Argentina’s delicate balancing

President Mauricio Macri’s economic inheritance was toxic; his policy of gradual fiscal realignment looks like it will lead to success in this year’s crucial mid-term elections, but the country desperately needs investment to maintain the transition.

Let me answer in the words of a financial investor I was talking to last month,” says Rodrigo Park, head of economics research for Santander Rio.

“He asked me why FDI [foreign direct investment] was so low and I said: ‘You should tell me.’ And he did, and I agree with what he told me. ‘One reason is fear. And the other is the fiscal deficit. If there is no fiscal consolidation there is no stabilization in the economy. These are the two main reasons why there has been no significant increase in FDI.’”

That is why direct investment has failed to materialize – abroad or domestically, Park tells Euromoney. And that investment is critical for Argentina. Without it the economy will, at best, stutter along in low-but-positive growth and will fail to attain the level that is needed for economic rebalancing and for the government to reduce its sizeable financial deficit (currently close to 7% of GDP).

But, as Park points out, many investors are waiting for a fiscal adjustment before committing capital. Solving this economic contradiction will need skill, patience and luck. And as ever in Argentina, politics will make the government’s attempts to untangle the economic mess it inherited difficult.

Former president Cristina Kirchner will win a seat in the senate in the coming mid-term elections on October 22. But the broader picture is positive for president Mauricio Macri to the point where Cristina’s presence in the senate should become almost an irrelevance.

The country held primary elections on August 13 that effectively serve as a national opinion poll for the mid-terms; Macri’s Cambiemos party did better than had been predicted. Macri won the important province of Buenos Aires by a whisker, but there are many reasons why Cambiemos should fare better in October.

First, the economic recovery is finally being felt in the industrial, employment-heavy industries that are prominent in Buenos Aires.

Second, higher turnout in the proper elections should favour Cambiemos (historically Peronists are more likely to vote in early-round or primary elections).

Third, the low recognition levels of the leading Cambiemos candidate, Esteban Bullrich, will be less of a factor after two more months of electioneering.

And, finally, the distant third place of Sergio Massa of the Judicialist Party in the August poll is likely to encourage his supporters to vote tactically and more of Massa’s supporters are expected to drift to Cambiemos than vote for Kirchner.

To read the full article visit Euromoney’s website


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