Argentina: Macri's victory fuels expectations for economic improvement
December 2, 2015
Argentina elected Mauricio Macri—the representative of the conservative Let’s Change coalition (Cambiemos)—as Cristina Fernandez de Kirchner’s successor in the run-off elections held on 22 November, thus fueling expectations of a shift toward more orthodox macroeconomic policies. Macri’s biggest challenge will be addressing the country’s macroeconomic imbalances and also building international confidence. If managed efficiently, his agenda should facilitate the country’s access to international markets and kick-start growth. The main source of uncertainty lies in the new government’s ability to revive the economy against the backdrop of weak domestic fundamentals and a challenging external environment.
Macri garnered 51.4% of the vote and triumphed over Daniel Scioli—the candidate from Kirchner’s Front for Victory party (Frente para la Victoria). Macri’s victory was a surprise following Scioli’s win in the first round as well as opinion polls’ results, which had continuously positioned Scioli ahead of Macri. Shortly after the elections, the newly-appointed President named his Cabinet, which incorporates members of different political movements, including a member from the outgoing government. Meanwhile, pressure is mounting on the Central Bank governor Alejandro Vanoli to step down in order to make way for the incoming government to go ahead with its market liberalization policies.
The election result represents a milestone in Argentina’s political history as it marks the end of Peronist dominancy following more than a decade of left-wing leadership. Macri has promised to unify the foreign exchange market, remove capital controls, deal with the country’s multiple fiscal problems, scrap the previous government’s subsidies and eventually resolve the holdout saga with the U.S. hedge funds. However, his to-do list will not be easy to implement as Argentina’s domestic problems such as depleted foreign reserves, poor statistical data, an overvalued currency and elevated inflationary pressures, are further exacerbated by external risks, in particular the economic slowdown in Brazil and low commodity prices. Complicating things further, a divided Congress will represent an obstacle for Macri as it might make it more difficult for his government to pass important legislation.
Expectations of a possible liberalization of the foreign exchange market have significantly increased the demand for U.S. dollars in recent months. This has urged the Central Bank to intervene in the FX market, which has in turn depleted its foreign reserves to levels not seen in nearly a decade. Recent data show that, in November, international reserves plummeted to USD 25.8 billion, which marked the lowest reading since April 2006. Iker Cabiedes, Economist at J.P.Morgan, adds:
“We expect FX adjustment to be accompanied by a consistent monetary tightening to contain inflation expectations by keeping FX pass-through modest. […] In our view, growth will be subject to a politically complicated shift from a pro-consumption to a pro-investment growth model. That said, expected fiscal consolidation and FX adjustment are likely to have a recessionary impact on consumption, while catalysts to boost investment early in 2016 are not evident.”
The optimism generated by the shift in political landscape and Macri’s commitment to change will give the benefit of the doubt to the new government, however, the optimism will not last long before investors and voters will want to see some tangible results. In late-November, Moody’s changed Argentina outlook from stable to positive on expectations that the country’s policy stance will become more credit positive under the new government. Macri will inherit a beleaguered economy. However, due to the weak fundamentals, it is still early to estimate to what extent the economy will recover going forward. This year, growth was fueled by unsustainable macroeconomic policies such as an increase in fiscal stimulus, so the next administration’s challenge will be to bring the economy onto a more sustainable growth path.
Author: Dirina Mançellari, Senior Economist