Will Argentina’s New President Bring A New Reality – Or More Of The Same? by [email protected]

As President-elect Mauricio Macri prepares to take office in Argentina, the country is at a crossroads: Will Macri’s administration mark a bright new age? Or will the current revival of optimism in Argentina be short-lived?

For the past 12 years, successive populist governments headed by the late Nestor Kirchner and his widow, outgoing President Cristina Fernandez de Kirchner, have staked the nation’s prosperity on high commodity prices and free-spending social programs, leaving Argentina mired in high inflation and a huge public-sector deficit, and isolated from access to international financial markets.

Under Macri, “important aftershocks are going to be felt across the region,” says Peter Schechter, director of the Latin America Center of the Atlantic Council, a Washington-based think-tank. The results of the Argentine presidential election will eventually have a profound effect on much more than domestic economic policy in Argentina, he adds. “It is a dramatic moment of inflection for the country.”

And yet, opinion is widely divided about Argentina’s prospects. Is the stage finally being set for Argentina to deliver on the enormous promise of its vast natural resources? Or will the nation of 43 million — the third most populous in South America after Brazil and Colombia — remain stymied by its deep-seated tradition of political divisiveness? The optimists stress that Argentina has a sizable middle class, huge energy reserves already popular with Chevron, Total and ExxonMobil, and an educated population. Those assets could offer significant additional opportunities for foreign investors and open new markets in Argentina for foreign providers of sophisticated consumer goods and value-added technologies and services — provided the Macri administration manages to make the critical economic reforms that he advocated during his campaign. Although everyone agrees that Argentina has vast potential for growth, the pessimists argue that Argentina’s long history of political instability and corruption does not bode well for Macri’s prospects to make those reforms over the next few years.

The New Reality

Argentina is the first out of the gate for the new reality in Latin America?Twitter ,” says Kirk Sherr, president of Clearview Strategy Group, a Washington-based advisory firm for the Latin American energy sector. The November elections in Argentina were the first in the region to judge a voting population’s response to a new governing style that doesn’t rely on high commodity prices and is more adjusted to global realities, Sherr notes.

“Argentina is the first out of the gate for the new reality in Latin America.” –Kirk Sherr

It’s not just the future of Argentina that is at stake because of over-dependence on the prices of soybeans, sugar, corn, beef and other commodities. “If we look at Peru and Chile, it’s mining; in Venezuela, it’s oil and gas; in Bolivia, it’s oil and gas with a little mining; in Brazil it’s oil and gas, soybeans, sugar,” Sherr points out. Like Argentina, all of those countries managed to ride a wave of high commodity prices that allowed the state to grow, while enabling the government and state-owned companies to gain wealth and power, and corruption to thrive. Argentina is the first country in the region to have an election under the new reality of lower commodity prices. Facing even more catastrophic economic conditions, Venezuela is slated to have its own parliamentary elections on December 6.

According to the latest forecasts of the International Monetary Fund, the Argentine economy will grow by a mere 0.4% this year, compared with 0.5% in 2014. In 2016, it may well even contract, said the IMF. On the other hand, the country has been suffering an enormous fiscal deficit that could exceed 6% of its GDP this year, and a powerful outward flow of capital. Argentina’s monetary reserves are some $27.7 billion, or about 40% less than when President Cristina Fernandez de Kirchner assumed power in 2007.

Monica de Bolle, a senior fellow at the Peterson Institute for International Economics, says that Macri has promised to completely overhaul the Argentine government’s macroeconomic policies, while arguing that Argentina’s Kirchner-era capital controls “are a mistake.” De Bolle adds that during the era of “Kirchnerism,” the central bank has lacked any independence from political leadership, and “there is no access to statistics” because INDEC, the national bureau of statistics, regularly generates figures that make the economy look a lot stronger than it really is.

Macri has criticized the outgoing administration for relying on widely discredited statistics to measure everything from inflation to poverty rates. “Argentina today doesn’t have credible information on the economy,” Macri said during his campaign. “We need to know the real condition of public accounts.”

Bright Spots and Shadows

Experts agree that Macri will have to confront the heritage of Peronism, the populist movement founded by late Juan Peron (Argentina’s president from 1946-1955 and 1973-74), and carried forward by President Nestor Kirchner and then his wife, Cristina. Although Cristina Fernandez de Kirchner’s term as president ends on December 10, she will vie to remain leader of the Peronist Party, which maintains a majority in the Senate, the largest bloc in the lower house, and governorships of 15 out of Argentina’s 24 electoral districts.

Barred from running for a third term as president, Cristina Fernandez de Kirchner’s voter-approval rate remains high. Nevertheless, Guido Sandleris, dean of the business school at Torcuato di Tella University in Buenos Aires, says that the outgoing president leaves office with Argentina’s economy in shambles. “The Argentine economy has been exhausted for four years. Along with Venezuela, it is the country that has grown the least during this period. It also has one of the highest inflation rates in the world — about 25% in 2015 — and the poverty rate has begun to grow again.”

Rafael Pampillón, an economics professor at the IE Business School in Madrid, notes that not everything about the 12 years of Kirchnerism was negative. Pampillón notes that the first Kirchnerist government enjoyed years of very strong growth as a result of high prices for raw materials, which permitted the government “to earn a great deal from its exports (above all, from shipments of soy), to raise salaries, undertake public sector spending initiatives, grant subsidies and take care of the poorest people” in the country. The data from the early years of Kirchnerist government were spectacular, says Pampillón. Under President Nestor Kirchner (2003-2007), the economy grew at an average rate of 8.7%, leading to job growth and a substantial reduction in poverty. Nevertheless, starting in 2005, notes Pampillón, the government “intervened strongly in the economy as prices for primary products began to decline, and [the government] started to take the blame for the fact that the public-sector deficit was growing.”

“Argentina today doesn’t have credible information on the economy. We need to know the real condition of public accounts.” –Mauricio Macri

Pampillón suggests that interventionism even had an impact on the agrarian sector, which was the most competitive sector in the Argentine economy. Agribusiness in Argentina had made major advances under Nestor Kirchner’s presidency, thanks to a few factors: First, “over the years, landholders had been dividing their lands among their sons; second, new players had entered the sector by purchasing lands; and finally, new technologies had been adopted” in the sector. Pampillón notes

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