Argentine President Mauricio Macri and his team can take a bow for their first year in office. Despite Macri’s outsider status and his party’s limited influence in the Congress, he in short order took on the country’s biggest economic distortions—unifying the exchange rate, resolving the fight with international creditors, cutting energy subsidies, reestablishing credible statistics, and eliminating a whole host of tariffs, quotas, and export licenses.
Now comes the harder part. Macri needs to capitalize on continuing international investor and domestic Argentine support to push through more fundamental changes, restructuring the state and the economy to enable longer-term sustainable growth. In order to accomplish these weighty goals, Macri must not only stay the economic course set during his first year, but also double down and take on Argentina’s outsized reliance on public spending.
The rewards from Macri’s exertions are just beginning, as at least some economic indicators are finally turning in Argentina’s favor. Inflation is falling, recession is slowing, and some sectors—agriculture, real estate, and construction in the capital city—are on the rebound. These beginnings of a turnaround will make it easier for Macri to continue taking measures to open up the economy.
The disarray within the opposition Justicialist Party (PJ)—better known as the Peronists —eases the way as well. Though the PJ was the dominant political force for decades, continuing recriminations over last year’s electoral losses, corruption investigations into former President Cristina Kirchner and her aides, and differing views on how to respond to Macri’s strategic carrot and stick offerings have kept party leaders divided. Some factions were even disinvited to October’s Day of Peronist Loyalty, as political rivals were unwilling to stand side by side for the annual photo opportunity. This has enabled the Macri administration to push through legislative reforms despite its minority position in both houses.
Most surprisingly, Argentines are being uncharacteristically patient. Despite high inflation, unemployment, and stagnant growth, recent polls show the majority of the population is still giving the president the benefit of the doubt, believing that this year will be better.
All of this suggests that if the government can boost growth, it may do well in next October’s midterms, gaining seats in Congress and the symbolic mandate to continue on a market-friendly path.
Yet at the same time, the challenges to Macri’s success are growing.
Macri’s Goldilocks gradualism of reform without austerity—evoking the “not too hot, not too cold” approach of the storybook character—all depends on international capital to support a bloated state as well as to ply provincial governors in return for their support on key votes. Investors, desperate for better returns and buying Argentina’s prodigal son story, have happily obliged to the tune of nearly $50 billion dollars.
Argentina will likely need another estimated $28 billion dollars in 2017. For those with any familiarity with Latin America, these outsized deficits bring a sense of deja vu—though Macri’s rhetoric differs, piling on public debt to fund current expenditures looks an awful lot like the populist economic policies practiced by his predecessor. With most expecting the American dollar to strengthen and U.S. interest rates to jump under the new Trump administration, financing large emerging market deficits will get harder and harder. The Chinese may jump in, especially if their money goes to building infrastructure that ensures that Argentine soy gets to boats headed west. But regardless, the financing limits are real.
The only way to balance the budget is to fire government employees and cut pensions. Nearly one in three Argentines works for the government, making wages the number one cost for the public sector. This is followed closely by pensions, which make up over a third of the federal budget. Yet this is politically untenable, as disgruntled workers and pensioners would go straight to the picket line, threatening to upend the whole economic project.
Finally, voters may galvanize the Peronist opposition in ways that their leaders have not. Whoever comes out on top in the Buenos Aires provincial elections this year will be the heir apparent to the vast party machine, one still easily able to halt the government’s agenda when united and if so inclined.
Argentines will ultimately decide if this time is different. The Macri government has tried to entice the estimated $400 billion dollars in offshore funds back to the country through a tax amnesty program, allowing Argentines who declare their funds to pay a fine, and giving incentives for those that invest in infrastructure related bonds. So far it has been a success, uncovering over $30 billion dollars in the first two months, with expectations of much more before the end of March when the window closes. But while the program has been successful in identifying funds, little of this money has come back to Argentina to stay. Argentines are waiting to see if the changes are real. International investors are following their lead. And if all decide to wait and see, then Macri’s path will be much more difficult.
The recent cabinet shuffle, replacing former Finance Minister Alfonso Prat-Gay with Nicolás Dujovne, reflects this quandary. And it signals that Macri may be ready to take a harder line as he enters his sophomore year. Known for his fiscal conservatism, the new finance minister has already promised to lower the official government deficit projection of 4.2% for 2017. The potential cuts to jobs, social programs, and provincial slush funds will undoubtedly bring political costs. But the current financial path carries its own risks in the face of the global economic volatility likely to come.
And politically, to convince Argentines that this time is in fact different, market-based means may matter just as much as the hoped-for economic ends.
Shannon K. O’Neil is the Nelson and David Rockefeller senior fellow for Latin America studies and director of the civil society, markets and democracy program at the Council on Foreign Relations.