Argentina
Q&A

'Argentina is again at a crossroads'

Bnamericas Published: Saturday, July 20, 2019
'Argentina is again at a crossroads'

Argentine President Mauricio Macri took office in 2015, pledging better times ahead for the country. 

The stars aligned for Macri and all seemed rosy until 2Q18, when a perfect storm of factors combined to knock the economy into a tailspin, exposing its structural weaknesses.

Under a belt-tightening program drawn up with the IMF, the economy now appears to be slowly regaining strength. It nevertheless remains fragile and susceptible to shocks such as capital outflows.

The state of the economy and Macri’s track record are central issues in this year’s presidential elections, which take place in October. 

Center-right Macri is virtually tied in the polls with Alberto Fernández and his vice-presidential running mate, the populist former president Cristina Fernández de Kirchner.

Ahead of next month’s primaries – which will serve as a de facto national poll and give observers an indication of how Argentines may vote in October – BNamericas spoke to Francisco Castañeda, a Chilean professor of economics who specializes in macro-finance and industrial policy. 

BNamericas asked Castañeda about the implications of a Macri victory, a Fernández victory, and more. 

BNamericas: If Macri wins in October, what could we expect in terms of fiscal and economic policy?

Castañeda: Macri recently announced that the government will establish a more demanding fiscal surplus for the third quarter – in addition to the objective of achieving a primary fiscal surplus of 0.3% of GDP (which already was agreed with the IMF) to send out a signal of confidence to investors. This would imply that, in the medium-term, the debt-to-GDP ratio stabilizes at around 60% of GDP, but at the same time it would leave less space for expansive fiscal policies. 

In the event that Macri wins, this contractionary trend in fiscal policy would likely be maintained. But that is just part of the solution to a very complex puzzle [which involves] reducing inflation – revised up by the IMF to an annual rate of 30-40% – improving real salary levels and stimulating economic growth to reduce poverty and unemployment. All of the above constitutes a set of short-term variables that are very difficult to balance simultaneously. But the fiscal anchor variable appears the preferred option to normalize the economy.

BNamericas: And if Fernández wins?  

Castañeda: If the opposite happens, that Fernández wins, the arguments that unemployment and poverty have increased during the Macri era will be a key part of his platform. This would inevitably lead to a relaxing of the fiscal target, to meet, in the short term, these social demands. If this does all happen, the pace of inflation and public debt growth would accelerate again, which would result in pressure on fiscal coffers and associated negative effects on the domestic economy.

BNamericas: Macri and Fernández are pretty much neck and neck in the polls. What could be the main factors that determine who wins and who loses?

Castañeda: The Argentine economy has started to rebound moderately, following last year’s recession. From negative growth of 1.2% this year, an expansion of 1.1% is expected for 2020.

The slow adjustment in terms of economic growth is mainly due to the high interest rates that have impeded the stimulation of internal demand and spending on imports. 

If the population starts to perceive these moderate improvements, and with medium-term prospects a little clearer, the chances of Macri winning will increase marginally. 

The recent IMF loan is in line with this, supporting the government as it works to reverse negative trends, but this involves meeting goals established by the IMF. In addition, whoever wins will face the major challenge of extending public debt payment deadlines.

BNamericas: And finally, if Macri wins do you think we would see an increase in investment – gross fixed capital formation – in the medium term? And if Fernández wins, could the opposite happen?

Castañeda: Investment should grow if Macri wins. Although things haven’t turned out as brightly as originally forecast, investors believe that, under Macri, there is a greater chance of projects being executed in Argentina.

How much investment we would see under Macri is linked to the stabilization of inflation and public debt and the economy returning to growth again in a sustained manner.

The fiscal challenge is the mother of all battles for Argentina; this is linked to the value of the dollar, capital flight, inflation, unemployment, poverty and economic growth.

Fiscal orthodoxy cannot be adopted as a solution; this would give more ammunition to those who highlight that poverty and unemployment will be the legacy of Macri. Argentina is again at a crossroads, like it has been many times previously. Let’s see what happens.

ABOUT

Francisco Castañeda is an economist from Universidad de Chile. He holds a Phd from Loughborough University and a MSc in Economics and Finance from University of Birmingham. He is an academic at Universidad de Santiago de Chile. His areas of interest are macro-finance and industrial policy.

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