Is Macri's Argentina ready to rebound in 2017 ?

After one year in office, Argentina’s President Mauricio Macri is still hoping for better days to come for his country. Elected in late 2015 with 51% of the votes, the former Buenos Aires’ mayor had promised to put Argentina back on track with an ambitious and bold programme. If some signs might suggest the country’s situation is stabilizing, the results have yet to be seen so far.

For many of the international investors observing the situation in Argentina, Macri’s election meant good news as he proved to be a credible businessman and a pragmatic leader. When he took charge, Argentina was banned from international capital markets as a result of the country’s dispute with vulture private funds holders of the country’s debt. The National Institute of Statistics and Censuses (Instituto Nacional de Estadisticas y Censos, INDEC) had been censured by the IMF in 2013 for publishing tampered figures. Underinvestment in infrastructure pushed the energy network to the brink of collapse, as the abundant use of cheap and subsidised energy caused a lack of capital for public services, thus resulting in regular blackouts.

Inside the first six months of his term, Macri proceeded to drastic changes in order to reduce the budget deficit (5,4% of GDP in 2015) and attract investment : devaluating the peso, removing export taxes and striking a deal with vulture funds. The president also cut energy subsidies as they have represented a growing part of government spending. In 2014, these subsidies amounted to 12,3% of government spending compared to 1,5% in 2005. He also rehabilitated the INDEC although this move has revealed the harsh reality of the country’s economic and social situation. For example, according to government statistics in 2013 (the last year they were published), 4,7% of the population at that time was in a situation of poverty, whereas the estimations from the Catholic University of Buenos Aires amounted to 27,4% for the same year. In 2016, as the INDEC published statistics for the first time since 2013, it estimated the poverty to represent as high as 32,2% of the population. Consequently, Macri’s task has progressively appeared even more difficult than it was at the time of his election. However, the rehabilitation of the INDEC has allowed the government to better target inflation - which has remained high in 2016. In an Economic forecast published in November 2016, the OECD states that inflation should progressively soften in 2017 through a repressive monetary policy.

With an unemployment rate around 9% and a GDP annual rate expected to fall sharply (between -2,5% and -3,5% depending on sources), 2016 has been a difficult first year in office for Mauricio Macri. But the president stays optimist and so do international observers. The economy is supposed to rebound in 2017 given the reforms implemented lead to the expected results.

However, while these reforms seem to go in the right direction, a lot of questions can be asked as to whether the macroeconomic policies’ package can deliver a sustainable and inclusive growth for the next years to come. In order to reduce the country’s budget deficit, disinflation, fiscal consolidation, tax reforming (aiming at lowering trade barriers and reducing administrative burden) should be implemented gradually so they can benefit to every part of the society. Moreover, these policies raise other questions regarding the state of international business. Attracting sufficient foreign investment will not be an easy task given the context in which Argentina’s main partners are. The economic and political situation in Brazil, Argentina’s main trade partner, is a source of concern for Mauricio Macri. The recession in Brazil has had a significant impact on Argentina’s exports, particularly in the automotive industry. China, Argentina’s second trade partner, is going through a structural rethinking of its economic policy as it experiences a slowdown of its growth. Finally, in the United States, Argentina’s third economic partner, the election of Donald Trump has drawn suspicions over the future of international trade as the president-elect has praised a protectionist economic policy. Mauricio Macri will seek to attract investment by opening key sectors such as telecoms, energy and infrastructures. Although, if investments do not reach his expectations, Mauricio Macri could resolve to keep on cutting public spending and this could mean firing government employees. Almost one third of the employed population in Argentina works for the public sector. Consequently, wages are the number one cost for the state.  

With legislative elections due in October 2017, the President is eager to obtain results as soon as possible. And some indicators might suggest he will: inflation is slowing down, so is recession. Moreover, some sectors such as agriculture, real estate and construction are on the rebound. Recently, Mauricio Macri has even proceeded in a cabinet reshuffle, replacing Finance Minister Alfonso Prat-Gay with Nicolas Dujovne. As opposed to Alfonso Prat-Gay, Nicolas Dujovne had praised a more pragmatic and conservative line regarding fiscal consolidation. His nomination is a sign Mauricio Macri is ready to push harder on his reform plan.