Despite Elections, Argentina's Economic Trajectory Is Set
Forecast
- Regardless of election outcomes in October, Argentina's next government will begin liberalizing its economy, potentially loosening restrictions on the repatriation of funds, reducing the enforcement of price controls and reducing subsidies.
- Despite slight changes to Argentina's regulatory framework, the government will continue to bar some investment and businesses to stem capital flight and to maintain a positive trade balance.
- Though the next administration may begin laying the groundwork to attract greater energy investments, the country's barriers are unlikely to be completely lifted during the next presidential term.
Analysis
Argentina's economy is again attracting global scrutiny as the presidential election, scheduled for Oct. 25, approaches. Brazil's stagnating economy and Argentine economic policies that have discouraged foreign direct investment have hurt the country's exports. The next president will have no choice but to address some of the national economy's distortions and the factors holding back investments in the country.
The three main candidates have all promised to amend, to different extents, the country's export taxes on agricultural products, its restrictive capital repatriation laws and its regulations on price controls. But progress on economic liberalization will likely be gradual, and the next government has a long list of priorities — some of which will be easier to manage than others. The next administration will have to reassure foreign investors, stem capital flight, loosen currency controls and adjust domestic price controls that have discouraged domestic production. It will also have to settle with the holdout foreign bondholders, whose dispute with Argentina helped the country fall into default in 2014. Overall, Argentina will not deviate in a major way from its economic policies, though some concessions to encourage foreign investment are likely in coming years.
The Regional Economic Environment
Argentina is experiencing the inevitable effects of its economic limitations. At the end of President Cristina Fernandez de Kirchner's first term, Argentina had experienced several years of consistent economic growth, peaking in 2010 when the country's gross domestic product grew by about 9 percent. But relatively high global energy prices and Argentina's hefty yearly debt payments over the past five years have steadily drained the country's foreign reserves. Between 2010 and 2014, Argentina's foreign reserves fell by more than 30 percent to $33.9 billion, a trend exacerbated by the economic slowdown in Brazil, Argentina's largest South American trading partner. In recent years, Argentina has had to resort to import barriers to maintain a positive trade balance and has dipped into a three-year, $11 billion currency swap with China to fund additional public works and to bolster its foreign reserves. Implementing barriers to trade and currency movement in the already protectionist Common Market of the South (Mercosur) may have helped Argentina protect its domestic industry, but such policies also starved it of foreign currency and contributed to its unsustainable economic situation.
Consequently, the next presidential administration will have to liberalize the economy some if Argentina hopes to reverse its economic decline soon. The 2015 election is a contest between handpicked candidate Daniel Scioli of the ruling Front for Victory party and conservative challenger Mauricio Macri of the Republican Proposal party. According to most polls, Scioli has a healthy lead over Macri of up to 10 points and, in the absence of an alliance between Macri and third-place candidate Sergio Massa, may face a smooth path to the presidency. Based on their public statements, Scioli seems to favor a gradual approach to liberalizing the economy, while Macri favors a quicker shift. But whoever is elected president is likely to undertake similar economic policies out of necessity rather than choice. Remaining on the same economic course would only hurt Argentina.
But some changes will be easier to implement than others. For example, Argentina's significant energy deficit is unlikely to be addressed in the next four years, though its impact on public finances has lessened somewhat, thanks to lower global energy prices. Despite some foreign interest from Chevron and Royal Dutch/Shell in Argentina's Vaca Muerta shale formation, low global oil prices, controls on the allocation and repatriation of capital, import barriers, and a history of bad experiences when it comes tointernational energy investment could curb widespread foreign investment. Moreover, given the inherent delays in establishing a viable regulatory regime and producing hydrocarbons, major investments and a revival of domestic oil and natural gas production are at least a decade away. Argentina will have to keep relying on imported energy, much of it from Bolivia, to satisfy its domestic energy needs for the foreseeable future.
Considering Foreign Capital
Though some progress will be made on creating a more welcoming regulatory environment for foreign investors, Argentina is unlikely to significantly change its stance on foreign capital during the next four years. Because Argentina is cut off from capital markets, any financing for deficit spending has to come from internal markets or from monetary expansion, which risks fueling inflation. The next government is likely to maintain some of the Fernandez administration's measures to remain a net recipient of foreign capital, including import restrictions in the form of additional licensing requirements, capital controls and the selective allocation of foreign currency for imports through the central bank.
The next administration may also remove some restrictions on imports and capital movement (particularly for strategic sectors such as the energy industry), though a quick and extensive rollback of such protectionist measures may not be feasible. Lower commodity prices and Brazil's economic decline reduced the value of Argentine exports between January and July by nearly 17 percent compared with the same period in 2014. When confronting declining foreign capital because of reduced exports, a subsequent government may at first decide to retain most of the measures the previous government relied on to maintain a positive balance of payments.
Still, there will likely be some advances in the next few years that will improve foreign investors' perception of the country. First, there eventually could be a deal with holdout bondholders. A negotiated solution to the dilemma, which keeps Argentina in a state of default to creditors, will probably be among the next government's priorities. Such a resolution would help get Argentina back on track toward settling its foreign debts and establishing steady lines of credit in the medium term.
Second, the government could relent on the policy of price freezes. From 2013 onward, the government has applied price freezes and price controls on a range of food and consumer goods to stem inflation and to give the illusion that it is addressing rapidly increasing consumer prices. While popular with Argentine consumers, such actions do nothing to address underlying monetary expansion, which has increased in 2015 in anticipation of the election. The next government may loosen price restrictions or remove some consumer subsidies to placate producers and foreign firms. However, a full repeal of Argentina's consumer protection policies is unlikely because it could exacerbate the country's already high inflation.
Overall, Argentina's next president will be pressured to change the way Argentina's regulatory systems operate. Limitations on investments and on the repatriation of funds will have to be addressed during the next four years, and the next president will have to begin trying to renew the domestic oil and natural gas sectors. But the country's export decline, protectionist stance and constrained public finances will curtail the country's ability to become more capital-friendly. Argentina will clearly change over the next several years, but the changes will not be as drastic as global observers hope.
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