March 31, 2016 | by Agustín Etchebarne Print

Argentinian President Mauricio Macri. Photo credit: Gobierno de la Ciudad de Buenos Aires (license CC BY 2.0)

It’s still too early to assess the success of Argentinian President Mauricio Macri’s administration. However, after his first 100 days in office, there are certain aspects of the new government that are becoming clear. It has been assertive in its pursuit of change. Argentina used to have Venezuela or Cuba as role models, but now has a government that wants to rejoin the liberal democracies working toward sustainable development.

The designation of former United Nations Under-Secretary-General for Field Support Susana Malcorra as chancellor may prove to be one of Macri’s more successful decisions, and ever since his introduction at the World Economic Forum in Davos, Switzerland, and a series of meetings with high profile leaders, he has managed to create favorable international expectations. There have also been state visits by French President François Hollande, the Italian Prime Minister Matteo Renzi, and the U.S. President Barack Obama, as well as talks of a possible free trade agreement between the South American regional trade bloc Mercosur and the European Union, and maybe with the United States, which could prove to be the president’s most lasting historical legacies.

As far as economic reforms are concerned, the government is fast approaching an agreement with the holdouts, having negotiated with Peronist governors the necessary support at Congress. The motive for this success is simple: When it comes to getting credit to spend, agreement comes fast. Governors are now discussing how to spend the money, or rather who gets to spend the money.

In this way, Macri could add another great success in his first 100 days: ending the “cepo” foreign exchange controls and the default without succumbing to any of the calamities that incumbent candidate Daniel Scioli had announced during the electoral campaign. Furthermore, this would show that the government is capable of reaching agreements with many sectors of the Peronist party, and not only with the right-wing Frente Renovador alliance. Governance should not be compromised as long as the president has a good team, because governors are rational. At the end of the day, they know that they are all on the same boat, and if it sinks they would sink together.

Everything points to a fragmentation of the Peronist party. This is in part because of hardcore Kirchnerists who are interested in maintaining confrontational discourse in order to divert attention from the legal problems related to corruption in the past administration, which may even reach former President Cristina Kirchner herself. Audits throughout different government organizations are consistently showing mismanagement and corruption. They recently found 400,000 “ghosts” paid by social security; also, 8 billion pesos that a businessman close to the former government kept for his firm from taxes on fuel he collected for the state. We also saw a parallel state at the Northern province of Jujuy: a corrupt network led by indigenous activist Milagro Sala, who is now imprisoned. Her network of cooperatives were paid more than 1 billion pesos for thousands of houses that were never built. Every news cycle was plagued with mayors, builders, and employees asking for Sala’s impeachment and explaining her modus operandi, which, according to claims by Jujuy’s governor, includes violence, threats and even three alleged murders that were denounced in public by the mother of one of the murdered children.

The government is taking advantage of the situation to propel a law allowing gentler treatment for repentant, cooperative participants in government corruption, as well as a recovery program for state assets. Both have been successful in Brazil, where one the most important businessmen, Marcelo Odebrecht, was imprisoned. Next May, Congress will debate this anti-corruption package, which incorporates laws that were advanced by Libertad y Progreso.

Ending the “cepo” foreign exchange controls implied a 60 percent devaluation of the official commercial exchange rate, which is still highly volatile. This happened, however, without expectations spinning out of control and with a relatively calm market, even in an unhelpful international context — Brazil, our primary partner, is undergoing a deep recession that could result on a loss of as much as 4 percent of its GDP; China’s growth is slowing down; Japan is undergoing another recession; and Europe is semi-stagnated. Only the United States shows relatively solid growth.

On the negative side, inflation has increased as expected after energy price corrections and peso devaluation. Employment levels are falling, and there’s a growing anxiety on future in several sectors. Finance Minister Alfonso Prat-Gay is decidedly optimistic in his projected inflation rate of 20–25 percent for 2016, which would be roughly similar (and even slightly lower) than the rate for 2015. It is true he has better information than we do, because he still hasn’t disclosed his whole fiscal and monetary program, so we only have assumptions about what he will do.

In our opinion, there will be approximately 30 percent inflation this year, and it may, effectively, start to fall at a rate of about 1 percent a month — but this will not start happening until later, in the last quarter of 2016. Accumulated inflation for the December–February period is 12.5 percent. We are suffering today from high inflation that stands at 60 percent annualized. There are two reasons: First, there is a fiscal deficit of about 7.1 percent of the GDP. The economic program announced by the government for 2016 will not reduce it significantly, because they chose a more gradualist approach financed by new debt (once an arrangement with the congressional holdouts is made). Second, they corrected some of the relative prices that had been distorted during the last administration. Even these price increases, though, in some cases only make up for less than 20 percent of total costs. It is clear that outdated prices helped curb inflationary tendencies, but at a high cost in terms of disinvestment in transport, telecommunications, energy, etc. The government adjusted part of the prices translating them into the first trimester. Furthermore, the end of the “cepo” foreign exchange controls corrected a large part of the exchange rate appreciation that had produced great prejudices within regional economies, but this also means higher inflation in the short term.

There will be an increase in inflation for the first trimester, but in our view it is still necessary to readjust transport prices, which remain outdated when compared to neighboring countries like Chile or Uruguay. Given that the reduction of the fiscal deficit will be rather small, part of this deficit will have to be financed by debt and another part by monetary emission, which will itself be partially absorbed by central bank notes — but only at a high cost in terms of interest rates (higher than 35 percent per year).

Only toward the end of the year we will see a strong reduction of inflation. With any luck, next year it could be as low as 16 percent or even 14 percent, reaching single digits by the end of Macri’s term in office. Meanwhile, the debt will continue to grow because the reduction of the deficit will be slow. This panorama will only start to reverse in 2018 or 2019 when the decrease in the deficit should fall below the rate of economic growth. Only then we will see a reduction in the debt in terms of GDP. The government is slowly recovering a free market, but continues its rhetoric that blames businessmen for the rise in prices. This does not help anyone understand the problem.

For balancing the budget, Minister Prat-Gay maintains his goal of reducing primary deficit from 5.4 percent of the GDP in 2015 to 4.8 percent in 2016. This is hardly ambitious. To this figure, we must add interest payments on debts, fiscal deficits at the central bank, and provincial debts. In this way, the total deficit will be reduced by only 0.4 percent, or less if they are not able to control the public expenditures and indebtedness of many provinces. However, a total deficit of almost 10 percent of the GDP is clearly unsustainable and would require a bigger commitment both from the government and the opposition.

The government has chosen to accumlate debt as a way to make a gradual adjustment and minimize the social costs of doing so, trying to incentivize investment so that in the already-expanding economy the transfer of unproductive public employment and handouts toward productive private-sector employment can done without social costs. It remains to be seen, however, whether this will work, and it will require maintaining positive expectations that the government will be able to control public spending.

As dollars from new debt enter the economy, the primary risk is that the resulting exchange rate appreciation will turn into trade imbalances. This means that Argentina may once again have twin deficits, for both trade and fiscal balance. The trade deficit, which was 2.2 percent for 2015, may reach a 3.5 percent this year and 4.3 percent in 2017. This may make the placing of new bonds gradually more difficult.

Right now, future expectations are high; in March, surveys have been up by 5 points. A recent poll shows that 69 percent of Argentines have a positive image of the government. It is highly important, however, that the government does not neglect fiscal topics and instead manages to successfully resist pressure to expand public spending for increased salaries, pensions, and subsidies. 

Agustín Etchebarne portrait
Agustin Etchebarne is director general of Argentina-based Atlas Network partner Libertad y Progreso, He is an economist specializing in economic development, strategic marketing, and international markets. He has been a professor of economics at UBA and ESEADE, and is currently a professor at Universidad de Belgrano. He is a member of Red Liberal de América Latina (RELIAL) and member of the Institute of Ethics and Political Economy of the National Academy of Moral and Political Sciences. Learn More about Agustín Etchebarne >