South America has been a special part of my life for four decades. I have lived many years in Brasil and Peru. I am married to an incredible lady from Argentina. I want to share South America with you.
Just 10 months into Mauricio Macri’s presidency, disturbing similarities are emerging between the market darling’s economic policies and those of his market nemesis predecessor, Cristina Fernández de Kirchner.
If you strip away the good manners and modernising discourse of the new business-friendly administration that has won the hearts of international investors — unlike the belligerent Ms Fernández’s outmoded rhetoric — the substance of economic policy remains much the same, say critics.
Above all, detractors point to a bulging fiscal deficit that is proving remarkably persistent, even though Mr Macri knows all too well that Argentine politicians’ congenital fiscal laxity is the root cause of economic crises that occur with alarming regularity.
Ahead of important midterm legislative elections next year which offer Mr Macri a chance to consolidate his reform programme, spending is expected to increase. The big question is whether after the vote, with only two years remaining until the next presidential elections, excuses will be found for a new cycle of politically-driven spending.
A second concern is the strength of the peso. Argentina has lost all gains in competitiveness since an abrupt devaluation after currency controls were removed in December. This year the peso has appreciated in real terms by 11 per cent, thanks to inflation that is expected to reach as much as 40 per cent in 2016.
As long as high interest rates are needed to stabilise inflation — it is beginning to subside as a credible targeting regime is implemented aiming at inflation below 17 per cent in 2017 — the peso is likely to remain overvalued. That in turn will complicate attracting foreign investment.
Although Argentina has a floating exchange rate, critics observe that a strong peso has always been a key ingredient of failed stabilisation drives, such as Domingo Cavallo’s currency board experiment in the 1990s.
Shy investors have been bitten not once, but multiple times. Almost every decade over the past 50 years, new governments have arrived triumphantly promising to restore the prosperity that Argentina once enjoyed as one of the richest countries in the world a century ago. So why should they believe that this time is really different?
For many, it is what the new administration is doing to strengthen institutions and the rule of law, even if the results may take time to show through. The central bank’s independence has been restored, the state statistics institute is producing credible numbers after years of manipulation, and the government is finally paying its debts again, after 14 years in default.
The previous government, unable to borrow abroad, simply resorted to printing money, with disastrous consequences for inflation
Such measures are aimed at regaining market trust, so important for Mr Macri’s technocratic government that genuinely believes private investment and an open economy are the key to unlocking growth. In contrast, the statist and protectionist Ms Fernández and her predecessor, husband Néstor Kirchner, smothered businesses, caring little for the opinion of Wall Street bankers.
A more subtle distinction between Mr Macri and the Kirchners is in the handling of the fiscal deficit itself, despite its similar size.
First, its composition is different. The new government is financing the deficit with debt. It is fortunate enough to be able to do this — temporarily, to get the country back on track — as it is hugely underleveraged after more than a decade of absence from the international capital markets. The previous government, unable to borrow abroad, simply resorted to printing money, with disastrous consequences for inflation.
Secondly, spending is now more efficient. Instead of pouring money into untenable subsidies on public utilities such as electricity, gas, water and transport, Mr Macri is concentrating instead on public infrastructure spending to reactivate the economy.
When Mr Macri was elected as president last year, there was a wave of euphoria as many Argentines bought into his campaign rhetoric that he could change the country for the better. For now, most Argentines still prefer to give him the benefit of the doubt. After all, if he does not succeed, it may be a while before the country gets another chance like this to relaunch.