The repercussions of the policy changes that President Mauricio Macri instituted to iron out the grave distortions brought on by the populist course of his predecessor Cristina Fernandez de Kirchner are beginning to work themselves through and out of the economy. Last year still wound up with a negative result, a real GDP drop of close to 2%, as household spending was held down by high unemployment and still-declining real wages. This has been keeping a damper on business sentiment, which, in turn, has harmed private investment. The sharp devaluation of the peso has helped to push inflation up to around 40%, after Venezuela’s the worst rate in Latin America. The slashing of unaffordable energy subsidies and the ensuing rise in utility bills added to the woes of hard-pressed householders. With one in 12 Argentines out of work and the economy in recession it is little wonder that the labor force has been restive and union-organized protests repeatedly brought demonstrators into the Plaza de Mayo in Buenos Aires and onto the streets of Cordoba.
In recent months, though, a number of green shoots have begun to sprout. Judging from the monthly indicator for economic activity (Estimador Mensual de Actividad Economica or EMAE) the decline in real gross domestic product has been bottoming out and consumer confidence and industrial production have improved. Exports in December were an impressive 34% up on the like month in 2015, following a jump by 20.8% in November. For all of 2016 the Plata Republic registered a foreign trade surplus of USD 2.1 billion, much-improved from a USD 3-billion deficit in 2015, when exports had been down 17% year-on-year. Clearly, Alfonso Prat-Gay, a former J.P. Morgan Chase & Co. executive who is well-regarded on Wall Street, accomplished much as Finance Minister. He not only introduced market-friendly reforms but also brought Argentina out of the cold by scrapping currency controls and resolving the long-running debt default that had isolated it from the international capital markets since its 2001 crash. But he is not exactly a team player and when he feuded with other Cabinet members over policy the President fired him last December 26.
His Ministry is now divided into a rump-Finance arm headed by Luis Caputo (who was Mr. Prat-Gay’s Finance Secretary and will oversee the public debt, state financing and the budget) and a Treasury Ministry focusing on macro-and micro-economic policies to stimulate consumption and pare the fiscal deficit, which is headed by Nicolas Dujoyne, a respected macroeconomist and former chief economist at Banco Galicia (one of the country’s largest private banks). Both are good men and will broadly follow the established direction of economic policy. The critical question for both will be whether they can enliven business activity while maintaining fiscal discipline, a course that some in Buenos Aires have come to call “pragMacrism.” There is little doubt that relations between the Casa Rosada and Congress will worsen in the run-up to the mid-term elections next October. There is, at this point, not much public support for the austerity measures the government has had to take, so Pres. Macri’s political fortunes will hinge on how soon Argentines feel tangible improvements in the economy. But, again, there are positive indications and I continue to expect real GDP to gain by 3% or better this year.
Interesting in this context was the meeting this week in the Palacio do Planalto in Brasilia between Pres. Macri and his Brazilian counterpart Michel Temer. Macri was accompanied by a large delegation of Ministers, Provincial Governors and diplomats on his first state visit to the neighboring country. The objective was to improve a bilateral relationship that had become frostier than it should be and to kick off a process aimed at eliminating existing trade barriers and revitalizing Mercosur by enhancing its ties to other trading blocs and markets.
Mercosur was initiated on a tidal wave of high expectations in 1991, with Uruguay and Paraguay as the two other founding members. It worked well initially, and by 1998 internal trade among the four countries had doubled as a share of the total. Mercosur had become a Customs union with a common tariff policy in 1994. But exceptions and non-tariff barriers persisted and the bloc was seriously rattled by the Brazilian devaluation in 1999 and Argentina’s subsequent debt default. Progress was further stifled by Left-wing governments in both countries and by the admission in 2012 of Hugo Chavez’s Venezuela. It may well be of help, now, that Mercosur last December suspended Venezuela for violating human-rights and trade standards and that the US under President Donald Trump is adopting a more protectionist stance. Externally, Argentina and Brazil hope to begin talks with Canada, Japan and South Korea and to improve relations with members of the Pacific Alliance group. There has also been work done on a free-trade agreement with the European Union. Internally, disputes that need to be resolved include those swirling around Argentine imports of Brazilian sugar and ethanol and the Argentine auto parts supply system, which Brazilians regard as highly protectionist.
Some argue that the timing is opportune because Mercosur will be under the leadership of the two big South American countries for a while, with Argentina holding the rotating presidency during the first half of this year and Brazil during the second semester. Nonetheless, at least for the time being one should not expect too much from this new “spirit of cooperation.” Until the Argentine economy has shifted into a significantly higher gear, manufacturers in the Plata Republic will be wary of intensified competition from Brazilian businesses. On the Brazilian side, sentiments are not too different. Industries in both countries have become less competitive because high tariffs have so long shielded them from the rest of the world. And President Macri is, in any event, unlikely to make serious and specific offers on trade ahead of the October elections.
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