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Tuesday, December 22, 2015

How Macri Will Revive The Economy In Argentina

Analytical Guidance: How Argentina's New President Will Revive the Economy

    
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Summary

Eager to dismantle his predecessor's economic policies, Argentine President Mauricio Macri marked his first week in office by taking aggressive steps to liberalize the Argentine economy. So far, the new president has managed to slash taxes on agricultural exports and lift currency controls, causing the value of the Argentine peso to plunge by 30 percent.
Macri's "shock therapy" policy will undoubtedly hike the country's already-high inflation even further, putting additional strain on the struggling economy, at least at first. And as Argentines begin to feel the potentially painful side effects, resistance to the president's approach will build.

Analysis

In Argentina, December is often a month of conflict. Soaring heat, intermittent blackouts, high spending levels and salary negotiations for the coming year push societal tensions to their peak. With Macri's rapid and dramatic adjustments to the economy, this December is shaping up to be no exception. Since assuming his post on Dec. 10 Macri has focused the bulk of his efforts on reversing Argentina's economic deterioration. After more than a decade of the protectionist policies and a heavily regulated foreign currency exchange system put in place by the previous adminsitrations, the country is in dire need of a new — and according to Macri, drastic — approach.
Macri's efforts to shock the economy out of its stupor began on Dec. 14, when he announced his intention to remove the export taxes in place on some of Argentina's most competitive agricultural products, including beef, wheat and corn. He also plans to reduce the export taxes on soybeans from 35 to 30 percent. The move marks a significant change in Argentine policy: Beginning in 2008, former President Cristina Fernandez de Kirchner maintained high taxes despite farmers' complaints to fund her energy subsidies and price-control programs.
While Macri's move may win the support of Argentine farmers, he runs the risk of making enemies elsewhere. The decision to reduce export taxes comes alongside his declaration of a state of emergency within Argentina's electricity sector as part of a plan to raise tariffs on electricity and natural gas starting in early January. The Kirchner-Fernandez clan's energy subsidies were among its most popular social policies; by undercutting them, Macri could risk inciting protests by the former leaders' power bases.
Still, the more pressing concern will be the rapid impact Macri's policies will have on inflation. After he lifted capital controls, the value of the Argentine peso fell by 30 percent, dropping from 9.8 pesos to the U.S. dollar to 15 pesos. (It has now settled at 14 pesos to the dollar.) As a result, inflation is expected to surge by the end of the month, potentially rising even further in 2016.
Compared with Fernandez's sudden devaluation of the peso in 2014, Macri's removal of capital controls was widely expected. Argentina's private banks have promised to lend about $7 billion to the country's central bank to help combat the climbing inflation rate. This will offer much-needed relief to the government, whose international reserves are dwindling. Alfonso Prat-Gray, the country's recently appointed finance minister, is also seeking $10 billion from Wall Street firms to help Argentina settle its debt with foreign bondholders, which currently exceeds $7 billion. Additionally, Argentina has managed to secure $5 billion with the help of the Inter-American Bank and $3.1 billion worth of yuan through a currency swap with China.

Who to Watch

In the coming weeks, Stratfor will be closely monitoring the reactions of the actors who play an important role in Argentine politics:
  • Members of the former administration: Members of the former ruling party, including Fernandez herself, have already begun to criticize Macri's plans to liberalize the economy. It will be particularly important to monitor figures such as Hugo Moyano, Hector Recalde, Carlos Kunkel and Hugo Yasky, who have enough clout within the labor unions and the legislative branch to slow Macri’s progress.
  • Pro-Kirchner groups and labor unions: Groups that support the previous administration, such as La Campora, will be important to watch because they will heed any encouragement by the former president to launch protests against Macri's moves to reduce social spending, especially ahead of the next midterm and presidential elections. Meanwhile, the General Confederation of Labor, the Central Argentinean Workers Union and the Transportation Union — all of which are led by opposition figures — are calling for protests in the coming week to obtain 5,000-peso bonuses in response to the currency's recent depreciation. Though these unions do not have the power to completely derail Macri's liberalization plan, they could use their influence among transportation and manufacturing workers to instigate strikes and protests among the low- and middle-income classes.
  • Sergio Massa and Daniel Scioli: Massa, the leader of the dissident faction of the Peronist movement Front for Renewal Dissident Peronist Party (the third-largest faction in the lower house of parliament), has refrained from commenting on Macri’s policies so far. However, because Massa's party has 27 seats in the lower house, its support will be crucial to Macri’s coalition (92 seats) as it looks to push through new legislation. Scioli, the presidential candidate for the former ruling party who warned against Macri’s "neoliberal" plans for Argentina during the recent campaign, represents a powerful Kirchernist faction and will likely try to persuade Massa to join the opposition, which currently holds 109 seats. 
  • Macri's allies: The Radical Civic Union Party is the biggest ally of the new ruling party, Let's Change. Together, the two control 92 seats in the lower house of parliament. With both houses politically fragmented, Macri will need the support of the party and its leaders, including Ernesto Sanz, Mario Negro, Angel Rozas and Jose Corral, to successfully push toward further economic liberalization. In exchange, Macri may need to yield to their requests for particular appointments to the Supreme Court and the Cabinet, as well as to their policy preferences more generally.
  • Residents of Buenos Aires province: December heat and the possibility of blackouts mean street protests unrelated to Kirchnerist politics could occur.

What to Expect

Since Argentines typically travel in January, the country will likely remain tense but relatively calm for the first month of 2016. However, teachers' unions and others may start demanding higher salaries in response to Macri's policies come February, which could lead to protests and/or strikes. If protests occur, demonstrators will probably focus their demands on increased salaries, not on calls for the president's resignation.