Macri struggles to fend off Argentina crisis

Bnamericas Published: Thursday, August 15, 2019

After the recent 15-point defeat in the primary elections, the Argentine government has announced economic measures over 40bn pesos (US$672mn) to unburden the middle class.

The primary result significantly increased the chances of President Mauricio Macri’s opponent, Peronist Alberto Fernández, who could even win in the first round in October’s presidential elections.

The measures unveiled by the government include tax benefits for hired and informal employees and SMEs, as well as grant increases for students and a bonus for public employees.

However, experts consulted by BNamericas say the additional spending is too small to make difference for voters. The devaluation of the peso, which plummeted by 20% on Monday, is already leading to hefty price increases.

These increases, coupled with inflation - expected to reach an annual rate of at least 50% - will mean the government‘s efforts represent little more than a palliative treatment for the average household.


According to Jimena Blanco, a political risk expert at Verisk Maplecroft, Monday’s currency crisis is already reflected in rising costs. While General Motors said its auto prices would rise 23%, the average consumer is seeing rising prices in supermarkets and other common stores.

“These measures are coming in a bit late…as a sort of band-aid that comes to cover a wound that was created by the election results. If we consider that these measures are unlikely to change the mind of a significant-enough portion of the electorate, they will also fail to calm the markets, as they are reacting to [an almost certain change in government],” she told BNamericas.

Furthermore, if, as the government said, the measures are fiscally neutral, they are unlikely to be effective in the short term, because other spending would have to be cut in exchange, and so they will not make a difference in terms of economic activity.

Argentina already dabbled with a first wave of economic measures in April. That time, they were aimed at combating inflation.


The Macri administration has its spending capacity curtailed by its commitments to the IMF, which last year extended a US$57bn bailout package as a currency crisis made a default likely.

According to Steve Hanke, an economist at Johns Hopkins university, this is a good thing. “The IMF program has wisely taken the ‘more spending’ option off the table…More spending would plunge Argentina into more economic chaos,” he told BNamericas.

The country cannot increase spending without a currency expansion, which is what got Argentina into its current problems in the first place. “[The previous administration] printed money to finance the fiscal deficit,” Verisk’s Blanco said. “This makes Macri’s wiggle room for making decisions pretty limited.”

According to Hanke, Argentina’s central bank also helped maintain Macri’s deficit spending through the sterilization of increases in the net foreign asset component of the country’s monetary base. Through the sale of bonds called Lebacs, the lender became an enabler for the country’s big fiscal deficit, which was a contributing factor in the peso crisis of last year that led to the IMF bailout.

But the IMF based the bailout on too rosy assumptions about an Argentine recovery when both parties signed the deal. The falling peso and bad economic indicators make it ever more likely that both lender and country will seek a debt restructuring that keeps Argentina away from another default. This could be enough to help recover some of the confidence lost by investors.

According to Blanco, the important question for Macri is if the restructuring will happen before or after the election. “The markets expected a renegotiation after the election. I think the option may now be to renegotiate before the election to help bring some stability to the transition [of power] and help Argentina’s ability to pay the debt in 2020,” Blanco said.

This could help the Macri administration avoid the vicious cycle that could trigger a default. As expectations of devaluation increase, the currency and local bonds fall further, which increases the possibility of a default and thus the expectations of more devaluation. The IMF leadership’s visit to Argentina next week to asses the situation could represent a first step toward a new agreement.


Another question is whether the IMF will negotiate with a leader who will probably be out of power next year, so Peronist candidate Alberto Fernández would play a key role in any renegotiations before year-end.

So far, Fernández stayed away from the issue, saying he is just an electoral candidate. For confidence to return to the markets, Fernández would have to commit clearly to paying the IMF debt.

If that were to happen, investors would see that “even though variables and regulations and public policy may change with a new government, the change will not be as sharp a turn as it has been before in Argentina,” Blanco said. 

The end of the Macri administration would mark the first time a democratically elected non-Peronist government reaches the end of its term as result of democratic elections.


The economic package announced by Macri includes a 20% increase in a special tax deduction for pensioners and employees that could mean benefits of around 2,000 pesos (US$33.2) each month.

The state will also start to return taxes that have already been paid this year. For a family with monthly income of 80,000 pesos (US$1,328), the return would amount to around 12,000 pesos (US$200).

The non-taxable minimum was increased to 55,376 pesos (US$920) for a single employee, and 70,274 pesos (US$1,167) for a married employee with two children. Meanwhile, independent workers will get a 50% discount on the taxes they must pay for the rest of the year.

Employees will also get a discount on their labor tax (11% of their salary) during September and October, with a cap of 2,000 pesos per month. The additional costs will be covered by the state.

For informal workers, the state will extend payments of 1,000 pesos for each child, valid only in September and October.

The around 400,000 public employees will receive a bonus payment of 5,000 pesos (US$83) at the end of this month.

The minimum wage will rise, although no figure was given. The current minimum wage is 12,500 pesos (US$208), while inflation has set the poverty line at around 30,000 pesos (US$498).

For SMEs, the government unveiled a deal with the AFIP, which manages tax collection, which will allow companies to delay their tax payments according to a 10-year timetable.

In energy, the government will freeze prices on gasoline and other fuels for the following 90 days.

And finally, the 640,000 students being funded by a government grant known as “Progresar” will see their grant amount increase by 40%. Progresar is a program that covers living expenses for students who seek to finish their primary, secondary, technical or university education (in Argentina, public school and university tuition is free).

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