Country risk expert insight: Argentina faces struggle to modernize economy
Euromoney Country Risk experts believe drastic change is in the pipeline for Argentina — but its newly elected government has a fight on its hands to push through economic reforms.
President-elect Mauricio Macri celebrates, but he now faces the tough task of keeping the economy afloat
On Sunday, Argentina narrowly voted for drastic political change in the country. President-elect Mauricio Macri has given ex-central bank chief Alfonso Prat-Gay the nod as finance minister, a move suggesting he intends to move quickly to restore the bank’s autonomy and free up the economy. ECR asked three experts for their views on how the political shift will impact the country.
Fernando Callorda, economic consultant and professor in ESEADE, Buenos Aires, Argentina
“Argentina will be governed by Macri, the leader of a centre-right coalition. The pillars of his campaign were to combat the [alleged] acts of corruption of the previous administration, improve access to public information and that relating to government acts — as he has already done in his role as mayor of the City of Buenos Aires — and to create a solid justice system.
“He is expected to decrease the perception of rife corruption in government, improve the system of local statistics and to improve open government. Macri is also expected to negotiate better access to international capital markets.”
“These changes will improve the ECR index of corruption, the index of information access, the index of regulatory and policy environment and the index of government non-payment.”
“There is a significant challenge to his ambitions, however. Frente para la Victoria (FPV), the outgoing party, will maintain an absolute majority in the Senate and also a majority in the House of Representatives, while the PRO, the new party in the Executive, will not own quorum in the two chambers. This situation will hamper the enactment of new laws.
“Furthermore, the new government will be conditioned by having won the ballot so narrowly, just 3% separated Macri from Daniel Scioli, the candidate of FPV. This, coupled with social and union groups attached to the outgoing government, will make the necessary changes to several public policies needed to reduce the fiscal deficit very difficult.
“For the latter reason, I expect to see a decrease to the ECR score for government stability, and anticipate any increase to the other indexes to be limited in the short term. My guess is that after the first months of government, the ECR political assessment index should return to the values near the end of 2011. This would be an improvement of 30% compared with the current situation. The future trend depends on public policies adopted in the first 100 days in office.”
Gabriela Nudel, chief economist, Fundación Capital in Argentina
“The starting point for the next government is complex, as it has to balance a burdensome economic heritage: low reserves, a deteriorated central bank, high inflation, FX tension, economic stagnation, low job creation, a partial default and high labour costs in dollars.
“The new government takes office when financial needs for the Treasury will be at its highest (December).
"This shows that the next government won’t have an extensive ‘honeymoon’ and the window of opportunity to recalibrate the economics dynamics is short to none.
“The policy goal ought to be more economic growth and less nominality for economic variables. Also, liquidity is missing in CB reserves. Thus, Macri’s new government has to make a rigorous assessment of the economic situation in the first days of government, and decide how it is going to proceed.
“I expect a faster recalibration of the economy supported by a comprehensive economic programme and a reunification of the FX market and, if feasible, some debt issuance in financial markets. Thus, a renewed credibility on the economy, a new mix of relative prices and a [bondholder] holdouts final solution may arise pretty quickly.
“In any case, inflows of dollars are imperative, at least financial ones in the very beginning, until the country is able to obtain dollars from traditional channels (trade and foreign direct investment).
“The next 90 days will be critical. Releasing FX controls is mandatory to boost investment, but it would not be harmless. Furthermore, it is not the same doing it with liquidity than without it.
“Overshooting may arise, that is why implementation does matter. No devaluation may gain competitiveness by itself; it requires a profound and comprehensive economic plan to smooth the pass through from devaluation to prices (paying attention to the evolution of public spending, monetary issuance and wages).
“Indeed, it is likely that a new government will, in the short term at least, watch the pass through to prices very closely, and call for an agreement between unions, companies and government.
“In this regard, a lot of back and forth on the implementation of a new public agenda may take place. Not only because of political restrictions (consensus has to be reached as the winning political party has no majority in Congress guaranteed) but social ones (inflation is 30%, no new jobs are being created and the economy is heavily subsidized).
“The management of these restrictions would lay the ground work for the governability in the short run. It is likely that economic reordering will be alleviated with more financing, but expectations have to be delivered.”
Chief economist for South America at a leading bank
“This election is going to mean a shift to more orthodox policies. What we know about Macri and his economic team is that they are aiming for a quick adjustment, which includes the exchange-rate unification. They probably won’t be able to completely open the capital account because there is a very low level of reserves. At this point there is more capital willing to leave Argentina than come in.
“Unification of the exchange rates is a very good signal for exporters, especially in the agricultural sector. It will provide a boost to foreign reserves. They will probably also negotiate for a good proportion of those dollars to remain at the central bank, maybe exchange them with some financial instrument that guarantees the farmers that they will have access to dollars when they need them; they don’t need to store them at their property.
“Another thing that is very good for the long-term prospects of Argentina is that the new government is committed to restoring institutions. The aim will be to restore central-bank credibility and independence.
“Of course in doing that they will also have to tackle the fiscal front and I think they will be willing to do this quite fast in terms of subsidies that are going to sectors of the population that don’t need them, such as energy and transport subsidies for the middle and upper classes.
“That will help in terms of not needing the central bank to finance the government. At the same time they are willing to put Argentina back into financial markets. It will be key to begin closing the fiscal deficit and to start to go abroad for resources.
“The judicial problem with the holdouts needs to be settled; they need to be paid. And opening up relations with the IMF, the World Bank and multilateral institutions will help people be confident in investing in Argentina.
“If the government takes those steps, issuing debt in international markets shouldn’t be a problem.
“Another step will be to devolve some power to congress. Over the last 12 years a lot of power has been transferred to the executive branch. That is going to help Macri initially because it means there is a lot he can do without the support of Congress, but of course for the medium-term prospects of the country you want to have more checks and balances. Macri understands that.
“I’m not saying it’s going to be easy; the result of election is not perfect. It was a very close call in the second round – 48% of the population don’t believe in what Macri has to offer. We all need to watch the developments carefully.”
This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.