Cristina Fernández de Kirchner has left a toxic legacy for newly elected president Mauricio Macri. Asset prices were buoyed by his election victory the mid-term outlook for the Argentine economy is brimming with potential, but he must get through the next six months unscathed and consolidate a weak political base.
“It’s like an atomic bomb – cut the wrong wire and… ” says Rodolfo Santangelo, one of the two founding partners of M&S Consultores – an economic consulting firm in Buenos Aires. He leaves the rest of simile hanging in the air, but the point is made: Macri is inheriting a dire situation and making reforms will be complicated.
The point is re-made again and again by members of Buenos Aires’ business community. Alejo Costa, Puente’s head of strategy, likens Macri’s task to a game of stack-crashing game Jenga: “Sequencing is important. Macri will have to be extremely precise about making movements, otherwise everything might collapse.”
The gloomy consensus about the next six months ( tough and likely recessionary) is offset by the positive mid-term outlook (huge potential). Optimism rests on Argentina being a large, resource-blessed country with a skilled workforce and a balanced economy that has low leverage and that has been waiting for years for the right regulatory and financial environment to attract investment – both international and domestic.
Pessimism about the near term is based on the fact that this is a country that has high-and-yet-still-suppressed inflation, capital controls and an artificially high exchange rate that has led the central bank’s net reserve position to be zero – and with costly future FX forward contracts written in recent months that expire in 2016.
The fiscal deficit is big – no one knows what it is exactly, although the best guess seems to be at least 7.5% of GDP in 2015 – with recent, politically motivated Supreme Court rulings worsening the central government’s fiscal position for next year.
Lack of clarity is pervasive: no one trusts the government’s statistics, and one of Macri’s first challenges will be to return a sense of trust in government data. Meanwhile, the strongest card Macri has – that of an underleveraged economy – can’t be played because the country won’t have unfettered access to the capital markets until a deal with the holdouts among the bond investor community can be negotiated and then approved by Congress – all without a political majority in the Congress or Senate.
As Bank of America Merrill Lynch analyst Claudio Irigoyen states simply: “Implementation risks to Macri’s reform plan are high. I wouldn’t be surprised if the first stabilization plan fails because there will be an inability at the beginning to coordinate expectations in an environment where you need to bring down inflation but also adjust relative prices.
“All this implies higher headline inflation next year. There is also a risk of overshooting with the exchange rate [devaluation], and so risks the stabilization plan – we have seen this many times in Argentina. And then you have to go to a second stabilization plan around March.”
An early test will be wage negotiations with the teachers of Buenos Aires City – just as possible pass-through inflation from devaluation hits headline rates. The level of this settlement will send a strong signal to subsequent negotiations with unions. And failure to agree a pay deal – and subsequent strike action – would be very politically damaging.
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