by Elliott Morss, Morss Global Finance
I taught for a few years at The University of Palermo in Argentina. My sense was that Cristina Fernández de Kirchner had made numerous economic mistakes and things would not get better until she was replaced. That happened in December with the election of Mauricio Macri. Macri, a civil engineer and former “chief” of Buenos Aires, is the first democratically-elected non-radical/Peronist President since 1916.
The Kirchners portrayed themselves as the saviors of the poor while enriching themselves and their supporters while in power. Will Macri be better? He is certainly off to a good start. He has:
- Lifted currency controls and let the peso float freely.
- Hired two economic professionals, Alfonso Prat-Gay and Federico Sturzenegger, as Minister of Finance and President of the Central Bank, respectively.
- Lowered personal income taxes and ended export taxes.
- Is eliminating energy subsidies.
- Negotiated a $5 billion loan with a group of international banks.
- Brought in a new team to run Argentina’s statistics agency, INDEC.
- Is working to settle with hedge funds holding out on an earlier Argentine debt default.
- Invited the IMF to do an “Article 4 Consultation”.
And even the IMF that earlier condemned Kirchner’s falsifying of economic data is starting to sound positive. IMF head Christine Lagarde recently said:
“Well, first on the negotiations, we are very encouraged to see that Argentina, and its new leadership, has taken the initiative to enter into negotiations with Argentina creditors. It’s been weighing on the country. And it will be a real plus if it results in a fair and balanced outcome. That would support Argentina returning to the financial markets and restoring its financial position. The macroeconomic policies that are currently identified by the new team and the new authorities in Argentina are very encouraging. And we hope that it will stabilize the Argentinean economy. We hope that, in particular, the determination for transparent data – the statistical emergency that has been declared by the Argentinean authorities – all of that is good. And we really support it.”
This all sounds impressive but the Kirchner “residue” and the resulting skepticism about any Argentine government will be difficult to overcome.
Some of the Kirchner Legacy
In my last piece on Argentina, I listed several major “problems” under Kirchner:
- Falsifying Government Data
- Efforts to Keep the Peso Strong
- Rampant Corruption
To discuss these and other matters affecting the future, I have asked a friend who lives in Buenos Aires to comment on these matters. Hendrik Jordaan (HJ) is the founder of Laurick International, a company that he started to promote business relations and interactions between Argentina and South Africa. His thoughts on these issues follow along with my questions/observations (EM).
HJ: The intimidation under the Kirchner governments was masked as support for “The Model”. “The Model” proponents claimed it protected the poor and the disenfranchised. It reached epic proportions during the last part of Cristina Fernandez de Kirchner’s government. In a sense, intimidation might have cost the Kirchner forces the election as the most intimidated person was probably their candidate, Daniel Scioli. Scioli was not allowed/did not dare to show independent thought or ideas that were different from “The Model”. So far under the Macri government there has been no intimidation or censorship. But the Kirchner supporters are crying foul whenever Macri closes a sector, department or dependency that was used to propagate “The Model”.
2. Falsifying Government Data
HJ: This is probably the biggest legacy of the 12 year Kirchner era. Nobody knew what was real and what was just propaganda. With an inflation rate somewhere between 20% and 30% per year, businesses and consumers did what they had to. Nobody knew the true relationship between prices and salaries. Critical data that was falsified or simply not reported included: inflation, unemployment, poverty, central bank reserves, houses built, access to basic services, health indicators such as malnutrition and poverty-related diseases such as “chagas”. Macri’s government now has the unenviable task of salvaging what is possible from this and having to present it to Argentine society and the world. And of course, the die hard-Kirchner fanatics and opportunistic opposition politicians will take advantage of the readjusted and reprocessed data to blame Macri for things that happened under the Kirchners and argue that he is only governing for the benefit of rich businessmen.
3. Efforts to Keep the Peso Strong
HJ: This was probably the biggest economic blunder of the Kirchner government. Because of the many historic economic crisis (almost always due to government mismanagement) Argentines prefer to hold their cash in dollars rather than pesos. So to be told they could not hold dollars created a mass hysteria and made it a conversation topic for everyone from the housewife through to the greengrocer up to presidents of multinational companies.
In these circumstances, it was inevitable that a black market for dollars would develop. The black market dollar price “Blue Rate” was created. And at times, it exceeded the official rate by almost 70% but always by more than 50%. The government claimed this was a negligible market. Not true. And it gave the people a sense of what their Dollars and Pesos were “really” worth: people acted and planned accordingly.
Had the government established a higher threshold so that the man on the street could buy, say, US$100,000 per year at the official rate, it would have made it a non-issue and would only have caused a minor dent in an already depleted foreign currency reserve of the Central Bank. With the fictitious but official exchange rate of 9 pesos to the US$ the government unbalanced the whole economy and caused a feeling of panic in the market. I call it fictitious because it was a rate that was almost impossible to buy Dollars at and clearly nobody willingly sold you private Dollars at that rate.
The exporters’ plight was severe. They got paid whatever the global price was in dollars. They then had to give up their dollars in exchange for Pesos at the official 9 Pesos per dollar rate. And on top of that, they had to pay an export tax the Kirchner had introduced.
Macri went a long way to solving this by making sure that there was a safe minimum of liquid reserves in the Central Bank and then allowing the Peso to float at a rate of 13.50-14 to the US$. He then announced that citizens could buy up to US$2 million per month. This calmed everybody to such an extent that although the Peso currently trades at 15.20 to the dollar and the black market rate is now virtually the same as the official rate (nobody talks about it anymore).
4. Rampant Corruption
HJ: Corruption reached epic proportions at the end of the Kirchner era with the increase of the President’s declared fortune having increase somewhere in the order of 500% during her time in office and having pro-government judges closing cases against her illegal enrichment three times before the investigations could start. There are many other examples and many others that will be confirmed by the soon-to-be revitalized justice system.
President-elect Mauricio Macri has presented all the members of his future cabinet and said one of his requests to the team was “honesty”. He added he “will be very strict and have no tolerance” with corruption acts. “There won’t be impunity or exceptions for anyone,” he added.
However, the Argentine former opposition will have to face the courts after a criminal complaint was filed against President Macri, the current mayor of Buenos Aires, and four top officials from the city government. According to the complaint – filed by lawyer and businessman Antonio Liurgo – the accused misappropriated public funds to the detriment of the city. Furthermore, Radio Ahijuna also presented a criminal complaint against Buenos Aires’ media and communication secretaries. Other radio stations are considering joining the plaintiffs. The complaint comes after seven media outlets rejected official data published by Macri’s Buenos Aires government on its website, claiming that the amount the mayor’s office reports it paid for advertising is much higher than the fee they charged. Some of the media claim they didn’t receive any money. They claim a government intermediary was responsible for making the payments, which could amount to over US$745,000 dollars.
EM: A point that amazes me is what I view as citizen complacency. Kirchner’s lackey almost won the last election! It is almost as if Argentine citizens believe it does not matter who the President is – all politicians are crooks and will mess things up.
HJ: This is a point that I can barely understand from a sociological point of view after having lived here for more than 16 years. I suspect that it is a psychological attitude whereby it is easy and good to blame a “corrupt and inefficient government” but take advantage of it for as long as possible. The workers could all see that the economy was grinding to a halt and that exports were almost stopping. But since they got huge salary increases annually that were higher than the “guestimated” inflation, they went along. And the government talked to them as if they mattered. So keeping quiet was the easy way out rather than acting responsibly and voting a sustainable long-term plan.
It was quite clear that Argentina would end up like Venezuela or Cuba if the country stayed on the Kirchnerista path. But many people felt part of a political force and were prepared to “die standing rather than kneel to the international money forces.” And to this day, many firmly believe that Macri is a small break between 2 Kirchnerista decades. The lack of rationality is astonishing in these groups. They are prepared to accept personal victories for example in growing salaries and more political and social rights even if this means the bankruptcy of the macro-economy.
EM: It is almost as if Argentine citizens believe it does not matter who the President is – all politicians are crooks and will mess things up.
HJ: Yes, this attitude is more prevalent among the middle and higher working classes. But the Kirchner government really went too far. Because of its corruption, attitude of total superiority and of being untouchable, the people started to realize that they should get involved in politics or else loose the country their parents and great grandparents constructed through hard work and education to a group that essentially functions as a mafia and clan.
HJ: The opposition, Kirchneristas and allies, are trying to make Macri look like an authoritarian dictator – a continuation of the military dictatorship of the 70’s – as well as a neoliberal pawn of multinational companies and international capital. Macri has to combat this while restoring order and assuring some semblance of a “normal” and transparent government. He has a weak majority in the lower house of Congress and an outright minority in the Senate that will make it essential for him to negotiate. Luckily for the President, the Kirchner Party (Frente para la Victoria FPV) has fractured and lost between 15 to 18 lower house representatives. These representatives have formed an independent and more moderate grouping.
Senate negotiations are a little more rational as senators formally represent the provinces. And since the Central Government holds the purse strings, it is in a very strong position after the “maneuverings” of the Kirchner government. It left a lot of legislative mechanisms that can be used and abused to discipline the provinces into complying with the most important pieces of Government-proposed legislation.
Macri is getting hit pretty hard in the press by “telesur” for negotiating with the “vulture funds” while not doing as much for the poor.
EM: Is that argument “selling” among the citizenry?
HJ: The media issue is something so intertwined with news and information in Argentina that it is essential to keep in mind who is reporting almost more so than what they are saying. Argentina had a media regulation law that dated from the time of the military government and was superficially updated until the Kirchner government decided to make a new law more in accordance with modern telecommunications and media. The idea in itself was more than promising and there was a broad consensus that a new law was needed but unfortunately, as most things done by the Kirchner government, it was ideologically tainted and in favor of their short term governmental interests more than leaving a law that would regulate the media for the first half of the 21st century. They wrote a law that was set up to destroy the biggest Argentine media conglomerate Grupo Clarín. It is rumored (but not proved) that Nestor Kirchner decided to destroy/dismember the Clarín Group because they were not prepared to share their profits with him and his party 70% Kirchner, 30% Clarín. An indication of this is that he, prior to creating a new media law, gave Clarín a special permit to own the two biggest internet providers and cable companies in Argentina.
The law was presented as the democratic renewal of the dictatorship’s legacy that allowed Grupo Clarín with a market orientated view to dominate and influence society without leaving a voice for the people through independent and new channels. The problem is that the law allowed for the government in power to inject its ideology into the whole system. The idea was of course that the Kirchners or similar would “never” leave power so it would be a huge propaganda system at their disposal.
Practical experience shows that Grupo Clarín did abuse their dominant position in the market to promote their business interests, products and preferences but the alternative was even more sinister as the new law was weighted in favor of a certain ideology and the friends of the government and did not look for a balanced representation of Argentine society and a protection of a non-ideological long term state interest.
This is all directly related to the Telesur criticism as it is funded through Venezuela as part of the agreement between Argentina and Venezuela to promote alternative views to the global media conglomerates. The previous relationship between Argentina and Venezuela is clearly not the same since Macri’s arrival and will not improve with Maduro still in power in Venezuela.
The other question raised about Macri’s legal problems is a sad but unavoidable truth about politics in developing countries: cases against the government will rarely prosper while the President is still strong. This seen in light of the “war” that the Kirchner government declared on the Judiciary that insisted on its independence when the Kirchner government wanted to oust its central figures and fill it with ideologically driven inexperienced fanatics that would not question official orders – such as the implementation and extinction of the Grupo Clarín. So it is safe to say that with a 12 year backlog of cases of corruption on a biblical scale the judiciary will not look at Macri too closely if he does not interfere with their “establishment” too much.
EM: It appears the teachers unions are very powerful. As I understand it, they worked well with the K regime and were paid handsomely. It will be very tricky to satisfy them while inflation moderates. In fact, it would appear that bringing the inflation rate down while reducing government payments will be a real balancing act.
HJ: The teachers’ unions are one of the toughest unions to negotiate with as they have a high visibility and form part of a very important link in Argentine society – children. They also always wait for the second half of summer holidays before they make their demands to make sure that people are already rested and ready for starting the new year’s obligations before they demand high salary increases.
As this is the first time the Peronistas do not control the province of Buenos Aires, also the most populous, since the return of democracy in 1982, Macri’s governess there, María Eugenia Vidal, already started negotiating with them as soon as she came into government. It can be seen that the need to talk tough from the Union side is a bit of posturing to save face and explain their existence and Vidal’s hard counter-posture a need imposed by Macri to ensure that the following months of salary negotiations would be done within reason to try and cap inflation and the demands made by other sectors.
EM: Does Macri face serious political challenges for other action he has taken or plans to take?
HJ: The most unpopular thing Macri has done to date was his pledge to the remove all subsidies on public services starting with electricity. Historically, the greater Buenos Aires and other urban areas received incredible subsidies on electrical consumption irrespective of the receiver being one of the poorest inhabitants or a multimillionaire. This caused that most middle-class homes in Buenos Aires paid an electricity bill that was something like US$10 every two months. Other less important voting districts also received subsidies but a lot less. Because the Kirchner did not allow electrical generation and distribution companies to increase their rates for more than 10 years, they reduced investment and production. This made it made necessary for Argentina to import energy.
What Macri did as soon as he came to power was to declare an “energy emergency”, stop all subsidies of electricity and allow a rate hike that translates for most consumers into an increase of about 350% in their bills. The same will probably happen shortly with natural gas and water. To mitigate the shock on consumers Macri has declared that low-income users will receive free electricity up to a certain level of consumption and he has also increased pension payouts and a plan that is known as Universal Assistance for Children – that is actually a sum of money paid to the mothers of the poorest families.
EM: Macri says he wants a “pragmatic and intelligent” relationship with Washington. This would be a break from 12 years of Kirchnerist governments that fought to push back against U.S. imperialism in Latin America by building regional integration. Macri announced developments in Argentina-U.S. relations at the World Economic Forum in Davos, Switzerland, one day after meeting with U.S. Vice President Joe Biden and other global elite.
HJ: Macri has the “easy” task of reopening Argentina to international investors. I say easy because the economy has been so closed to foreign investment that any change would be seen as significant but it is also a very difficult task as he would need to convince investors that Argentina has changed and is a legally safe destination for their funds. At least in the short term this is quite certain but most investors might have doubts about Macri’s ability to stay in power effectively as the midterm elections approach and thereafter the second half of his term. If he does manage to show the voters that he can control inflation and he gets the votes for the midterm elections then it is safer to say that he might get elected for a second term. This all reflects on his foreign policy because he will have to makes sure that he establishes international relationships that allows him to withstand the criticism from the unions when the unemployment rate starts to grow because of more accurate statistics and also the ending of many government jobs and subsidies (The previous government had a very unique way of measuring unemployment and President Cristina Fernández de Kirchner left office with an official unemployment rate of around 7%.)
The unions will seize the chance to criticize Macri’s pro-business policies as being against the workers’ interests. They have already begun to warn of an impeding disaster and “el ajuste”. The unpopular decisions that Macri is taking to obtain some form of fiscal discipline and rationalization of state expenditure will inevitably cause a spike in unemployment in the short term. Macri’s short and medium term foreign affairs will therefore have to be aimed squarely at attracting more investment and more jobs but preferably, for his future political aspirations, in sustainable long term value adding industries and infrastructure investments.
EM: Argentina’s foreign reserves are about $25 billion or only five months of imports. They will increase as a result of a loan from a group of banks that should arrive shortly. The loan, which would be backed by dollar bonds held by the central bank, will be for between $4 billion and $6 billion, according to Finance Minister Alfonso Prat-Gay. In addition, Prat-Gay said that Argentina is willing to allow the International Monetary Fund to conduct an Article IV review of the economy for the first time since 2006. And the U.S. Treasury Department said it will end its opposition to loans for Argentina from multilateral development banks due to the steps being taken by the new administration.
And there are the $81 billion Argentine debt default holdouts. A US judge previously ruled that Argentina could not settle with these holdouts for more than what it paid those who have settled. Nevertheless, the Argentine government has just offered the remaining holdouts – Dart Management, Montreux Equity Partners, Elliott Management, Aurelius Capital Management, Davidson Kempner Capital Management and Bracebridge Capital $6.5 billion (75% of the debt face value and far more than what the paid for the debt) to settle. Dart and Montreux have already said they would settle but nothing from the others as yet. And there is some good news: the US judge has done an about face – he will no longer require Argentina to pay those who previously settled the same share of face value the remaining holdouts get. In fact, the judge is urging the holdouts to settle. Getting this matter cleared up is extremely important – it will allow Argentina to tap international markets for funding.
EM: In recent years, the Argentine economy has slowed. This is in part attributable to lower commodity prices but more importantly to Kirchner’s economic “mandates”. So what can be expected in the future? Argentina’s GDP consists of consumption (64%), investment (20%) and exports (15%). A government deficit can provide a stimulus (deficit) while a surplus can cause a contraction.
Table 1 provides relevant data on these items. The projections are based on the consensus of a group of international banks and other financial firms that report regularly on Argentina assembled by FocusEconomics (FE). That having been said, nobody really knows how all of this will sort out. The future of Argentina looks a lot better than it did before last December, but there will definitely be some ups and downs moving forward.
Table 1. – Economic Projections
EM: While there are definitely things to look forward to in Argentina, there is also great uncertainty. What will Macri be able to accomplish, and how will it affect consumers? Consider first consumption. It is projected to drop a bit in 2016. FE report that consumer sentiment fell slightly in both January and February. This is hardly surprising: Macri is telling consumers he wants to end the huge public utility subsidies. These are huge – estimated at 4% of Argentine GDP. So consumers will be saddled with these new expenses. In addition, and in part as a result of more expensive imports resulting from Macri floating the Peso, the FE panel projects the Buenos Aires inflation rate will be 31.2% in 2016. That is a worrisome number. Unexpected things might happen.
EM: The FE panelists’ project that investment will grow by 3.5% in 2016 and by 8.5% in 2017. Will it? It could. Macri’s reforms are designed to open the doors to private foreign capital. And settling the remaining debt default issue will be a signal to offshore financial institutions that Argentina is again “open for business.”
c. The Government Deficit
EM: The government deficit jumped to 5.7% of GDP in 2015. The FE panelists’ project it will fall slightly in 2016. However, there is considerable uncertainty on how this will all work out. The subsidies Macri says he wants to end represent 20% of all government expenditures or about 4% of GDP. They probably will not be completely eliminated, but whatever happens will constitute a major government saving.
HJ: To be honest I am not sure as this is also still a work in progress and only subsidies on electricity have been officially lifted. Natural gas is being looked at now and then transport/fuel will follow. As you can imagine, every subsidy that is removed brings with it a crescendo of complaints and threats of strikes etc. so it has to be done slowly and lightly to ensure that Macri does not get into trouble before Congress even opens on March 1st. As it is he will have to negotiate under huge pressure to keep his fragile coalition united and keep the splintering FPV falling apart.
Should Macri loose support in Congress he will be forced to govern through the use of Executive Orders or “Decretos” as it is known locally and this will reinforce the opposition perspective of him as authoritarian and a follower and heir of the military dictatorship of the 1970’s.
EM: Macri is also eliminating most export taxes. He said he was ending export taxes on wheat, corn and sorghum exports and a tax cut on soybean exports, from 35 percent to 30. He also told business leaders that a five-percent tax on industrial goods for export would also be scrapped.
Total export tax receipts totaled $3.6 billion in 2013. That is far less than what the government should save from the ending of utility subsidies. Therefore, the fiscal deficit should fall. One good thing coming out of the Kirchner era – external debt is quite low (only 25% of GDP) because Argentina could not borrow on international markets.
HJ: This is still a work in progress but at the moment these taxes have been lifted on all agriculture exports except soybeans where they will be phased out gradually by 5% per year from the 35% where they started from at the end of the Kirchner government. Export taxes on mining are also in the process of being removed. The idea is that the government wants to motivate and encourage businesses and farmers to produce as much as possible and earn foreign currency. There is a feeling among businessmen that Argentina lost out on the commodities boom due to unplanned and unorganized taxes on exports making it difficult for Argentine producers to enter the global market in a competitive way and having nothing to show for all the years of export taxes that just disappeared into a bottomless abyss of murky government spending. Argentina can still produce food at a much more competitive price than most countries in the world and the thinking is that we need to win back lost markets and opportunities while adding value to the commodities produced thus creating jobs and earning foreign reserves.
EM: Argentina is the world’s third-largest producer and exporter of soybeans, after the United States and Brazil, and the largest producer of soy products. The country competes with Ukraine for the title of third-largest corn exporter, and is the seventh-biggest wheat exporter.
Outside Argentina, the tax cuts have stoked fears of a glut of grains and soybeans, at a time of already-low global prices for agricultural commodities. Argentina’s farmers have an estimated 17 million tons of soybeans, 20 million tons of corn and 10 million tons of wheat in stock. European grain prices were down after Macri’s announcement. By lowering export taxes and floating the Peso, Macri has created real incentives for export growth. This means the stocks that farmers have built up over the last few years will be sold along with the annual crops.
EM: How about on the import side? I know that the K regime blocked some imports such as Apple phones. Have these bans been removed?
HJ: Officially and practically imports have been opened and Argentines can now again start getting products from international brands and companies but it is still a work in progress with some industrial sectors complaining and insisting on protection against unrestricted imports. This requires some fine balancing from Macri to keep Argentina “open-for-business” according to international standards and not being accused of not protecting the Argentine industry.
EM: We have heard a lot about how the declining growth rate of China is causing real problems for the commodity exporters of Latin America and in particular Argentina and Brazil. The concern is somewhat overblown. Table Y provides data on the 20 leading importers of Argentina’s products for 2007, 2011 and 2014. Since 2007, Argentine exports have increased by 23%. Exports have fallen since 2011, but a significant part of this decline is probably attributable to farmers withholding product from the market because of the disincentives to export introduced by Kircher. It appears the country has acquired some significant new Asian partners – India, Indonesia, Malaysia and Vietnam. Over this period, commodity prices have fallen so these value figures imply higher volume changes.
Table 2. – Argentine Exports, by Country
Table 3 provides data on the composition of Argentine exports and how they have changed. The final column provides projected price estimates drawn from both the FE Commodities Report and the IMF Commodites projections. The numbers suggest that the commodity price collapse has ended and a gradual improvement is under way.
e. The Stock Market
EM: If things are getting better, is this a time to invest in Argentine equities? It would appear most of the good news has been anticipated. The Merval Buenos Aires (^MERV) is up 45% over the last year.
EM: There is no doubt that Macri faces serious political challenges ahead in trying to implement his economic reform program. And many citizens view Macri as just another politician trying to feather his own nest with the support of multinational firms. But to Westerners and their financial institutions, what Macri is trying to do looks great. Provided Macri does not get badly waylaid by politics, his plans should certainly spur a better resource allocation within the country and more foreign investment. The future should be bright for Argentina.