MACRO REPORT: When will Macri's measures bear plump fruit for Argentina?

Monday, March 20, 2017

Market-friendly measures championed by Argentina's President Mauricio Macri, such as scrapping FX controls, cutting energy subsidies, reigning in inflation and returning to international capital markets, have not been easy to implement nor have they produced immediate results – but things may be about to change.

Argentina's stubbornly high inflation, a legacy of the previous administration and also a consequence of reducing subsidies in the energy sector, with a higher-than-expected 2.5% CPI in February, still well above the central bank's target of 1.5%, has exhibited a clear downward trend since 4Q16, however.

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"In the first half of 2016, inflation rose rapidly, reflecting the impact of the year-end 2015 devaluation as well as substantial increases in energy tariffs. Monthly inflation peaked in April at 6.5%, but has gradually fallen since then. In the six months to January 2017, inflation fell to less than 17% on an annualized basis compared to 40% for 2016," rating agency Moody's in a report.

"We expect lower inflation to boost real wages and consumption. The disinflationary process should support Argentina's central bank's objective of reaching single-digit inflation by 2019," it added.

Price hikes, and their impact on inflation, are not over, however: energy minister Juan José Aranguren announced on March 12 that consumer gas prices would increase 30-40% in April.

"Paying just 10% of what energy is worth comes at a price for Argentines," Aranguren was quoted as saying by newspaper La Nación.

Price hikes have pushed up inflation expectations for this year to 20.8%, according to the central bank's February expectations survey, beyond the central bank's target of 12%-17%. This is preventing a more aggressive key rate cut. Indeed, it has been kept unchanged at 24.75% for more than two months.

The pace of the economic slowdown, despite high interest rates, is beginning to weaken, and the country could be close to a return to growth. In January, the industrial activity index EMI contracted 1.1% year-on-year, marking its 12th consecutive month in negative territory. But it was the smallest contraction since March 2016.

Nothing less than a strong recovery is crucial if the government is to hit its macroeconomic targets. "A weaker recovery could jeopardize fiscal goals by weighing on revenues and raising the political costs of spending cuts during an election cycle," according to rating agency Fitch.


In 3Q16, GDP contracted 3.8% year-on-year and, according to a forecast in a World Bank report, GDP could have contracted 2.3% in 2016 compared with an expansion of 2.5% in 2015. For 2017, the World Bank projects an expansion of 2.7%.


The CPI in the Greater Buenos Aires area, used as a national proxy, was 2.5% in February, up from 1.3% a month before and well above the central bank's target of a monthly CPI of below 1.5% for the end of 2016. Analysts consulted in February in the central bank's monthly survey (REM) forecast 20.8% inflation for this year, above the bank's target range of 12-17%.

FX rate

While initially depreciating 54% against the US dollar after the lifting of FX controls in December 2015, the peso has been trading close to 15 to the US dollar ever since. As of March 17 the peso was trading at 15.5 to the dollar. However, analysts consulted by the central bank project it will pick up starting April to reach 18 pesos to the dollar by the end of the year, and surpass the 20-peso barrier in 2018.

Interest rate

Currently at 24.75%, the key rate has remained unchanged for more than two months after a succession of weekly cuts that brought it down from 38% last May over concerns of rising inflation expectations prompted by still-pending price hikes. Analysts project the rate will be cut to 20% by the end of the year.


The unemployment rate was 7.6% at the end of 2016, down from 8.5% in Q3 and 9.3% in Q1, according to  statistics agency Indec. Unemployment in the greater Buenos Aires area was higher than the national rate throughout 2016 and stood at 8.5% at the end of the year, down from 10% in Q3. An IMF World Economic Outlook report published in October projects unemployment of 8.5% for this year, down from 9.2% in 2016.

Trade balance

Exports in 2016 totaled US$57.7bn, up 1.7%, while imports dropped 6.9% to US$55.6bn.

Fiscal accounts

For 2017 the government set a fiscal deficit target of 4.2%, down from a target of 4.8% in 2016, which the government exceeded by 0.2 percentage points. "A recovery is crucial for achieving the government's economic targets, as cuts in energy and transport subsidies will not be enough to achieve the target of a 4.2% primary deficit for 2017, especially when considering a significant hike in pensions," Fitch said.


Price hikes and a still elusive economic recovery have taken their toll on the government's approval ratings. According to a poll conducted in December by consultancy Management & Fit and cited by local paper Clarín, the government's approval rating was 39.1% and its disapproval rating 52.1%.

Pictured, from the left, finance minister Luis Caputo and treasury minister Nicolás Dujovne.