By Rodrigo Vivas and Guillermo Fremd
Emboldened by his resounding victory in mid-term congressional elections, Argentina’s president Mauricio Macri has been forging ahead with investor-friendly economic reforms, taking advantage of disarray and divisions within opposition Peronist ranks.
Yet while they currently appear beleaguered, Macri’s political foes could return to challenge him if the free-market reforms he has pursued since his election two years ago fail to rein in inflation and deliver promised foreign investment, critical to job creation and restoring the economy to health.
The October elections, in which Macri’s ruling centre-right Cambiemos coalition won 41 per cent of the national vote, was seen as an endorsement of his attempts to change the economic course of the country, shifting away from the protectionist, free-spending policies of his Peronist predecessor Cristina Fernandez de Kirchner toward a pro-business agenda.
Macri’s reforms have encouraged investors, but while they have been keen to snap up bonds – a recent sale was more than four times oversubscribed – significant foreign direct investment has yet to arrive. Argentina has real investment potential, with its renewable energy, shale gas and lithium sectors among the biggest draws. Investors though have been put off by high business costs and macroeconomic concerns, which Macri is trying to address.
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Moody’s raised its credit rating for Argentina in December, but it remains five levels below investment grade. Macri has removed currency controls, scrapped or lowered export taxes and slashed utility subsidies, yet the budget deficit and inflation remain stubbornly high. The economy is slowly returning to growth after last year’s recession, though growing levels of borrowing to cover the government spending shortfall has stirred fears of a rerun of the ruinous 2002 debt crisis.
Yet the mid-term congressional elections increased Cambiemos seats in both chambers of Congress, with Fernandez’s Unidad Ciudadana coalition suffering substantial losses. Macri’s victory – his bloc triumphed in the country’s five largest electoral districts – suggests that Argentinians are prepared to give him more time, despite suffering real economic pain. While the poverty rate has started to decline after a big spike in 2016, inflation, currently at about 20 per cent, the second-highest level in the region, is severely eroding living standards.
Macri, whose popularity rating rose to almost 50 per cent following the October polls, has been benefiting from public disenchantment with Fernandez whose long period in power was associated with corruption, cronyism and profligacy, in particular the provision of subsidies for inefficient or unproductive parts of the economy. Across Argentina there is a realisation that changes need to be made. Macri has also been helped by – and exploited – the turmoil engulfing his main rivals. Following their electoral defeat two years ago, the Peronists have fragmented, Fernandez’s continued leadership of the movement proving very divisive.
While she won a Senate seat in the October polls, she remains deeply discredited. Fernandez is facing corruption charges and was recently indicted for treason for allegedly covering up Iran’s possible involvement in the bombing of a Buenos Aires Jewish centre in the Nineties. She has denied all the allegations against her. Parliamentary immunity is protecting her, for now. Her continued political prominence, albeit diminished, is convenient for the president as it undermines Peronist unity.
Macri has taken advantage of divisions among his principal opponents, forming alliances with moderates among them in order to get his reforms through Congress. Last year the president negotiated with provincial governors, many of whom are Peronists, to reduce their spending. In a sign of his increasing political clout in the wake of the mid-term congressional elections, he secured a deal with most of the governors to drop legal claims for billions of dollars of federal funds they are owed in exchange for the proceeds of a 10-year government bond. The governors, who wield significant influence over their respective congressional deputies, also agreed to lower some taxes, accept spending limits and back pension reforms.
In December their support helped to secure congressional approval of a pension reform bill – expected to save the state several billion dollars – in the face of violent and widespread protests in Buenos Aires and a 24-hour national strike by unions. That was followed by the passing of tax reform legislation – which will see cuts to corporate and employer social security taxes. A reform of the labour code is being planned for this year, likely to include the provision of incentives to formalise undeclared workers.
Macri had been criticised by some on the right of his coalition that his reforms have been too modest. Until recently, he had been pursuing a gradualist approach in order to keep the public onside and the opposition at bay. His electoral success has emboldened him though he does not have much time to deliver economic gains. Presidential elections, in which he is expected to run, are just a couple of years away. He hopes to reduce the deficit from 4.2 to 3.2 per cent of GDP by the end of 2018, when he expects inflation to have dropped to 15 per cent. There are also plans to spend more on infrastructure projects, which, along with an anticipated uptick in foreign investment, may boost employment.
Taming inflation, a major public concern, will be key to his re-election prospects. If it remains high, it will doubtless be seized upon by the Peronists. They could yet challenge Macri if after four years in power he has little to show for his austerity measures. The Peronists may be down but they cannot be written off. Fernandez currently divides them, but she is a shadow of her former self and, as her influence diminishes, the movement might revive, especially if the hopes invested in Macri begin to fade.
Rodrigo Vivas and Guillermo Fremd are analysts at Alaco, a London-based business intelligence consultancy.