Argentina has a bumpy road ahead.
The package of economic reforms that business-friendly President-elect Mauricio Macri is preparing could increase societal tensions by stalling the social gains made under outgoing leftist President Cristina Fernández de Kirchner. But despite the likelihood of short-term hardship, Macri’s market-oriented strategy is needed to kick-start an imploding economy, business leaders and analysts say.
The current model, based on so-called heterodox or neo-Keynesian policies, is running on legs of lead. The annual fiscal deficit—the amount by which a country’s spending exceeds its revenue—is the highest in three decades, and this year’s inflation is estimated at 25%, according to non-government calculations (the official numbers are widely doubted).
And the bad news continues: Locked out of global lending markets, the Central Bank is running out of money. Growth is anemic. And investment is waning.
‘There’s no choice.’
Even supporters of the government’s methods have long been warning of economic paralysis. “Argentina kept being heterodox too long, and is now experiencing classic developing-country problems,” economist Paul Krugman wrote in the New York Times last year, referring to the inflation rate and the shrinking reserves at the Central Bank.
As the situation grows more critical, the Central Bank has clamped down on outflows of its foreign currency reserves. American Airlines stopped selling tickets in pesos because it couldn’t convert those sales into U.S. dollars. And acquisitions by the state-run oil company, YPF, seem to have been thwarted by the lack of dollars.
These problems have cornered policymakers into charting a different course for Argentina, economists say. Macri is expected to devalue the peso and remove currency restrictions soon after taking office on Dec. 10. Even the candidate for Fernández’s party, Daniel Scioli, was expected to make similar changes if he won, though at a slower place in order to ease the pain. (Fernández was constitutionally barred from running for a third consecutive term.)
“There’s no choice,” says Federico Thomsen, an independent economist in Buenos Aires.
Macri’s reforms will most likely trigger a spike in prices, eroding the purchasing power of working-class Argentines. As real incomes fall, the economy will shrink by 1.1% next year, according to a Nov. 24 report by Barclays research economists Sebastián Vargas and Pilar Tavella.
But business leaders say the moves are needed to increase the competitiveness of Argentine producers and remove barriers to investment in order to bolster growth. Vargas and Tavella estimate that Macri’s moves will lead to growth of 3.5% in 2017.
Last place
The agricultural sector, especially the export of grains like soy, is the keystone of the Argentine economy. It generates around 60% of foreign income. But farmers say they have been discouraged by high export tariffs and domestic price controls, which reduce profits, and import restrictions, which put replacement parts and productivity-enhancing technology out of reach. Imports have plunged by nearly 10% this year, according to Argentina’s Chamber of Commerce.
“Today, we’re in last place in the region for competitiveness,” says Ernesto Ambrosetti, chief economist at the Argentine Rural Society, the country’s largest farming association.
Macri has promised to address these problems by slashing export tariffs and removing import restrictions.
As removing import restrictions will allow export businesses to use their new profits to increase investment, Carlos de la Vega, president of the Chamber of Commerce, says he is optimistic about the upcoming business climate. But he expects that there will be turbulence.
“We have to be conscious that in the short term it’s going to be difficult,” he says, noting that it may take several months before the Central Bank builds up enough reserves to remove import barriers.
Fast or slow?
Some economists think removing currency controls immediately would be careless, as it could lead to a sudden rush for dollars and, conversely, a painful weakening of the peso.
But Macri’s economic team is hoping that its moves to improve Argentina’s world standing—for instance, by resolving international trade complaints, restoring the credibility of official statistics, and appointing technocrats to key cabinet positions—will stop any bank run.
“When you recover credibility, you recover the process of investment,” says Federico Sturzenegger, the lawmaker and economist who Macri has named to run the Central Bank. “There are more dollars to come in than to head out,” he adds, estimating that Argentines are holding around $300 billion in uninvested cash.
Dangers ahead
Macri faces a treacherous road. The scion of a wealthy family, he won the elections by a slim margin and he comes from outside the political establishment. If he lunges too aggressively to the right, he risks social upheaval and a backlash from the Peronist political movement he defeated.
Moves to liberalize the economy too quickly and deeply would be like flying a kite through a hurricane, analysts say. Against this backdrop, his ministers have already promised to keep some government price-control programs in place for six months, and not to cut energy subsidies for the poorest.
“He has to build popularity,” says economist Thomsen, “not destroy it.”
