Tuesday, August 4, 2020

OPINION AND ANALYSIS | 02-02-2019 11:14

Futurology in the land of Macri and Cristina

With the first month of 2019 having now come and gone, an intense electoral cycle is upon us with a technical draw between the president and his eternal antagonist since the days in which he was mayor of Buenos Aires.

Distance, sometimes, is the best antidote for one’s own prejudices, allowing a suspension of judgment under the usual set of categories. At the same time, attempting to interpret a complex set of problems, such as those faced by Argentina and President Mauricio Macri more specifically, from a country with certain parallelisms and many differences, enriches that analysis.

Macri broke into the political scene as a relative outsider, beating the establishment Peronist candidates into an unexpected presidency that didn’t respond to Argentina’s traditional political lines.

Correctly interpreting that the majority of the population’s exhaustion with Cristina Fernández de Kirchner’s empty and dogmatic 20th-century ideology, made even more irrelevant by rampant corruption, Macri’s electoral strategy targeted people’s emotions by focusing on words like ‘hope’ and ‘honesty.’

From a policy standpoint, Macri’s main electoral promises included the reduction of inflation, the eradication of poverty and corruption, and the insertion of the country into the global economy. To achieve this in the first part of his presidency – as a minority government in both chambers of Congress – he increased the fiscal deficit which is mainly composed of social spending. Paying union leaders, social movements, and pensioners in order to guarantee governability, Macri financed his government issuing a boatload of foreign debt, denominated in dollars, and focused his economic strategy on trying to jumpstart the portion of the export sector tied to primary goods and raw materials.

Thus, the production of oil and gas at the Vaca Muerta shale formation has been heavily subsidised (to the benefit of Paolo Rocca’s Tecpetrol, a subsidiary of Techint, which is currently reeling after a supposed cut in subsidies), the agro-exporting sector has seen export duties slashed, the prospects of a lithium boom appear well founded, and mining in general continues to perform. The logic being that if Argentina could orchestrate a competitive export sector, then it could generate enough dollars to cover domestic demand and therefore support the value of the peso at a balanced rate for both the business sector and the consumer.

Conceptually, the plan hatched by Ecuadorean political advisor Jaime Durán Barba and Cabinet Chief Marcos Peña, with the support of Buenos Aires Province Governor María Eugenia Vidal and City Mayor Horacio Rodríguez Larreta, made sense. Macri built an alliance with a sector of the Radical Civic Union (led by Ernesto Sanz) and firebrand Elisa ‘Lilita’ Carrió’s Civic Coalition, giving his Cambiemos (Let’s Change) coalition national reach and legitimacy in the battle against corruption, respectively. He convened a host of CEOs he dubbed “the best team in the last 50 years” in order to run the economy, claimed he could bring inflation to the single digits in just a few years, and toured the world as the “slayer of populism” hoping to attract foreign investment.

It seemed like it was going to work through 2017, as the economy grew and inflation fell dramatically, but it all came crashing down in the form of an acute currency crisis-cum-recession in 2018. The brilliant 2017 midterm electoral victory over Cristina Fernández de Kirchner came with a stable foreign exchange rate and an economy that was prepared to boom, but part of the lie was the government’s reliance on expenditure which in turn raised the deficit which in turn set up the conditions for a loss of confidence and successive run on the peso.

Market actors expected the US central bank, the Federal Reserve, to continue raising interest rates while Donald Trump’s trade war with China was telegraphed for the world to see. Noone, though, anticipated the voracity of the run on emerging market currencies, with Argentina and Turkey the most salient victims. Add the impact of the worst drought in half a decade and an overpriced peso – and mix it with an unexplained press conference on December, 28, 2017 in which Cabinet Chief Peña publicly humiliated then-Central Bank governor Federico Sturzenegger, calling for lower interest rates to exchange inflation for growth – and you have a recipe for disaster. Not only did it erode the credibility of the Central Bank in a country with a history of spooking markets, but it set up the conditions for an even deeper and more violent depreciation.

The implications for the real economy were brutal, as consumption plummeted and a credit crunch severely hit small- and medium-sized business, which make up more than 90 percent of firms in Argentina. That’s when it became clear there was no plan B from an economic standpoint. This country still counts with one of the world’s highest tax burdens and rigid labour laws, making the conditions for businesses extremely tough. At the same time, inflation shot up, in great part due to the pass through as a consequence of the fall in the value of the peso, meaning real wages fell hard. Consumption tanked, job losses mounted, and Macri’s relative standing in terms of surveys and polls followed suit.

The rise of Fernández de Kirchner as a palatable political opponent was not only the consequence of Macri’s economic blunders, but also a creation of his electoral team. The famous grieta or strategy of polarisation with which Macri’s PRO party has become unbeatable relied on keeping Cristina alive from a political standpoint. While the Judiciary’s offensive against Kirchnerite corruption, most graphically illustrated by the socalled “corruption notebooks” graft scandal, has added to the Macri administration’s political capital, yet it never hurt Cristina’s aspirations to return to power. A fragmented Peronist opposition stuck between its vendetta against the Kirchnerites and its failed attempts to present a sustainable platform for a bankrupt nation has only led those disillusioned with Macri towards Cristina, or alternative candidates with negligible chances. That same grieta has fed the markets’ distrust in Argentina, creating a vicious cycle that torments Macri day after day.

With the first month of 2019 having now come and gone, an intense electoral cycle is upon us with a technical draw between the president and his eternal antagonist since the days in which he was mayor of Buenos Aires. It is unlikely that the economy will pick up to the point where Macri can benefit ahead of the elections, and the austerity plan set in motion by Christine Lagarde’s International Monetary Fund, executed by Economy Minister Nicolás Dujovne and Central Banker Guido Sandleris, indicates opportunistic expenditure is unavailable.

It is difficult to ascertain what is best for the country: four more years of mediocrity or a return to populism. Unpleasant as they seem, Mauricio and Cristina appear as the only options, despite the círculo rojo’s insistence on an alternative candidate like Roberto Lavagna. As was the case with Macri’s own election, the unexpected should never be ruled out in the Southernmost country of the world.

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Agustino Fontevecchia

Agustino Fontevecchia

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