 14th), Argentina´s long term future depends on solidifying 3 key pillars:
- Institutions: making existent institutions transparent, agile and credible while fighting against criminality and corruption,
- Sound Economic Strategy: implementing an economic strategy beyond commodities, while directing investments towards infrastructure, mobility, trade, tourism, energy and digital infrastructure for connectivity,
- A well engaged Middle Class: creating jobs, skills, and training for the next generation, while opening equal opportunities for all.
The last, most tricky pillar will only arrive by successful implementation of the first two. Frost & Sullivan is encouraged by the prospects of increased prosperity and, hence, investment opportunities, but there will still be risks associated with brash moves.
Based on his history of success, and his relationship with the business community, we perceive that President Macri has the opportunity to take Argentina back on track and regain chances for success in the decades to come. Keep tuned to the south of the Bravo River, sooner or later there will be some news.
Fatal error: Call to a member function getUserUserBio() on null in /home/frost/public_html/digitaltransformation/packages/problog/helpers/blogify.php on line 362