Argentina: Judging Macri’s judgement
President Mauricio Macri’s success in Argentina’s primary elections suggests that his gradualist approach to reform might be the right strategy after all.
Visiting Buenos Aires in August just before the country’s primary elections that set the expectations for the outcome of the crucial mid-term elections was, as ever, an interesting experience.
Of course, all the bankers and financiers I met backed president Mauricio Macri and his reform process. The new administration, which began its devilishly complicated task of returning Argentina to economic orthodoxy in December 2015, clearly has the goodwill of this community – as it still does with the international financial community.
But the support was mixed with criticisms of his tenure, two of which are worth considering.
One is that Macri is playing too nice. “He’s brought an argument to a gunfight,” was one comment. Another very senior banker seriously suggested Macri should have ordered that the car of one of his political opponents, who holds a senior position in the state system, “be smashed-up to get them to quit their post”. The banker’s point being this is how Argentine leaders have, in the past, got around constitutional limits to their powers.
|President Mauricio Macri was clearly in a difficult spot when he won|
A more widely made comment was that Macri’s administration could – and should – have had allegations of corruption against the former president Cristina Kirchner more vigorously pursued by the judicial system. “She should be in jail,” said more than one banker.
However, this was far from a consensus view. “He was elected to clean up politics and so he could have hardly played dirty,” says one; and another pointed to the desire of investors, national and international, to see increased effectiveness and independence in the country’s institutions. Any perception that Macri was using these levers of power in self-interest would, they argued, have backfired by working against investment decisions.
It was also suggested that it was a clever tactical strategy to seek an electoral battle with Kirchner as a way to polarize the country’s politics ahead of the mid-terms. This makes the voters’ choice a simple one – go back or go forward – and negates the appeal of third party or compromise candidates who, it is thought, would be more likely to back Macri in a head-to-head fight with Kirchner.
I found the other major criticism more persuasive: Macri should have been explicit with the Argentine people about his economic and financial inheritance. The model employed by Kirchner’s administration was running on empty before she lost to Macri. The central bank was virtually insolvent and, towards the end, the Kirchner government was relying on ridiculously generous (and harmful) forward FX contracts that passed the problem to Macri. (And from which some banks reportedly profited handsomely and then ‘hid’ these gains by boosting provisions).
Traditionally this is how the Argentine populist economic model worked: fiscal laxity puts strain on inflation until the currency sees sharp depreciation and the crisis devalues the relative cost of the build-up in government expenditures.
Macri’s administration did not want the crisis – it chose to liberalize FX – and raised billions in dollars in the international market that (in part) stabilized the peso exchange rate. But without the bust, the correction has arguably been more complicated, both economically and politically. Growth has returned but slowly, frustrated by a lack of investment. It has also been uneven, with much better rates of recovery in the countryside, which is benefiting from FX and export tax reforms, while the industrial and populous areas around Buenos Aires continue to suffer a slowdown and high rates of unemployment.
Macri was clearly in a difficult spot when he won. He wanted to turn an economy around quickly and push through significant reforms. He may have reckoned that revealing the ruinous state of the economy would have knocked consumer and business confidence just when he was attempting to build momentum. It was a big political and economic calculation: would revealing the size of his challenge buy him time to effect the turnaround? Or would it make the job harder still?
Ultimately, emphasizing the toxic state of his economic inheritance would probably have only made sense had Macri decided to go for a sharper, more painful and front-loaded fiscal adjustment. But very early on in his run for president he was persuaded of the need to adopt a deliberately gradual approach to cutting the fiscal deficit by slow reductions to subsidies and tariffs.
Macri believed anything other than a gradual approach would have been political suicide. The gradual approach essentially meant keeping fiscal expenditures stable and reducing them relatively as growth and investment boosted revenues.
As the primaries approached, the opinion polls suggested this balance of economic and political could backfire. “And it’s too late now to say what a mess he found when he won – he owns it now,” said one banker.
But was this second call by Macri really a mistake?
I left Buenos Aires sympathetic to the view that Macri would have gained a small, but potentially vital, extra sliver of political support in the upcoming midterms by being clearer about just how close to collapse the Argentine economy was at the end of 2015. But as I returned to Sao Paulo the results of the primaries were beginning to feed through and Macri had performed surprisingly well. And his administration should have increased its support by the midterms.
Thankfully it looks like Macri was right in both these key calls – just as he was to hold his nerve and stick to his political and economic strategy this year while the polls went against him and his supporters in the business community (and journalists wishing his reform process well) got increasingly nervous.