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OPINION AND ANALYSIS | 07-09-2019 01:01

Is this you, Macri?

It is imperative to understand the founding principles of Macrinomics, in order to realistically assess its relative merits and failures.

Even to this day, some officials at the highest levels of the Mauricio Macri government claim their management of the economy was “the only possible alternative to the disaster we inherited” and that they did “the best we could.” It is difficult to stand behind these arguments unless one puts oneself in their position: an election is still ahead of us, and even though reversing the results of the PASO primaries which Alberto Fernández won by a landslide appears impossible, the ruling Cambiemos (“Let’s Change”) coalition – rebranded under the Juntos por el Cambio (“Together for Change”) banner – still needs to secure enough legislative muscle to transition into the role of political opposition. And dream of 2023.

Yet, it is imperative to understand the founding principles of Macrinomics, in order to realistically assess its relative merits and failures. Whether or not Jaime Durán Barba and Cabinet Chief Marcos Peña can stage a comeback, or even if Alberto and political godmother Cristina Fernández de Kirchner have a shot at stabilising the country and finally breaking a 70-year cycle of downward mediocrity, depends on it.

Macri asked society to vote for him in 2015 in order to put Argentina on a sustainable path to growth, which he claimed would reduce poverty and eventually unleash the locked potential of the country’s economy. The cornerstone was the quick reduction of the fiscal deficit, which the Kirchner era had left standing at some four percent of GDP, along with a lowering of inflation into single digits (which ended 2015 at around 30 percent). To achieve this, Maci and the electorate dreamed of inserting Argentina into the global economy by boosting exports of goods and services where the country has a competitive advantage, namely the agricultural sector and the energy sector, where the Vaca Muerta formation holds the potential to make the country a global exporter of natural gas that could rival the United States. In parallel, structural reforms, including a pension reform ,would help create a sustainable State, while a deep labour reform and other business-friendly policies including lower taxes would target the uncompetitive private sector, particularly small and medium-sized businesses, which concentrate the vast majority of formal employment in the country.

At its core, Macri understood the economy as a traditional liberal where the issue was too much spending and no saving. Micro-managing the economy like a private company – where there are no alternatives to austerity when there’s little left in the bank – seemed to be his solution. At the same time, Macri sought to “build the future“ through public works projects, spending on roads and sewers while lowering subsidies on public utilities to essentially “force savings“ on a population too used to the largesse of populism.

Macri’s marquee policy in the first 100 days of his term was the lifting of the infamous cepo cambiario, or set of capital restrictions used by Cristina, former economy minister Axel Kicillof, and ex-commerce secretary Guillermo Moreno to compensate their lack of foreign exchange reserves and the economy’s general scarcity of dollars. The policy, handled by then-economy minister Alfonso Prat-Gay, was successful in that it did not cause a panic, while a devaluation of the peso to the tune of 36 percent took the national currency to a fair value, as marked by the black market “blue“ rate.

Lifting capital controls while guaranteeing a free-floating currency made Argentina more competitive by rationalising its internal relative prices, while lowering imports and the haemorrhaging of dollars, in turn making Argentine exports more attractive. It was also a necessary condition to attract foreign direct investment, indicating to the market that Argentina would not indulge in currency manipulation, changing the rules of play arbitrarily, while allowing global capital to flow seamlessly in and out of the country. This would give investors the conditions to bring capital into the country in the form of financial flows first, and investments later, withdraw profits, and potentially reinvest.

Another key measure was the settlement with holdout creditors, including Elliott Management’s Paul Singer, for some US$9.3 billion, gaining access to international markets for a country with a history as a serial defaulter. Argentina was back, and Macri was a rock star, having defeated populism while promising average annual GDP growth of three percent, a drop in inflation to five percent by 2019, and an end to chronic deficits.

So, the Macri administration went on a borrowing binge in order to finance the transition into first-worldness. Borrowing tens of billions of dollars during the last days of global easy money, Argentina would avoid using the printing-press to finance its deficits, while building reserves and buying time to pass much needed reforms. The deficit grew in the early years of the Macri government as social spending was used to guarantee governability, but the reforms never materialised. In order to avoid putting additional pesos into the system – from the international debt financing used for covering the deficit – the Central Bank, then led by Federico Sturzenegger, used short-term paper known as Lebacs with attractively high interest rates for sterilisation, while conducting tight monetary policy with inflation targeting to tame the monster. Thus, the financial system grew, with more financial instruments for banks, institutional investors, and individuals who could chase high returns rather than park their cash in dollars, which should also lower dollar demand.

At the end of the day, Macri’s honeymoon – with the global community on the one hand and the market on the other – and the fact that he was going to seriously tackle the issue of structural reform, was going to attract international investors. This capital investment would help improve competitiveness, starting in places like agro-exports and Vaca Muerta, which in turn would begin to generate dollars through exports. More investment in Argentina, and more exports, would translate into less downward pressure on the peso, and as inflation fell and confidence grew, wages would begin to grow in real terms, and consumption, which represents two-thirds of GDP, would kick into high gear.

This, of course, didn’t happen. After a tough 2016, Macri and the main stars of Cambiemos, Buenos Aires Province Governor Maria Eugenia Vidal and City Mayor Horacio Rodriguez Larreta had to put Kirchnerismo out of their misery in the midterm elections. The Central Bank aggressively intervened in the currency markets, keeping the peso steady, which added to high rates pushed inflation down. Tough reform packages were left for after the election, and after an impressive victory in the midterms, Cristina’s political career appeared over. Yet, after winning the election the overvalued peso began to slide, while the government used its political capital to isolate itself politically and seek to pass reforms without consensus (remember the street battle in front of Congress?).

Sturzenegger’s independence at the Central Bank, meanwhile, was shattered after inflation targeting was replaced with more growth in the fateful December 28 press conference in 2017. Then came the external shocks, showing Argentina was no more on a sustainable path than when Macri took office, only a lot more indebted – and in dollars too. The Fed rose rates, emerging markets tanks. And Macri continued to promise the worst had passed, but the lluvia de dolares never materialised, and so Argentina’s labour-intensive PYME sector (small and medium-sized companies) were faced with a perfect storm of exorbitant interest rates, falling consumption, rising costs, rigid labour laws and an incredibly high tax burden. Enter the International Monetary Fund once again, forcing Macri into the austerity plans he needed, but giving him a record US$57 billion that ultimately went to financing capital flight.

We have been in crisis mode ever since, even going into this year’s PASO primaries, where the government once again intervened the currency markets to freeze the peso and lower inflation. Once again, no Plan B for Macri, who set expectations for a strong election and lost his shirt.

The economic history of the Macri administration has many more details that are worth analyzing, but the key concept is that in no way did his plan lead to an improvement in competitiveness. And so, we are left worse off than before he took office, with GDP shrinking 3.4 percent, inflation totalling 240 percent, and an increase in poverty, as Sturzenegger noted. There was no way he was going to engineer growth.

Agustino Fontevecchia

Agustino Fontevecchia

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