The relative calm after the storm that was an intense currency crisis that saw the Argentine peso lose 25 percent of its value in just two weeks — despite the Central Bank injecting some US$10 billion to buy temporary stability — found the Mauricio Macri administration soul-searching for answers. Better late than never, Macri decided to centralise economic decision-making power around Treasury Minister Nicolás Dujovne, while inviting political actors from his Cambiemos (Let’s Change) coalition back from their self-imposed exile. The failure that was having to resort to the International Monetary Fund (IMF), despite President Macri claiming to have “the best economic team in the past 50 years,” forced the government to question its trajectory, as Macri and his fledgling party recalculated their political opportunity for re-election in 2019. The real question now is whether this introspection and apparent metamorphosis is a mere deception to woo Macri’s allies and the more benevolent members of the opposition, or whether this is a real change in a direction that can truly help create the conditions for sustainable development.
As always, Macri will hope for a helping hand from abroad, where he has been successful in positioning Argentina as a relatively valuable member of the international community, with the government seeking entry into the Organisation for Economic Co-operation and Development (OECD) group of rich countries and, in parallel, getting Morgan Stanley to reclassify the nation as an “emerging market,” up from the lowly “frontier market” category, leading to an influx of much needed dollars. The issue, as always, are those bloody dollars, as the Argentine economy insists on a de-facto dollarisation in the face of twin deficits and an unproductive economic layout that shows no signs of being corrected. Macri’s challenge, then, is to eliminate the primary deficit while working towards economic stability and predictability, which should incentivise investment and growth.
Time. It’s all about time at this juncture. Macri and his team of CEOs and technocrats surprisingly won the 2015 presidential elections by promising change after more than a decade of rampant populism at the hands of Néstor Kirchner and Cristina Fernández de Kirchner. This change relied on breaking a cultural paradigm in order to reduce dependence on the state and generate a productive economy that reinvested profits. Relying on cheap money, Macri entrusted Finance Minister Luis “Toto” Caputo to buy said time in international debt markets, effectively mortgaging the country in order to get out of the hole it was in.
While the vision appeared correct, fragmented policy decisions led to inflation remaining stubbornly high while the trade deficit ballooned out of control in the face of an artificially high peso. The Central Bank, led by monetarist Federico Sturzenegger, tackled inflation with extremely high interest rates, while offering tens of billions of dollars worth of short-term paper (Lebacs), generating demand for pesos that, in turn, fostered imports on the back of a strong national currency and disincentivised the agro-exporting sector from liquidating its crops (it also was hugely profitable for financial speculators who took advantage of the ‘carry trade’ or bicicleta financiera at the expense of the Central Bank). At the same time, public expenditure, mainly on social plans and payments to guarantee governability, actually grew, while the fiscal deficit as a percentage of GDP fell at a sluggish pace.
Time seemed to pass slowly after the administration’s unbeaten electoral campaign team, led by Cabinet Chief Marcos Peña and star Ecuadorean advisor Jaime Duran Barba, proved they would handily beat Cristina in the PASO primaries, delivering a national victory for Cambiemos. Yet, time quickly accelerated as the government sought to capitalise on its electoral victories to strongarm reforms through Congress. Ignoring his allies and relying on the counsel of his closest advisors, Macri was forced to backtrack with reforms, but then decided to instruct the Central Bank to abandon its fight against inflation so as to allow for more growth, delivering a double whammy of higher inflation and loss of credibility for Sturzenegger. And, of course, less growth.
That’s when Macri lost his shirt. Between the electoral victory in midterm elections and today, the president’s approval rating has tanked 22 percentage points to 36 percent, according to the latest figures by Poliarquia, while the Central Bank’s reserves have dropped some 17 percent in just the past five weeks. The currency crisis that began in late April was the final straw, forcing Macri to open up his inner circle and look for answers.
Time, it seems, has slowed down again. In a move welcomed by markets and political observers, Macri decided to give Minister Dujovne the mandate to coordinate multiple ministries to streamline economic decision-making, focusing on getting Christine Lagarde’s IMF to approve an emergency line of credit while promising to cut the fiscal deficit even further. Then, he eroded the power of the Machiavellian Marcos Peña, inviting the likes of Emilio Monzó (President of the Chamber of Deputies and a Cambiemos ally historically close to the Peronists) and Ernesto Sanz (one of the leaders of the important Unión Cívica Radical party who allowed Macri to form a coalition that gave him the presidency) back into the war room. This wasn’t pure Macri, though, he folded to the desires of his political proteges and current rock stars, Buenos Aires Province Governor María Eugenia Vidal and Buenos Aires City Mayor Horacio Rodríguez Larreta. The intention, it seems, is for Macri to ease on his technocrat vision of the state and to begin to behave politically in order to create a broader social pact that will allow him to pass much-needed reforms. This means concessions to opposition governors, many of which aspire to Macri’s seat, like Salta’s Juan Manuel Urtubey. Macri might even be convinced to negotiate with Sergio Massa of the Frente Renovador. The only limit is Cristina.
The best way for Macri to prove himself is to stop looking at the polls and consume his political capital fixing the country. That doesn’t mean slashing spending blindly to balance the deficit, but working hand-in-hand with his political rivals in a plan that aims at recovering productivity. Global integration should go beyond the financial sector, which exposes the country to the whims of the dollar, and should focus on regional economies and building value-added economies. Predictability should help Argentines break the cycle of saving in dollars. The IMF’s austerity plans will be a challenge. If all goes downhill, Macri may have to kiss goodbye his aspirations for a second term. Yet, he does hold the ace of spades: Vidal.