Argentina: Far-reaching reforms in sight after ruling coalition earns landslide victory
November 7, 2017
President Mauricio Macri was unequivocally backed by the Argentine electorate in the second round of mid-term legislative elections held on 22 October. The ruling Cambiemos (Let’s Change) coalition clinched an important victory in the elections, in which roughly a third of senate seats and half of lower-house seats in the Chamber of Deputies were contested. Seen as an evaluation of Macri’s first two years in power, the vote gives the president a strong mandate to pursue his pro-business reforms after two years of painful measures that targeted correcting market distortions. Markets reacted positively, with Argentine stocks, the peso and dollar bonds all rallying. The result is monumental not only because it represents a dramatic shift in domestic politics, but also marks the best opportunity in decades to unshackle the economy from low productivity and enact probusiness reforms.
The result was a landslide victory for the ruling coalition, which scored important victories in the country’s electoral districts, including in the five most populous cities. The ruling platform increased its nationwide vote share from the first round of the 2015 presidential elections and obtained over 40% of the national vote in both legislative chambers. Despite falling short of a majority in both chambers, the result has left the splintered political opposition in disarray and without a strong leader after former president Cristina Fernández de Kirchner came in second in her bid for a senate seat.
The outcome gives Macri ample room to maneuver and a sufficient timeframe to gradually implement his ambitious economic reforms to minimize economic hardships. The government is eyeing far-reaching reforms targeting the labor and pension system, the public sector and the tax system. These reforms follow the dismantling of exchange rate controls, the removal of taxes on most exports, and the slashing of subsidies on public utilities since Macri took office in 2015. An ambitious tax reform is first on the agenda, and preliminary details were unveiled in late October. The reform is expected to be fully implemented in a period of five years to avoid a steep drop in government revenues. It envisages simplifying the complex tax code and closing loopholes. It also proposes lower taxes on employer’s social security contributions, firms that reinvest profits and consumer goods such as cellphones.
The underlying objective of most of these reforms is to shrink the government’s chronic fiscal deficit. The government, however, is in a difficult position. Stubbornly-high inflation forces it to keep social spending elevated and continue accruing external debt to finance the deficit. However, if Macri succeeds in striking deals and implementing reforms, the country’s economic recovery should gain traction and the economy should become less reliant on external financing. On 30 October, S&P Global Ratings hiked Argentina’s credit rating up a notch, from B to B+, citing growing confidence in the implementation of reforms, which could rekindle faster growth in the upcoming years.