Macri and Argentina: It Started With Such Hope - An Update

September 14th, 2016
in latin and south america

by Elliott Morss, Morss Global Finance


Last February, I wrote a piece on the reforms the newly elected President of Argentina was in the process of introducing. Things looked quite promising. But as we all know, the devil is in the details. So in this piece, I look at the progress and lack of progress since February. As I did earlier, I have asked a friend who lives in Buenos Aires to comment on these matters. Hendrik Jordaan is the founder of Laurik International, a company that he started to promote business relations and interactions between Argentina and South Africa. His thoughts on these issues (HJ) follow along with my questions/observations (EM).

Follow up:

EM: Currency controls – is the peso still floating freely? And if so, is their evidence that exporters are benefiting?

HJ: The Peso is in effect floating freely but the Dollar and the Brazilian Real are losing value, so the Peso is still not weak enough to really make Argentine value-added exports competitive. It is also now harvest time and many of the exporters are bringing in foreign reserves. And that action strengthens the Peso.

EM: Are the Finance Minister and Central Bank heads still in their jobs? Have there been any other notable appointments?

HJ: All members of the original Macri cabinet are still in place. There are three leadership issues worth noting:

  • The Minister of Energy, the previous CEO of Shell, still holds a substantial amount of Shell stock. Opposition on the left continues to point this out and that it poses a conflict of interest threat.
  • Macri sacked the head of customs because there is a slight suspicion he may be involved in a case of bribery. Some think that Macri might be trying to clear the customs head’s name so he can continue fighting against the system installed by the previous government where bribes had to be paid to be allowed to trade.
  • The Supreme Court now has its full complement of judges (5) and they candidates have been generally accepted throughout the political spectrum.

EM: Macri promised to lower personal income taxes and end export taxes: what has happened here?

HJ: The lowered income tax is still working its way through Congress. However, pensions for the elderly have been increased as has the way in which the increases are calculated. Needless to say, this action is quite popular.

The taxes on beef, wheat and corn were previously 15%, 23% and 20%, respectively. These taxes, along with all other agricultural exports taxes except soybeans have been cancelled. The export tariff on soybeans has been lowered from 35% to 30 percent. These changes have been very positive for the agricultural sector. And although the 2015/16 weather was not perfect, farmers are very optimistic and highly motivated to producing as much as possible going forward.

Macri is also trying to get Congress to approve new rules to calculate the income tax as rates have been constant for almost 15 years. And with the high inflation, citizens considered too poor to pay taxes must now pay them.


EM: Eliminating energy subsidies – I know there are problems here. Of course, nobody likes higher energy bills. But it also sounds as if the Macri government made numerous mistakes in how it introduced the higher charges.

HJ: The government’s current main concern is to raise energy prices. They have gone about doing it in such a haphazard non-political way that they have just been sent back by the Supreme Court to do things according to the book. Macri is learning that governing is not just “common-sense” decision making and administration. And even though it might be tedious and time consuming, procedure should be followed. Most people in Argentina agree that energy prices should increase: even the judges that vetoed Macri’s price hikes agreed they are needed. But the Supreme Court insisted the process should involve public hearings to ensure that everybody is heard.

As an aside, I find it quite unbelievable that a person with Macri’s background would commit so many procedural errors. His approach in the kindest terms can be described as “trial and error”. The opposition is labeling his efforts to increase energy prices as a “rich kid playing with a new toy.

EM: Any problem with the $5 billion loan negotiated with a group of international banks?

HJ: No, the financial sector in general is comfortable with Macri and is more than willing to give him loans – something that should be monitored not to end up with a new 2001-2002 debacle. Back then, Argentina’s external debt got to 137% of its GDP. Argentina then chose not to abide by the rules and suggestions of the international community and declared a default. It is important to monitor the current government’s borrowing as Argentina’s politicians have a tendency to favor short term measures for immediate gain at the expense of future sustainability. And Macri might be tempted to finance his government with foreign loans to win the elections for the next 8 years and then leave a mess for the following government – not unlike 2001 and 2015.


EM: On INDEC, I know that an IMF team just visited Argentina and were impressed by what INDEC is doing.

HJ: Yes, Macri is receiving a lot of praise from international leaders. He has just announced more than US$35 billion has been pledged for new investments. But it has not turned into jobs yet and people are starting to worry and moan….

EM: Has there been any talk of Macri asking the IMF for an Article IV consultation?

HJ: Yes, Macri is trying on bilateral and multilateral levels to get Argentina reintroduced back into the international financial community. Talks with the IMF have started although nothing has been made public yet.

EM: Intimidation – in our last article, you said:

“So far under the Macri government there has been no intimidation or censorship.”

Is this still holding up?

HJ: In general yes. Macri appears to still be listening to the people. But the Minister of Security has begun to implement Internet surveillance for possible attacks and threats against the government. As of yet this is still “normal” and can be seen as “a sign of the times” but it can also be a beginning of a warning campaign to tone down the opposition. Controls on opposition protests became accepted policy under the previous government.

EM: Corruption – Macri said he would reduce corruption. Has he taken concrete steps, and how about the cases against him? Is he leaving the courts alone?

HJ: I honestly think that the system is rotten to the core. That means judges won’t bother sitting politicians if it is not for something very obvious or game-changing. Macri has not interfered officially with the judicial system. And after 12 year of rampant and blatant Kirchner ccorruption and crime the judges have more than enough to keep themselves busy.

Something that might bother Macri relatively soon is the fact that in November of last year approximately US$80,000 was stolen from the vice-president’s residence by one of her police bodyguards. This crime was not made public until recently and the origin of the money has not been adequately explained yet. It might just be a case of grey accounting from a high-level politician of undeclared income or it might be a growing drama that forces Macri to let her be impeached to show that he is serious about corruption. And then you also have the Panama Papers that have also not left Macri standing spotlessly. However, nothing too damaging has appeared yet….

EM: Overall, what are the opinions of business and citizens about what he is doing?

HJ: People, in general, are prepared to give him some time and the general benefit of the doubt but patience is running out especially when people’s personal finances are starting to get complicated by the high inflation, increasing and newly accounted for unemployment and the time it is taking for the promised investments to turn into jobs. There is also a growing feeling among exporters that with the continued high rate of inflation, the Peso will again become uncompetitive for them.

EM: Powerful political groups – in the first piece, you said the teachers’ union, the Peronistas and other powerful political groups will attempt to block Macri’s reforms and cause him problems in other ways. Have they?

HJ: They are doing their best to be as complicated as possible and obstruct Macri’s ideas for the simple selfish reason of not wanting him succeeds. It will take some time for politicians to mature and work in favor of the greater good. And meanwhile the Peronistas are regrouping to try and at least get the Province of Buenos Aires back to be able to pay for their social mafia-like voting machines but the governor there has Macri’s full support and she is doing a decent job of keeping the people happy.

Consider a concrete example: the most populated voting district in the province of Buenos Aires is La Matanza. This district, along with other municipalities in the metropolitan area around the federal city of Buenos Aires control the not-always-spontaneous mass demonstrations by exerting significant power over the distribution of social aid and other voter-motivating methods.

The governor announced last week that she was going to actively seek the redesign of the metropolitan municipalities in such a way that it would improve administration and not just political maneuverings that have kept Peronistas in power since the 1980’s and before.

EM: How are international businesses viewing developments in Argentina? Is there evidence of an uptick in foreign direct investments in Argentina?

HJ: Yes, without a doubt there is lot more international investment interest in Argentina and due to the vacuum left by the previous government big business is finding it easy to identify areas for investment and production. However, with the continuing high inflation that is not matched by a weakening Peso, there is concern that Argentina will soon lose its attraction to at least some foreign investors.

Wine as an Export Case Study


It has been a trying period for the country’s winemakers—after peaking at $921 million in 2012, Argentine wine exports fell to $819 million in 2015. Because of actions taken by the former regime, there were no profit incentives left to export wine.

Table 1. – Wine Exports
Source: INDEC

Upon coming to power, Macri almost immediately dumped a wine 5% export tax, a move that gave the industry a potential $40 million+ windfall. He followed up by devaluing the peso a few weeks later. Argentina’s currency quickly dropped from its ‘official’ rate of 9.83 pesos to the U.S. dollar to its parallel or ‘blue’ market rate of 13.95 pesos. That meant winemakers made about 40% more for each sale. And this differential has grown since the Peso has lost more value to the dollar (now at 15.12). However, wine makers and other exporters are complaining again. They point out their costs are now rising (with a 40% domestic inflation rate) more rapidly than the Peso is weakening, thereby reducing their margins.

Economic Analysis

Table 2 provides FocusEconomic’s “consensus” economic projections for Argentina. GDP is expected to fall this year, causing unemployment to increase. On average, FocusEconomic’s forecasters expect Macri’s reforms to start bearing fruit in 2017 with a predicted jump in real GDP of 2.9%. But nobody can be sure. One of the forecasters – APOYO Consultoría – is predicting GDP to fall another 0.4% in 2017.

Table 2. – Argentine Economic Data
Source: FocusEconomics

With a 40% inflation rate expected this year, it is not surprising that consumption in real terms is expected to fall this year. The forecasters see investment as the real growth driver: they predict it to grow by 8.6% in 2017. With growth questionable going forward, reducing the government deficit will reduce aggregate demand. But clearly, the projected deficit of 5.3% of GDP cannot be continued for long. If all energy subsidies were to be eliminated, Bloomberg estimates the government would save $4 billion which in turn would reduce the deficit in 2016 to 4.6%. But Macri has had to make numerous concessions here so the reductions will end up significantly lower than $4 billion.

The trade balance is small but important and especially so given Argentina’s still limited international borrowing possibilities. And as the economy picks up, imports are likely to grow more rapidly. The reduction/elimination of export taxes along with a much weaker peso should also cause exports to increase. But what are the prospects that exports will grow because of higher commodity prices or accelerated economic growth in Argentina’s largest export markets?

Table 3 provides data on some of Argentina’s largest export markets. It appears that a significant jump in commodity prices will not happen soon.

Table 3. – Commodity Prices

Table 4 provides projections of economic growth in the largest export market countries of Argentina. Brazil and Venezuela are in downward spirals with no turnaround in sight. China, India and Vietnam are doing well and hold great potential for increased trade in the future.

Table 4. – Projected Economic Growth in Argentina’s Largest Export Markets
Source: FocusEconomics



There is general agreement that the reforms Macri is pushing are needed. And already, the elimination of the export tax and letting the peso float have been great for exporters. However, higher costs resulting from inflation are cutting into exporters’ margins.

It will take some time for the reforms to show benefit. And Macri’s bungling on introducing higher energy charges has delayed this needed reform.

And an inflation rate of 40% is disconcerting to both consumers and business.

The global economic prospects for Argentina are not good: commodity prices are not increasing much and Argentina’s largest export partners are having problems, particularly Brazil.

Time is not on Macri’s side.

The question is whether the people will have the patience to wait for reform benefits to kick in. And as time passes, it is certain opposition parties will increase their pressure on Macri.

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