In the weeks since his inauguration, Argentina’s President Mauricio Macri has made significant steps in the right direction as he spearheads major shifts in economic and foreign policy. The shifts signal Argentina’s break with the populist agenda of former presidents Néstor Kirchner (2003-07) and his wife Cristina Fernández de Kirchner (2007-15).
Under the Kirchners’ presidencies, highly interventionist economic policies and a penchant for expropriation made for a hostile commercial environment and triggered steady capital outflows. In addition, Argentina’s deepening alignment with hard-line leftist regimes in Latin America strained diplomatic relations with hemispheric leaders, including the US and the UK.
In contrast, the new president, who was elected in November 2015, has set his sights on Argentina’s return to global capital markets as early as next year, boosting foreign investment in the country, and strengthening trade and investment ties with regional and extraregional partners. Indeed, the president was warmly welcomed at the recent World Economic Forum (WEF) in Switzerland as the first Argentinian president to attend the conference in 12 years.
Notably, the US has agreed not to automatically vote against Argentina accessing funding from multilateral lending agencies such as the World Bank. Instead, the US will assess Argentine projects on their merits.
Days after assuming office, Macri kept his campaign promise and removed export taxes on agricultural products, including grain and beef, while cutting the tax on soybean exports by 5% to 30%.
In a bold move, the new government also removed currency controls that had been in effect for four years. The Argentine peso plunged 30% to trade at 13.78 per $1 on December 13, effectively closing the gap between official and black-market rates.
One of the biggest challenges facing the new government is the standoff between Argentina and the so-called “bond holdouts,” who in 2012 won a judgment that some estimates place at $15 billion. With foreign reserves steadily dwindling (amounting to $25 billion at the end of December) and the fear of “me too” claims, ex-president Cristina Fernández had staunchly refused to settle and triggered defaults on restructured bonds.
At the WEF meeting, the president confirmed that he and his team will meet with representatives of the creditors and a mediator in the US in February in a bid to reach a mutually acceptable agreement. Argentina is willing to offer 120 cents on the dollar versus the creditors’ demand for 350 cents on the dollar. A successful conclusion would clear the way for Argentina to re-enter financial markets from which it had been excluded since its historic default in 2001.
Perhaps unintentionally, Macri has become a regional pro-democracy champion of sorts by breaking ties with Iran and Venezuela, close allies of the former president. Moreover, Argentina’s representatives also met with the IMF in Davos as a first step in improving relations that had disintegrated under Cristina Fernández as the fund steadfastly rejected official statistics on growth and inflation. Argentina has agreed to submit to an IMF audit — its first in nearly a decade. Despite his generally conciliatory stance, Macri so far is not prepared to budge on Argentina’s claim on the Falkland Islands.
While applauded by markets, the reforms have not been without challenges at home. Macri has been labelled as authoritarian by some after temporarily appointing two Supreme Court judges by decree and firing the head of the media regulator. In addition, Macri fired an estimated 10,000 public sector employees, including Senate and Cabinet workers, in the first week of January as the government reviewed job contracts issued under the previous administration.
One of the main threats to the president’s reform agenda is the relative weakness of the ruling three-party coalition that includes Macri’s Republican Proposal in the legislature. Indeed, the Kirchners’ FV or (“Front for Victory”) opposition party still holds a majority of seats in the lower house. At the local government level, the FV is still quite powerful, having won 50% of the recent gubernatorial races. Nevertheless, investors are now taking a second look at Argentina.
Michelle Campbell is a Senior Economist on D&B’s Global Data, Insight & Analytics team. Based in the UK, she covers the Latin American region for D&B Macro Market Country Insight Products. In addition to her experience in the financial services sector, Campbell has worked as a visiting lecturer in the UK and in the Caribbean. Michelle holds a master of science degree in economics from the University of the West Indies in Trinidad.