This week Argentina began its presidency of the G20. This prominent role comes shortly after a major congressional victory for President Mauricio Macri and his economic reform agenda. Is Argentina finally back on the world stage?
While the Trump era and Brexit put the commitment of major superpowers to free trade in doubt, a new market-friendly posture is manifest in Argentina as it assumes the presidency of the G20 in 2018. After years of isolation and economic turmoil under the Kirchner presidencies, Argentina is back on the global stage at a time when globalisation lacks strong proponents of the free-market economy.
The coalition of Mauricio Macri won a sweeping victory in congressional elections in October. It strengthened the president’s transformational change agenda, which includes a platform of domestic fiscal and structural reforms. Meanwhile, Macri’s new efforts as a vocal advocate for Argentina abroad is delivering further political capital to his administration.
Departing from the approach of his predecessors, the rightward-leaning Macri government adopted free market principles and quickly implemented reforms in the months following his election at the end of 2015. It introduced measures to normalise the economy, lifting currency restrictions and scrapping barriers to the flow of capital, devaluing the Peso, removing taxes on food exports, as well as striking an agreement with the infamous bond holdouts. The latter was symbolic, as Argentina officially returned to the international stage in August 2016 with a successful sovereign bond sale of ARS$16.5bn (AUD$1.25 billion). Underwriters received close to ARS$70bn in orders, providing an early measure of proof of the market’s renewed confidence in Argentina.
Since then, the Macri administration has implemented further deep reforms, eliminating import restrictions, liberalising the exchange rate, cutting bloated subsidies and targeting inflation, which still hovers in the double digits after the devaluation of the peso resulted in a surge to 40 per cent in April 2016. Macri tackled the fight with international creditors, bringing it to a resolution, and he is credited with improving the accuracy of state statistics.
However, Argentina’s comeback on the international stage has not spared the country from other challenges. While the outlook for international trade looks promising for Argentina, the domestic political situation has been deteriorating. The legacy of bad economic policies of Argentina’s former presidencies, consisting of reckless spending, self-defeating price controls and regulatory controls, as well as challenges with public debt restructuring, gave the new government a difficult first term.
In an effort to flag investment opportunities, Buenos Aires hosted Argentina’s first Business and Investment Forum last year, a strategic overture to international partners intended to attract inbound investment. This initiative was a significant move, as the lack of confidence in Argentina has resulted in the country receiving a relatively small share of foreign direct investment compared to other South American nations. The event was an opportunity for Macri to showcase his reforms to the world, but it seems like international markets wanted to see more reforms before investing. Foreign direct investment contracted by 50 per cent from ARS$11.8 billion in 2015 to ARS$5.7 billion in 2016. A strong rebound of ARS$14 billion is expected by the end of 2017, representing an almost threefold increase.
Macri’s actions are restoring Argentina’s economy for the long term, but they have resulted in short-term side effects that have left the majority of citizens disappointed and even outraged with the necessary adjustments to inherent subsidies. Macri had the support of a majority of the public earlier this year but it is not clear if the Argentine patience will hold up against continuing inflation, unemployment and slow growth. Argentines have seen price increases, especially in energy where gas tariffs have quadrupled; tariffs for electricity have increased sixfold. The country’s supreme court ruled the rise in gas illegal, illustrating the roadblocks to market-oriented reform. In July, the benchmark equity index MSCI declined to upgrade Argentina from frontier to emerging market status, roiling Argentine markets and sending the peso tumbling. MSCI defended its decision with the caveat that it was too early to judge the impact of the market-friendly reforms.
Following the midterm elections, the government is cautiously optimistic that the macroeconomic measures will attract investment from both local and foreign companies, leading to the creation of jobs. The increase in both the quantity and quality of employment is the strategy of the Macri government to end poverty in Argentina. While working to diversify the country’s economy, the government also intends to improve its infrastructure, education and health systems as well as Argentina’s legal framework.
These efforts are bearing fruit; tenders on infrastructure projects are up by nearly 200 per cent and the government has been negotiating with Peronist unions. In mid-September, the government sealed a deal with unions funding Macri’s universal healthcare coverage plan with ARS$8 billion from the unions’ Social Solidarity Fund. The ambitious plan offers coverage to nearly 15 million people currently uninsured. There was organised domestic opposition to his education reform led by the public sector and other labour unions. However, public sentiment can now be measured by October’s midterm elections which showed strong support for Macri across Argentina’s five urban centres, a situation not seen since 1985.
Macri has promised economic credibility and transparency to the international markets, and the country is starting to see a spike in investment. Macri expects the economy to grow 3.5 per cent in 2017. The IMF, which predicted a 1.5 per cent contraction last year, expects that Argentina’s economy will rebound in 2017 with a more moderate rate of 2.8 per cent, with which Bloomberg agrees.
Either way, by implementing fundamental changes in its underlying economic strategy and operations, Macri’s administration is creating a nationwide transformation in the business culture, and the international markets are responding with keen interest. While it may take a few years for Argentines to reap the benefits of Macri’s pro-business reforms, the country’s economy is on track for a powerful rebound and is predicted to accelerate in 2018.
Fernando Rodriguez has a degree in economics and a master’s degree in international trade from Monash University. He leads the South America practice for Swann Global and is a director of Magellan Australia.
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