Last Thursday, Dec. 10, Mauricio Macri took office as Argentina’s first non-Peronist president in more than a decade, promising to end policies of leftist populism and revive the country’s ailing economy. This significant change had a positive reception, particularly from the private sector, which hopes that Argentina’s new pro-business government will fix the country’s economic problems and bring new business opportunities to Latin America’s third largest economy.
However, President Macri’s promises will not be easy to achieve, as the economic inheritance passed down from the previous government is more complex than most realize. Among the most delicate problems faced by the new government is the dangerously low level of reserves at the central bank – approximately US$ 20 billion. Reserves have fallen significantly in recent years mainly due to their excessive use by former President Cristina Fernandez de Kirchner to support an overvalued Argentine peso.
President Macri is also subject to his campaign promise to lift restrictions on buying US dollars and thus eliminating a booming black market that has made it difficult for local businesses to operate. However, the fulfillment of this promise will likely lead to a sudden devaluation of the Argentine peso, a scary proposition in a country that defaulted on US$ 100 billion in debt during its 2001-2002 financial crisis, which drove union protests amidst significant economic loss across Argentina.
Given the complexity of problems the government needs to address, the appropriate implementation of corrective policies will take time. However, a potentially prolonged adjustment period would generate extra pressure on the government, as President Macri will need to send the right signals to the market as soon as possible. Accordingly, he has proactively sent some of his advisors and ministers to the US to begin the conversations required for the successful implementation of several campaign-promised policies:
- Elimination of capital controls
In an effort to quickly remove currency controls that restrict access to US dollars, last week President Macri sent a delegation of economic advisors to the US with the objective of negotiating a credit line worth between US$ 7-10 billion with a group of Wall Street banks. This loan aims to bolster Argentina’s low foreign reserve level and help the country begin the process of lifting capital controls.
Most recently, Argentina’s new Economics Minister, Mr. Prat-Gay, asserted, “We will ease capital controls when we are sure it’s the right moment. We will do it as we can and as calmly as possible.” This statement was well-received by the investment community and provided some peace of mind to the increasingly anxious Argentine population, which fears that an overly rapid adjustment could make the Argentine peso plummet against the US dollar, accelerating price increases and eroding purchasing power.
- Negotiation with holdout creditors
President Macri also sent Finance Minister Luis Caputo to New York last week to meet with Daniel Pollack, the mediator handling the case filed by holdout creditors who rejected the terms of Argentina’s 2005 and 2010 debt restructuring deals (these same creditors have also sued for full repayment).
In another official statement, Mr. Prat-Gay said, “We would like to conclude the talks [with the holdout creditors] as soon as possible, but as you know, we will negotiate as hard as possible.” Mr. Pollack, the mediator handling the case in the US, said in a statement that Minister Caputo had shown the willingness of the Argentine government to solve the problems with the holdout creditors.
- Elimination of excessive (punitive) export tariffs
President Macri recently signed a supreme decree that eliminates the punitive taxes and government restriction on exports of agricultural products including beef, wheat, and corn. The decree also reduces a tariff on soybeans by five percentage points, from 35 to 30 percent. The unwinding of taxes on agricultural exports comes as Macri is trying to rebuild international reserves that are at a nine-year low. The tax agency, known as AFIP, estimated that this sole change could help the government collect as much as US$ 8 billion in fiscal revenue from the export of the soy, corn, and wheat that have been hoarded by farmers waiting for improved economic conditions to sell the goods.
While the government is already sending the right signals to the investment community and has proactively begun negotiations to begin implementation of some corrective policies, Macri and his team must now assess the true extent of the economic damage they are inheriting. Long-discredited official statistics continue to hide the real size of the fiscal deficit, while the true level of foreign exchange reserves is murky and the rate of inflation (already one of the highest in the world) is also unclear.
In addition to the immediate economic challenges facing the new administration, political challenges could significantly hinder reform attempts. President Macri is already facing an uphill battle: he lacks a majority in congress to pass the laws required to implement reforms and faces rising pressure from labor unions that are looking to satisfy their own agendas.
During his presidential campaign, Macri promised to exempt the end-of-year bonus from taxes, following the practice that Cristina Fernandez began to implement in 2011. However, Macri changed his mind after being advised that not collecting these taxes would restrain the government’s ability to finance the demanding social investment agenda inherited from the Kirchners. But last Friday, Dec. 11, the president again shifted his stance on the implementation of income taxes following complaints from key transport union leaders as well as representatives from Kirchnerite and anti-Kirchnerite unions, who warned that strikes and other demonstrations could come quickly if he did not keep his campaign promise to reduce the tax burden of workers.
Mauricio Macri has been president of Argentina for less than a week but has already begun to feel the pressure of time and the internal forces that may play against the implementation of many of his proposed policies. The next three months will be key for Macri to convince political and economic stakeholders that the government will be prudent but also efficient in pursuing the changes that Argentina needs for its recovery. If Macri succeeds in this endeavor during the first quarter of his government, FSG’s view is that he will have laid the foundation necessary to enjoy solid credibility with the Argentine people, potential political allies, and the investor community. Support from these groups would allow him to implement more complex policies such as the elimination of capital controls, which will be key to attract the levels of investment Argentina needs to boost its economic recovery.
For a detailed analysis of the policies that Macri will implement during his first year of government, clients can read our “Planning for Recovery in Argentina” report here. Not a client? Contact us to learn more.