Macri’s election success is no cure-all for Argentina’s structural issues


Jeremy Weltman
Published on:

Risk experts offer a lukewarm assessment of the sovereign borrower after the recent legislative elections, noting the improved economic and political situation, but also the formidable challenges to reforming the economy.

Say 'challenges': Mauricio Macri can't help but show the strain behind
his smile

Mid-term legislative elections for half the lower house seats and a third of the Senate provided an endorsement for president Mauricio Macri’s three-party, centre-right Cambiemos coalition – seemingly strengthening his position for the pro-market reformist agenda that appears to have his supporters and financial markets enthused in equal measure.

The voting in October was certainly a measure of confidence in Macri’s record since ousting in 2015 Cristina Fernández de Kirchner’s left-wing Peronist government, whose populist economic policies were blamed for pushing Argentina’s economy into crisis and the sovereign borrower into default.

The change of direction has led to a steady, but notable, improvement to Argentina’s risk score for the past two years (see chart), pushing the country higher in Euromoney’s global risk rankings, to 93rd out of 186 countries.

Argentina has moved from tier five – containing the highest default risks – to tier four, just below Dominican Republic and above Algeria in risk terms. Scores for almost all the political and economic indicators are higher.


Taking stock

Cambiemos won in 13 of the 23 provinces, notably in areas where the largest populations reside, but is still short of majorities in each chamber of Congress: increasing its seats from 86 to 107 in the lower house, where it needs 130 for a majority; and from 15 to 24 in the Senate, below the 37 required.

Consequently, although there is a degree of optimism in Argentina’s prospects, there is also one of stark reality given the government’s predicament – cajoling the opposition to ensure the passage of bills – and sub-par performance of the economy.

Economic vulnerabilities do not appear to have received due attention, but are a reason why Argentina is still considered a medium-to-high risk on Euromoney’s scoreboard.

Roberto Cervelló Royo, an associate professor at the Universidad Politécnica de Valencia, believes that when economic situations have been so dramatic – as in Argentina’s case, ending up as a crisis – any change usually delivers better scenarios.

He mentions the lowering of taxes, delivering a populist boost, and signs of a small economic recovery, but also states: “After 13 years of Kirchnerismo, and almost 70 years of Peronismo, I am not sure if Macri will do better.”

“Inflation is extremely high and the economic crisis is still strangling the urban and rural, less-privileged population.”

Alfonso Dingemans, a post-doctoral research fellow at the Universidad de Santiago de Chile, takes a similarly, grounded view, quite detached from the flurry of excitement in the financial markets.

“The latest elections contained some interesting surprises, but the structural problems of Argentina – economic, social and political – will not be solved because of these results,” he says.

“In addition, I’m not so sure to what extent it would improve Macri’s political support and/or legitimacy, and therefore his ability to press on with his reform agenda. The country remains ideologically deeply divided.”


Other contributors note vulnerabilities, including the sharp rise in the current-account deficit, which is likely to be around 3% to 4% of GDP in 2017-2018 thanks to an over-valued currency.

Forecasts from the IMF show GDP growth backsliding a little in 2018, decelerating to 2.5% from 2.75% this year, and clearly any halting of the cyclical upswing in the global economy would set the country back.

Inflation is seen coming down, but only to 17% in 2018, from 27% in 2017, and the unemployment rate is close to 9%.

Undoubtedly, Argentina has emerged from the worst of its problems, and further gradual improvement will be rewarded in time by credit rating upgrades; currently the sovereign is rated B/B3/B+ respectively by Fitch, Moody’s and Standard & Poor’s.

Encouragingly, the government has confirmed the primary fiscal deficit (1.5% of GDP) has come in below target (2%) in the first half of this year.

However, the headline deficit, while falling, is still too large (around 4% of GDP) and to really make ground a bigger structural reform effort is required.

This, in turn, requires a broader political will to back Macri in the national cause – a crucial factor that cannot be guaranteed with the next presidential elections coming into view in 2019.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.