Macri rues his magical thinking on Argentina’s economic growth
President’s promised green shoots of recovery are long overdue
After a “spiritual retreat” to an Argentine oceanfront resort with his 22-member cabinet last week, Mauricio Macri admitted that he had generated unrealistic expectations of “magical” change when he took power a year ago.
“If you want to see a magician, go and see [David] Copperfield,” Argentina’s president drily joked to reporters.
But the harsh reality of an economy still in the doldrums is beginning to weigh on Argentines — and the government of Mr Macri, who is hoping to win a congressional majority at midterm elections next year, allowing him to deepen his reform programme.
Despite repeated assurances that the second half of 2016 would see the economy rebound, and hasty claims as early as August that “green shoots” had begun to appear, industrial production and construction shrank 8 per cent and 19 per cent respectively in October compared to last year.
“The bar was set too high. The minute expectations weren’t fulfilled people started to blame Macri,” says Andrés Borenstein, chief economist at BTG Pactual in Buenos Aires.
Analysts say that overcoming the economic imbalances inherited from Cristina Fernández, Mr Macri’s predecessor, is proving much harder than first thought. Many now also worry that the victory of Donald Trump in the US presidential elections is threatening Argentina’s reliance on the international markets to finance a transition away from an economy that was in default and on the brink of a balance of payments crisis when Mr Macri became president last December.
Although there is broad consensus that 2017 will see an economic turnround, with growth of around 3 per cent of gross domestic product expected next year, the continuing recession is already causing political headaches for the government.
An emboldened opposition is starting to obstruct the government’s reform programme in congress, after impressive progress this year with more than 70 laws passed, despite the government’s lack of a legislative majority. But now a major tax reform is running into problems, while an attempt to introduce an electronic voting system was rejected.
The bar was set too high. When the minute expectations weren’t fulfilled people started to blame Macri
Some fear that pressure to show results is leading to policy mistakes. Mauro Roca, an economist at Goldman Sachs, argues that the central bank’s recent decision to cut interest rates is “not clearly warranted” given inflation has been stubbornly high, and may have more to do with concerns about the deeper-than-expected recession.
Others complain that the government has made too many concessions to the opposition in congress, such as a “social emergency” law allegedly backed by Pope Francis. Unplanned increases in spending are undoing efforts to shrink a bulging fiscal deficit that is at the root of Argentina’s economic troubles, say critics.
Despite the complicated economic scenario, most polls show that Mr Macri’s approval ratings remain above 50 per cent, and social unrest has so far been limited. Officials proudly observe that this is the first non-Peronist government — in reference to the Peronist political movement that has dominated Argentine politics for the last 70 years — that has avoided a general strike in its first year, even though real salaries have fallen.
“The people understand what we are doing, trust in the president, and are strongly hopeful that things will improve even though their situation may have deteriorated since last year,” says one senior official. “They realise that there are no quick fixes, and that this is going to take time and effort.”
Even so, Mr Borenstein admits to being “puzzled” at the economy’s slow recovery, pointing to positive indicators like a sustained growth in credit and falling unemployment.
Elypsis, a local consultancy, suggests that one important factor holding back the recovery may have been high local interest rates designed to tame inflation expected to reach 40 per cent this year, but which also diverted investment away from the real economy. Meanwhile, public infrastructure programmes have also been slow to kick into action.
But economists are confident that in 2017 the economy will swing back to life — not least because comparisons with the low base of 2016 will be so favourable.
Analysts say the recovery will be underpinned by a pick-up in public infrastructure spending and agricultural exports, while some hope that Brazil’s struggling economy will no longer prove the handicap it was this year. Another key factor will be escalating consumption thanks to ongoing disinflation, end-of-year bonuses and the gradual implementation of pension adjustments, according to analysts at Morgan Stanley.
Nevertheless, scepticism remains over Mr Macri’s promises to bring profound change to Argentina, beyond just restoring normality to the economy. Marcos Wentzel, a senior partner at Puente, a local investment bank, is impressed by the progress of reforms so far, but wonders how far they will go. “Is this a government of transition, or transformation?” he asks. “At this point no one can say.”
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