Argentina Politics January 2016


Argentina's new president acts quickly to jumpstart the economy

Mauricio Macri, who triumphed in December’s presidential elections by tapping into voters’ exhaustion with Peronist dominance, is quickly moving forward with reform implementation and thus fueling expectations of an economic U-turn. Campaigning on an economic recovery by changing the previous government’s unorthodox policies, Macri succeeded and garnered over 50% of the vote. A month after taking office, the new President has already delivered on some of his key campaign promises, such as slashing export taxes and removing currency controls. If managed efficiently, Macri’s agenda should jumpstart growth and facilitate Argentina’s access to international markets. The main source of uncertainty lies in Macri’s ability to turn around the current macroeconomic trends against the backdrop of weak domestic fundamentals and a challenging external environment.

Following more than a decade of Kirchner dominance, Macri’s reform agenda comes as a breath of fresh air for the Argentine economy, which has been in the doldrums for years. Last month, the new government scrapped taxes and quotas on agricultural exports. This was a beneficial move for the country’s farmers, who have been holding onto their crops due to rising inflation and high export taxes. As a consequence, they are now starting to sell again. Amid depleting foreign exchange reserves, the new government also removed currency controls by letting the peso trade freely. In the wake of the news, the currency depreciated sharply against the U.S. dollar and closed the day 40% weaker (17 December: 13.31 ARS per USD). However, the peso recovered some lost ground later on and at the end of the month traded at 12.94 ARS per USD. As a result of the steep fall, the gap between the official and unofficial exchange rates is now much smaller compared to the pre-depreciation period.

The tax reforms coupled with a weaker peso are expected to benefit the country’s exports, increase business profits and subsequently fuel growth. However, the other side of the coin is that the depreciation of the currency represents a substantial risk to inflation, which is already in the double-digits. If real wages don’t keep up with the increase in consumer prices, a weaker peso will harm private consumption, which, in turn, will negatively affect growth. Under Kirchner’s administration, growth was broadly driven by government spending and popular policies such as energy subsidies for consumers. Macri is firmly aiming at changing the drivers of economic growth by attracting more investment in the country. He is also moving ahead with plans to revise the subsidies on utilities in order to reduce the budget deficit. Analysts at JPMorgan comment:

“Rebalancing the monetary and fiscal equilibrium to support growth in the medium term will require that the economy undergo a severe FX devaluation that will push the economy back to recession in the short term. Resolution of these issues stands out as critical to raising investment and kick-starting growth in an economy where consumption and net trade will be less supportive. Indeed, investor expectations will only be satisfied if policies that serve to finance growth, as opposed to those that just serve to finance the deficit, are engaged credibly.”

The new government hopes to seal a deal with the U.S hedge funds over USD 5.4 billion in defaulted debt as soon as this month, which would give Argentina access to international capital markets. The optimism generated by the quick shift in political landscape and Macri’s commitment to change is fueling expectations for economic improvement. However, the optimism will not last long before investors and voters want to see some tangible results. As part of the overhaul, the new government reformed the country’s statistical agency (INDEC) by changing the staff and the methodology. For years, INDEC has been viewed with suspicion both within the country and abroad for misreporting economic figures. Since the government declared “national statistical emergency” last month, the institution has stopped releasing official data.

Due to the weak domestic fundamentals, it is still early to estimate to what extent the economy may recover going forward. Given the external challenges and the policy adjustment, the economy will likely decelerate in 2016 before speeding up in the following years. FocusEconomics Consensus Forecast panelists expect the economy to expand a weak 0.2% this year, which is down 0.3 percentage points from last month’s forecast. For 2017, panelists expect the economy to accelerate significantly and expand 3.2%. Moreover, our panel expects non-official GDP to contract 0.4% this year before rebounding and increasing 3.7% in 2017.

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Argentina Politics Chart

Argentina Exchange Rate January 2016 6

Note: Daily international reserves (USD bn) and daily spot exchange rate of official and non-official Argentinean peso (ARS) against U.S. dollar (USD).
Source: Argentinean Central Bank and Thomson Reuters.

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