Wednesday, January 20, 2016

Macri Raises Hopes For Argentina's Economic Revival


Macri raises hopes for Argentina’s economic renewal

Premier signals intent to reintegrate with trip to Davos and readiness to address disputes
Mauricio Macri, opposition presidential candidate and mayor of Buenos Aires, speaks during a debate with ruling party candidate Daniel Scioli in Buenos Aires, Argentina, on Sunday, Nov. 15, 2015. Macri, the mayor of Buenos Aires, leads Scioli 49 percent to 42 percent ahead of the November 22 runoff election, according to poll results published by Giacobbe & Asociados. Photographer: Diego Levy/Bloomberg *** Local Caption *** Mauricio Macri
Mauricio Macri is taking on issues such as the Falklands dispute with the UK and the demands of hold-out hedge funds © Bloomberg
As Mauricio Macri becomes the first Argentine president in more than a decade to join the global financial elite in Davos, he is also hoping to break from the past by turning Argentina into a rare bright spot in emerging markets.
With a cloud hanging over most emerging economies after a collapse in commodity prices, it could hardly be a tougher moment for the former mayor of Buenos Aires to engineer a turnround in Argentina’s fortunes. But many investors are brimming with optimism for Latin America’s third-largest economy, as Mr Macri leads a drive to normalise relations with the international community following his election victory in December.
A planned meeting in Davos between Mr Macri and the UK’s David Cameron could pave the way for an agreement over the long-disputed Falkland Islands in the south Atlantic, after frequent clashes between the UK and Cristina Fernández de Kirchner, Mr Macri’s fiery predecessor.
Argentina’s new centre-right government is expected soon to announce a $5bn loan from a group of international banks led by JPMorgan and HSBC to boost central bank reserves depleted by the previous leftist administration.
“Macri has hit the ground running,” says Edward Glossop, an economist at London-based Capital Economics.
But although the new market-friendly administration has made a “strong start”, including awell-received devaluation, Mr Glossop warns that serious challenges lie ahead.
They include tackling inflation of about 30 per cent, a fiscal deficit of almost 8 per cent and a decade-long legal dispute with “holdout” creditors in the US that are blocking Argentina’s access to international capital markets.
In an effort to end the debt saga, Argentina will make a proposal to the group of hedge funds led by Paul Singer, a US billionaire, by next week, say government officials. The approach is sooner than many analysts had expected and could open the door to economic normality for Argentina.
But gaining support for a deal with the holdouts, or “vultures” as they are known in Argentina, in the opposition-dominated congress is key. Even so, the fact that Sergio Massa, an influential opposition leader, has accepted Mr Macri’s invitation to accompany him to Davos is an encouraging sign, say analysts.
On tackling the economic challenges, Alfonso Prat-Gay, finance minister, last week announced plans to shave one percentage point off the primary fiscal deficit and bring inflation down to between 20 and 25 per cent, a target economists at Bank of America Merrill Lynch described as “very ambitious”.
The 30 per cent devaluation of the Argentine peso, shortly after Mr Macri took power, removed stringent capital controls in put place by Ms Fernández de Kirchner in 2011 but fuelled inflation fears even though economists at Barclays described the move as “perfectly orchestrated”.
Moreover, measuring inflation — an important step to regaining investors’ trust — remains difficult until Indec, the national statistics institute, launches a new consumer price index, expected in September, to replace the widely discredited previous measure.
The decision by the country’s central bank last week to introduce 200 and 500 pesos bills, with a 1,000 peso bill to follow in 2017, illustrates how steeply prices have climbed in recent years.
But for Alejo Costa, head of research at Puente, a local investment bank, the most challenging issue is the fiscal deficit. “How to decrease it while dealing with the highest fiscal pressure in history will be the most complex challenge,” he says.
Without fixing the fiscal deficit, which is seen as the root cause of periodic economic crises over the past half century, it will be hard to fix inflation and to return to growth, says Mr Costa.
For Mr Macri’s his trip to Davos, where he is scheduled to hold wall-to-wall meetings with heads of state and corporate leaders from around the world, will prove a welcome distraction from the challenges at home.
Copyright The Financial Times Limited 2016. You may share using our article tools. Please don't cut articles from and redistribute by email or post to the web.