President Mauricio Macri has used his first 100 days in office remarkably well and has made good progress in starting to repair the critical damage the economy suffered under populist controls during a dozen years of rule by his two Peronist predecessors, Cristina Fernandez de Kirchner and her late husband, Nestor Kirchner. Thanks to his running start, the outlook for the country has brightened a great deal and the Plata Republic has become a rare spot of light on the otherwise rather gloomy firmament of emerging markets.
Wisely, Macri has been applying what one local analyst described as all the gradualism that is possible, with all the shock that is necessary. This offers no guarantee that there will be no popular resistance against his dismantling some of the previous government’s giveaways in order to mop up fiscal red ink, but so far his drive has met with a generally positive public response.
Only days after donning the blue-white-blue sash of office, Pres. Macri abolished export taxes on agricultural products such as wheat, beef and corn and cut them on soybeans, in his first fulfillment of a campaign promise and with the understanding that “this country cannot get by without farmers.” Argentina’s tax agency has estimated that the farmers have been hoarding as much as USD 11.4 billion of soya, corn and wheat. There are now indications that they have started to sell off some of the stash, which is helping to replenish depleted official currency reserves.
Macri’s step two, just a couple of days later, was to lift capital controls and free the exchange rate of the peso, which promptly depreciated close to its black-market value. The currency is now floating freely and trading at around ARS 14.75 per USD, off from the formal 9.8:1 that was quoted prior to the liberalization. The devaluation, while honing the competitiveness of Argentine exporters, has been putting upward pressure on inflation, which already before was over 30%.
Indications are that the government’s hopes are not panning out that business and labor union leaders can be persuaded to do their part by keeping a tight lid on wages. Still, Macri & Co. are probably on solid ground with the assumption that the impact of the peso debasement on prices will be a one-shot deal of which the effects will disappear as the currency and the economy stabilize. Banco Central already on December 15 yanked up interest rates on short-term deposits by as much as eight percentage points, to a staggering 38% and this should help dampen monetary erosion.
Perhaps most important of all, even though the Peronist party still controls 42 of the Senate’s 72 seats, the government, helped by provincial governors who need access to credit, was able to gain an overwhelming vote for abolishing two laws that had prevented the country from settling with “holdout creditors” in the wake of the 2001 default on USD 100 billion of debt. These are the Ley Cerrojo or padlock law, enacted in 2005 during the first round of restructuring and meant to prevent Argentina from offering holdouts a better deal, and the Ley de Pago Soberano (sovereign payment law) intended to circumvent the injunction issued by New York judge Thomas Griesa by rerouting payments.
The Senate vote not only underscored Macri’s strong leadership and ability to maneuver successfully in an opposition-controlled congress, it also paves the way for a settlement, at long last, of the debt-battle that had isolated the Plata Republic and prevented any return to the international capital markets. An agreement is already in place to pay USD 4,653 million to satisfy the claims of the four largest holdouts. Finance Minister Prat-Gay has said his government plans to issue USD 15 billion in debt to fund the payments and the holdouts have agreed not to try to interfere. This is likely to be the first of several new bonds issued by the nation, by individual provinces and by private companies.
The borrowings are likely to be well received in the markets. Since Argentina has long been absent its leverage is low and Argentine bonds yield an alluring 7.5%. The hedge funds holding Argentine paper must be paid off by April 14, or the deal is off. But by raising finance abroad Argentina will also be able, along with announced cuts in energy subsidies, to plug its gaping fiscal hole, which was as big as 5.8% of GDP last year. The US appeals court will now hold a hearing in mid-April and Judge Griesa has already declared himself prepared to lift the injunctions. A number of smaller bondholders – individual investors, mostly from Argentina -- may still try to throw sand into the gears of the process because they have been sidelined in the negotiations, but together they account for only about USD 2 billion of IOUs. They will not be able to derail the deal and will probably not even succeed in delaying it.
Meanwhile, Argentina is beginning to issue more meaningful economic numbers, now that Macri is putting an objective statistical office together. Pres. Fernandez had taken great pains to hide the dire consequences of her ill-chosen policies. She had fired bean counters whose findings displeased her and even prosecuted private consultancies for daring to publish realistic data. She ran an administration that was so overstaffed by patronage that many of the workers never showed up at their jobs except to collect the pay check. Under her, Argentina became the first country to be censured by the IMF for misreporting GDP and wholesale as well as consumer prices.
Public service ranks are now being trimmed, however, and an effort to put together new statistical bases is being made, suggesting that the reporting will get much more honest. This may take a while and the biggest problem the government may face in the longer run is to get Argentines to continue supporting its reforms even though this will involve some hardships. President Macri’s political honeymoon will not last forever. At this point, though, the omens are good overall and the economy should rebound handsomely. There will be a renewed influx of foreign investment and real GDP growth is likely to hit close to 5% next year, following a still-sluggish 2016.