Alaco

12.08.2016 | Argentinian nerves jangle as Macri overhauls the economy

The country’s President has prescribed some tough economic medicine in an effort to attract foreign investment.

President Mauricio Macri, the son of an Italian-born business tycoon, is a man with a mission.  Ever since coming to power in December, he has sought to revive the country’s recession-wracked economy by introducing business-friendly reforms, reaching out to foreign investors and improving relations with trading partners.

He has certainly had his work cut out.  The combination of populist and protectionist policies embraced by his Peronist predecessor, Cristina Fernandez de Kirchner, discouraged much needed international investment and led to tensions with important allies such as the United States, while her free-spending policies left the country with a large budget deficit, which amounted to 5.8% of GDP last year.

In an effort to undo the Kirchner legacy, Macri’s ‘Let’s Change’ centre-right governing coalition has championed market-orientated reforms and repaired relations with creditors, while the President has travelled extensively in an effort to reposition Argentina, the third-biggest economy in Latin America, as a global player after the isolation of the Kirchner years.

Macri has introduced a number of measures to try to stimulate the economy.  Export taxes have been slashed, the lifting of currency controls devalued the peso by about 30%, and import restrictions along with generous subsidies for electricity, gas and water have been removed.  A long-running legal dispute with US hedge funds over a debt default has also been resolved, enabling the country’s return to international capital markets.  In April Argentina held a $16.5 billion bond sale, the largest ever emerging market debt deal.

The President’s diplomatic offensive and free-market reforms have led to a rapprochement with the US and strengthened ties with the European Union, one of the main destinations for Argentinian food products.  But the President has also been careful to maintain good relations with China, which Kirchner had cultivated.  Argentina’s new ambassador to Beijing, Diego Guelar, recently summed up the balancing act, “The challenge ahead is not to minimise China’s role, but instead to give more room to the US and Europe."

In a major diplomatic breakthrough, Barack Obama visited Buenos Aires in March – the first visit by an American President in almost two decades.  Accompanied by a large business delegation, he promised to encourage investment in the country.  Other signs of improving relations between the two countries have included the US Financial Crime Enforcement Network’s renewed cooperation with its Argentine counterpart and Washington’s decision to end its opposition to World Bank and Inter-American Development Bank loans to Argentina.

US companies are said to be prominent among the hundreds of foreign firms that have pledged to invest over $30 billion in the next three years.  Much of the funds are slated for the industrial sector, mining, transportation and communications.  The authorities are hoping to generate yet more overseas funding pledges next month, when they host the inaugural Argentina Business and Investment Forum, with more than 1,500 foreign businessmen and investors expected to attend.

But while the $1.3 billion of FDI that flowed into the country in the first six months of the year was almost equal to that for 2015, many overseas investors are said to be keeping their investment pledges on hold until they see an improvement in the struggling economy, which is expected to contract by 1.5 per cent this year, despite Macri’s reforms.

It is a grim state of affairs.  Over sixty thousand public and private sector jobs were lost between January and May, with youth unemployment the highest in Latin America.  Prices continue to rise – inflation is forecast to reach 40% by the end of the year – and the recessionary pressure is taking a toll on living standards.  A recent study by the Catholic University of Argentina estimated that 1.4 million people fell into poverty in the first three months of the year.

While Macri remains popular, his ratings recently dropped amid signs that people are not prepared to take much more of his economic medicine.  There have been protests over job cuts and soaring utility bills, which in some cases have risen by over 1,000%. US Secretary of State John Kerry has called on Argentinians to be patient, while Macri has attempted to ease some of the hardship by putting a cap on gas bill rises and announcing plans to bolster the national health system and pay funds owed to union-controlled healthcare schemes.

Macri is hoping that the promised investment will help to deliver the economic relief that Argentinians are desperate to see, although some observers believe the President will need to implement more sweeping measures to overcome investor caution, such as massive tax cuts or a bigger currency devaluation.  But Marci is walking on thin ice, as too many reforms could trigger the same social unrest that so bedevilled his predecessors.