The votes have been counted and Cambiemos’ Mauricio Macri is officially Argentina’s new President. Now that the political posturing and campaign vagaries have come to an end, it’s time for President Macri to directly implement the specifics of his economic plan to address Argentina’s myriad of economic woes. What should we expect?
Addressing Argentina’s economic problems is not an easy task, and solving them, while necessary to prevent a Venezuela-esque situation down the line, will not be politically popular. Argentina’s government spends more money than it brings in, which had created a massive fiscal deficit. The fiscal deficit came with unintended consequences of spending more money than you have, namely:
- Depreciation of the Argentine peso (AR$)
- Falling reserves in the Central Bank (BCRA)
To make matters more complicated, President-On-Her-Way-Out Cristina Fernández de Kirchner introduced a series of complexly interrelated measures that are short-term fixes to beat back these problems. These include but are not limited to:
- High taxes and non-tariff licensing schemes restricting exports
- Multiple, increasing restrictions to buying foreign currency for individuals and companies
- Restricting imports almost to zero
- Forcing insurance companies and private banks to liquidate foreign currency holdings
- Using the Central Bank (BCRA) to finance the fiscal deficit
- Refusing to negotiate with the so-called “vulture” holdout funds after losing a drawn-out court battle in the United States
Multiple accusations of corruption are icing on the cake. Public officials including high ranking members of Cristina’s administration range from Vice President Amado Boudou to the former Transportation Minister Ricardo Jaime, from the current head of the Central Bank Alejandro Vanoli up to Cristina herself.
President-elect Mauricio Macri has inherited a ticking time bomb of an economy. Diffusing it will necessitate politically unpopular measures that in the short-term, Argentines will feel in their wallets. While Macri has deftly dodged answering specifically which spending cuts he will make, he has been clear about a few big issues. Furthermore, accusations that Macri will bring about an era of dreaded “neoliberal” free market frenzy are far off base. As the former mayor of the City of Buenos Aires as well as a successful businessman, it is safe to assume that Macri fundamentally understands that money doesn’t grow on trees and the free market will not independently create socially positive programs like bicycle lanes or health centers.
When it comes to costly consumer subsidies, Cristina’s government has already begun phasing out the most egregious offender, electricity. This phase out will take effect on Macri’s watch and incorrectly be attributed to him. Macri is likely to keep in place popular subsidy programs such as the Universal Child Allowance welfare payment based on children’s school attendance. He has vowed not to phase out Futbol Para Todos, although I think he will, and he is likely to end precios cuidados price controls at supermarkets. He is likely to maintain state ownership of YPF and Aerolineas Argentinas, but has indicated he will address management of the state airline due to its pesky habit of pissing away well over US$1 million dollars per day.
Macri has vowed to end the dollar restrictions known collectively as the cepo (literally, “clampdown”) and to unify the blue dollar and other parallel currency rates on day one of his administration but has yet to provide specifics. Directly related, he has vowed to completely remove all export taxes on all products except for soy. He has indicated he will reduce the export tax on soy, currently at 35 percent, gradually in increments of 5 percent per year. Unifying the currency market and removing the parallel “blue” dollar rate will necessitate changing rules and requirements from the Central Bank (BCRA), the tax agency (AFIP) and the legislature that affect individuals, businesses and banks and other financial institutions. I expect Macri to devalue the official rate to the current blue dollar equilibrium of roughly 15 AR$/US$ in order to pay lip service to his campaign promises. He will then have to remove controls for purchasing foreign currency gradually, increasing the size of the market and diminishing the parallel market.
Macri indicated that he will designate a development-focused economy minister and will place equal importance on the economy, agriculture, energy, production and infrastructure. This has led to speculation that Rogelio Frigerio, current president of Banco Ciudad, will be named. Frigerio brings direct, applicable experience to the difficult challenge of removing dollar restrictions and attracting and executing foreign investment within Argentina. Although current Central Bank Governor Alejandro Vanoli has claimed he plans to complete his mandate through 2019, I find that highly unlikely given the pending criminal charges against him. He could be replaced by former Central Bank Governer Alfonso Prat Gay, who served under Néstor Kirchner from 2002 and 2004, and has substantial international and private sector experience as well.
Macri will resume negotiations with the so-called “vulture” funds consisting of holdout creditors. He couldn’t pay the US$1.3 billion in cash immediately even if he wanted to, as the Central Bank is decidedly quite cash poor these days. He will likely reach a swift agreement consisting of cash plus new bonds, similar to that negotiated with Repsol for the expropriation of YPF. Along the same lines, Macri is expected to normalize the country’s relationship with the International Monetary Fund, paving the way for the Fund’s participation in future financing or involvement in infrastructure projects.
Macri has vowed to address the national statistics agency’s (INDEC) failure to accurately report important development indexes such as inflation and poverty. This correction will likely be fast and furious for two reasons. The sooner accurate statistics are corrected, the more effectively problems can be identified and addressed and Argentina can experience a collective “come to Jesus” moment. More importantly, the quicker problems are identified, the easier it will be for Macri to lump blame for them on the outgoing Kirchnerite administration.
Mauricio Macri has a busy and difficult task at hand of diffusing an economic time bomb, and fundamentally shifting Argentina’s economy onto a fundamentally different and sustainable track. To his advantage, Macri’s combined public and private experience has taught him the wide chasm that exists between ideology and reality, and he has sold himself to the Argentine people as a consensus builder rather than a miracle worker. Working against him, he will be the face of necessary policies that directly and immediately impact the economic well-being of millions of Argentines. The next year will be a roller coaster: let’s hope President Macri is up to the task.