Argentina: Macri strikes historic deal with holdouts in a bid to stoke growth
March 14, 2016
Less than three months after taking office, newly-elected President Mauricio Macri has already delivered on most of his key campaign promises such as scrapping currency controls and sealing a deal with the country’s credit holdouts, thus fueling hopes that the country is on the brink of great change. With the aim of shrinking the fiscal deficit, the government ended the popular electricity bill subsidies in January and, according to officials, this change will contribute up to USD 4 billion to the public accounts this year. If managed efficiently, Macri’s agenda should boost economic activity. However, the main source of uncertainty lies in his ability to turn around the current economic trends against the backdrop of fragile domestic fundamentals and rising external risks.
The new government struck a milestone deal on 29 February with a group of creditors who had refused to restructure the debt following the country’s sovereign default in 2001. The agreement, which returns 75 cents on the dollar to creditors, must still get the final green light from the Argentinian Congress. Besides approving the deal, Congress needs to repeal two laws, the Lock Law and Sovereign Payment Law, which impede the country from paying the holdouts. Even though Macri’s party lacks a majority in Congress, there is hope that he will secure a consensus in his favor. The Argentine government has announced that it will issue bonds of over USD 10 billion to fund the payment, thus avoiding using the country’s depleting foreign exchange reserves.
While the agreement marks a substantial step for Argentina as it clears the way for the country to borrow again on international markets, there are uncertainties going forward. In the wake of the news, on 29 February, the Argentine peso, which started trading freely two months ago, lost ground against the U.S dollar and closed 14.0% weaker at 15.84 ARS per USD. The currency has lost over 22.0% of its value against the greenback since the beginning of the year. Macri’s commitment to quick change might turn out to be politically costly as high inflation due to the recent depreciation of the currency, job cuts in the public sector and the end of populist reforms have the potential to trigger public unrest. Macri’s approval rating remains relatively high at 60%, however, it has recently fallen considerably. Analysts at BofA Merrill Lynch outline what they see to be the main risks the economy faces going forward:
“Main Risks: If the Congress rejects the deal with holdouts this may derail the recovery. A too gradual fiscal adjustment may limit the confidence shock. Fiscal consolidation may affect the government’s popularity and governability. Wage negotiations may risk the inflation target. The economic crisis in Brazil and lower commodity prices are also risks.”
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. Following a period of data scarcity after the government declared “national statistical emergency” in December, the institution started publishing few official data earlier this month.
Author: Dirina Mançellari, Senior Economist