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FTI Journal | Critical Thinking at the Critical Time

Hurry Up and Wait, Argentina!

Argentina’s new President, Mauricio Macri, came into office in December 2015 with a mandate to evolve the nation towards a more market-oriented economy. The result has been limited progress mixed with pain. Will the people stick by him and allow him to reach his goals?

When Argentinian President Mauricio Macri took office in December 2015, he brought along big plans for overhauling Latin America’s third largest economy. The former businessman promised to cut the budget, tame double-digit inflation, restart growth and create jobs by attracting foreign investment, particularly in infrastructure. His announced goal was to reduce the primary deficit target to 3.3% of GDP in 2017.

Macri acted swiftly by removing currency controls, eliminating tariffs on exports and imports and reaching an agreement with holdout creditors. The moves signaled Macri’s willingness to steer the country through short-term economic pain in return for long-term gains based on market oriented policies.

But over the past few months, a number of political setbacks and uncertainties have slowed Macri’s agenda. He has since shifted to a more gradual reform strategy and announced a revised target deficit rate of 4.2% of GDP for 2017. But the outcome of his efforts will largely depend on the state of the economy next October—when the country’s parliamentary elections occur. A stronger position in Congress would bolster his reform agenda and strengthen his claim for four more years in office.

An investment-driven rebound of the economy is the best way for Macri to consolidate his power and his plans. Here’s a look at five key reforms undertaken during the Macri administration and the status of each as the nation inches forward over the next 11 months.

Reform #1: Remove Currency Controls and Ease Other Governmental Restrictions

Macri’s Move: Shortly after his inauguration on December 10, Macri fulfilled a campaign pledge to remove currency controls established under the previous President, Cristina Kirchner, that had propped up the Peso. As expected, the value of the Peso fell (by 30%) within days, but allowing the Peso to float signaled to the world Argentina’s commitment to dismantling certain controls implemented by Kirchner. Furthermore, removing the currency restrictions in an orderly manner, without causing panic, increased the competitiveness of the country’s export sector.
Status: Remarkably, the shift to a floating Peso was met with little backlash, demonstrating early confidence in Macri’s vision of a future with greater foreign investment and increased exports. Though inflation has remained stubbornly high, recent positive signs have emerged: foreign currency reserves reached $US 40 billion in early October, an increase of 63% from $24.9 billion on December 10.

Reform #2: Slash Subsidies to Meet Fiscal Consolidation Targets

Macri’s Move: Thanks to generous subsidies first imposed in 2002, Argentinians were paying the lowest utility bills in Latin America when Macri took office. Gas subsidies alone amounted to 1.5% of GDP. Early in the year, Macri raised gas prices tenfold, leading to public discontent and legal challenges that rose to the Supreme Court. In August, the Court ordered the government to suspend the cuts and hold public hearings on how the prices were calculated. A compromise was reached allowing for a more gradual rate increase through 2019.
Status: Macri’s original subsidy strategy was to go as far and as fast as possible in achieving market-driven prices, knowing that these changes would be contested in court and by opponents aligned with the Peronista opposition. Following the gas lesson, Macri proposed a gradual increase in electricity rates, and the Supreme Court concurred. The new more gradual approach is designed to avoid judicial setbacks.

Reform #3: Add Transparency to Government

Macri’s Move: To boost credibility and trust in business, Argentina has taken steps under Macri to become more transparent in governmental affairs while also cracking down on corruption. Earlier this year, the government overhauled the state statistics agency to report more reliable data on GDP and inflation, among other statistical categories. The International Monetary Fund endorsed the move, and announced it would likely lift the 2013 formal censure it had placed on Argentina’s data by November. In August, the legislature proposed a bill that would hold corporations responsible for corruption violations—a change from existing laws that applied only to individuals charged within the corporations themselves.
Status: The corruption bill is expected to come up for vote within the next few months. If passed, Argentina will join a number of other Latin American countries that have moved towards more accountability by enacting similar legislation intended to improve the private-public business environment. Still, there’s limited optimism as Argentina has not demonstrated consistent appetite to enforce existing anti-corruption laws.

Reform #4: Recover Undeclared Assets Held Abroad and at Home

Macri’s Move: In May, Macri announced a partial to full tax amnesty covering an estimated $500 billion in undeclared assets stashed away by Argentinians. The move is designed to recover funds to help pay long-overdue pensioners, whom the President pledged to assist during his campaign, as well as help finance a multi-billion infrastructure program.
Status: The amnesty period closes in March 2017. As of October 31, 100,000 Argentinians have declared approximately $4.6 billion in hidden assets, but the government hopes that approximately $30 billion could be returning to Argentina, which could help trigger the foreign direct investment the economy needs to move forward more quickly.

Reform #5: Cultivate the Trust of the Argentine People to Gain Time

Macri’s Move: With a leadership style markedly different from his polarizing predecessor, Macri’s discretion and ability to compromise may have appealed to Argentine voters—albeit by a slim majority. His aggressive agenda is praised by the business community, even as he has preached patience to a populace accustomed to significant state largess.
Status: With a stubborn inflation rate and increased unemployment, Macri’s approval rating is 40%, down from a high of 63% in December 2015. There is restlessness: the General Confederation of Labor (GCT) is threatening to strike by the end of the year if things do not improve, while 1.5 million Argentines have slid into poverty since the start of the year. But according to The Financial Times, many investors believe the country hit its low point in 2016, and can only improve in 2017. Further, polls indicate Macri is still well-liked personally.

Given the vast issues left over from previous administrations, and the extent of the reforms proposed by Macri, it’s no surprise that movement towards a more competitive economic model is crawling. The question is: Will the people give Macri the time he needs to achieve his mandate?

Published November 2016

© Copyright 2016. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.

About The Authors

Diego Cano
Managing Director
Forensic and Litigation Consulting (Latin America)
FTI Consulting

Gavin Parrish
Managing Director
Global Risk & Investigations Practice
Forensic & Litigation Consulting
FTI Consulting

Roberto Simon
Geopolitical Intelligence Practice
Forensic & Litigation Consulting
FTI Consulting

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The views expressed in this article(s) are those of the author and not necessarily those of FTI Consulting, Inc., or its professionals.
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