Making Argentina ‘Normal’: Is Macri’s Project Falling Apart?

Argentina has appealed to the International Monetary Fund (IMF) for an emergency credit package – just days after hiking interest rates to 40% – in an effort to avoid a financial crash and boost the Argentine peso. The currency has lost 15% of its value against the dollar since the start of the year, and this week hit a record low of 22.3 to the dollar. The latest dip comes after interest rate rises in the US encouraged foreign investors to move their money out of riskier emerging market currencies and into the dollar, and has been exacerbated by anxious locals exchanging pesos for dollars. 

The appeal to the IMF and the sharp hikes in the country’s key borrowing rate – the increase to 40% was the third rate rise within a week, from 27.25% on 27 April – suggest that President Mauricio Macri is struggling to achieve the goal he set himself when he came to power in 2015, of turning Argentina into a ‘normal country’. And in a bumper year of elections across Latin America, what happens to Macri’s project matters. His election was the first in a series that saw the region turn against politicians of the Left. If Macri’s attempts to liberalise Argentina’s economy fall apart, the ripple effects may prompt many other countries in the region to swing leftwards again. 

Macri’s quest to make Argentina ‘normal’ was never going to be easy. This is a country that suffers from periodic economic meltdowns: it had one in 1989, when inflation soared to 5000%; then another in 2001, when it reneged on $81 billion of sovereign debt in the biggest default ever; and yet another in 2014, when it defaulted again. It is a country that can go through four presidents in a single month, as it did during the December 2001 crisis. And where the government can simply make up the official inflation rate, as it did between 2007 and 2015 under Macri’s predecessor, Cristina Fernández de Kirchner. None of this is ‘normal’. 

Then there were the problems Macri inherited from Fernández. In addition to the bogus inflation figures (the official rate usually hovered at around 10%; the real rate was more than 30%), the peso was massively overvalued, there were indiscriminate subsidies for transport and energy (costing 4% of GDP in 2015) and a large fiscal deficit. To make matters worse, the country had been frozen out of international credit markets since 2001 – the result of a dispute with a group of ‘hold-out’ bondholders who refused to accept the settlements offered to them; Fernández called them the ‘vulture funds’. This meant that the country could not borrow any money. And since the money flowing in during the commodity boom of the 2000s had long since dried up, borrowing was needed for growth. There were also capital controls in place, with Argentines taxed 20% on all dollar purchases, and big export tariffs on key commodities like soybean, which meant that farmers periodically rolled out their tractors to block highways in protest, and often preferred to stockpile than export. 

Fixing the economy would require bold policies. In December 2015, just a week after assuming office, Macri lifted capital controls and floated the peso. He stopped the meddling with inflation numbers and began to rein in the transport and energy subsidies in an attempt to trim the fiscal deficit. He also reduced export tariffs and finally restored Argentina’s access to international credit markets by paying off the ‘vulture funds’ in a $9.3 billion deal. 

But these fixes would not come easy. Floating the currency led to devaluation, with the peso immediately falling 30% against the dollar, and so inflation increased even further – to 40%. By April, meat cost 44% more than it had a year before. As always with inflation, the poor were the hardest hit – one study alleged that 1.5 million people had fallen into poverty during the first nine months of Macri’s term. The middle class also suffered, especially as a result of the hike in energy and transport prices. Resentment overflowed onto the streets, with thousands marching through Buenos Aires in September 2016, while 2017 saw 32% more street protests in the capital than in the previous year. 

Despite this, Macri’s economic reforms did not prevent him from succeeding at the ballot boxes. In the October 2017 mid-term elections he won a landslide. His reforms also seemed to be working, at least to some degree. The economy has been growing at an annual rate of 3% per year in the past 18 months, the fiscal deficit has been reduced from 5.4% of GDP in 2015 to 3.9% in 2017, and inflation has come down from 40% to 25%. Crucially, the country can borrow once again: in June 2017 it sold $2.75 billion of a 100-year bond at a yield of 8%. 

But the picture is now looking decidedly less rosy. The government revised its inflation target in December from 12% to 15%, and even this figure is now looking fanciful, with experts estimating a year-end figure of 20–25%. Such a wayward estimate undermines the credibility of the central bank, and credibility is crucial when it comes to borrowing. Indeed, the price of the country’s 100-year bonds has already fallen by some 15%. Macri’s approval rating has also dropped, to 49% from a high of 71%, and his recent attempts to deal with more systemic issues, such as rigid labour laws and generous pensions, have met with stiff resistance. In other words, the job of making Argentina ‘normal’ has just got a whole lot harder.

And what happens in Argentina matters, because Macri is the trailblazer for Latin America’s conservatives. If Macri’s project starts to fall apart then the recent turn towards economic liberalisation that has swept across Latin America may be reversed. This year sees voters heading to ballot boxes across Latin America, with six presidential elections taking place, including in the region’s most populous countries: Mexico; Brazil; and Colombia. In Mexico, leftist leader Andrés Manuel López Obrador leads in the polls, while in Brazil polls suggest that there is still significant support for former left-wing President Luiz Inácio Lula da Silva, despite his being in prison. Both countries have seen the rise of anti-establishment politics as corruption scandals and political crises have hollowed out the credibility of the governments in power. 

Macri will hope that, by the end of the year, he is not the only leader in the region trying to push through liberal economic reforms. He will also hope that his central mission, of turning Argentina into a ‘normal country’, is still intact. It certainly will not be easy.

The views expressed in this Commentary are the author’s, and do not necessarily reflect those of RUSI or any other institution.