Will Argentina’s New President Bring A New Reality – Or More Of The Same? by Knowledge@Wharton
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.”
David Einhorn Buys Three New Stocks: These Are The Names And Theses (Q3 Letter)
David Einhorn's Greenlight Capital funds returned 5.9% in the third quarter of 2020, compared to a gain of 8.9% for the S&P 500 in the same period. This year has been particularly challenging for value investors. Growth stocks have surged as value has struggled. For Greenlight, one of Wall Street's most established value-focused investment funds, Read More
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 that Kirchnerism imposed tariffs on Argentine exports “in order to be able to enter the sector. As commodity prices collapsed, some landholdings were abandoned because people could not make any money from the crops that were cultivated there.” Moreover, Pampillón adds, the government showed “strong hostility to foreign investment.”
The Next Stage
Turning Argentina around will be no small task, given the fractured political dynamics of the nation. Despite Macri’s victory, Argentina remains a deeply divided country, notes Wharton management professor Mauro Guillen, director of The Lauder Institute. About one half of the population remains loyal to the uniquely Argentine-brand of populism of the Kirchners — the party defeated by Macri. The new president is expected to encounter fierce resistance in the Congress, where he doesn’t have majorities in either chamber. Congressional approval is particularly important for the long-standing debt dispute between Argentina and a group of creditors in the United States. Under Cristina Kirchner, Argentina refused to negotiate despite repeated rulings by a U.S. federal court judge against Argentina, a stance that prevented Argentina from accessing international credit markets.
Regarding Macri’s populist opponents, Guillen explains, “Many of these people are pro-labor in the wrong way – meaning, ‘let’s just work as little as possible, and let’s just use the natural resources in the country’ — while the other half of the population is much more cosmopolitan, more export-oriented, more competitive and better educated.”
These sorts of social and political tensions are not going to disappear under Macri, Guillen notes. “In Argentina, you have this pendulum depending on the circumstances,” swinging between the populist Peronists, who tend to be more inward-looking, and the other half, who are more conservative, more pro-business and also more internationalist.
“I am not very optimistic,” Guillen says. “In Argentina, history gets repeated. It’s like a Greek drama. Macri was a mayor, and is someone who clearly knows how to run a business. From now on, the Peronists are going to do whatever it takes to make the Macri presidency end in a bad way.” And if they can get rid of him earlier in his term, so much the better, Guillen adds. “That’s what happened with [President] Fernando de la Rua in 1999,” he notes. “They just made life impossible for him, and in the end he had to resign because Argentina went into default. The problem is that you have these stalemates in politics between the Peronists and [their opposition, who are] pro-export, pro-business — and they never get resolved.”
The good news, says Sherr, is that even in the darkest times in the last few years of Kirchner’s political policies, foreign oil and gas companies have been keen to get into the Vaca Muerta geological formation, containing major deposits of shale oil and shale gas, in the Neuquén Basin in Argentina. Total, Exxon, and Chevron have all gone into the region. “If they’ve been keen on the geological and developmental capacities of those shale deposits, they should be really keen to go in [now] under a better government,” he said. “What I remind them is that the Peronists are not going away. They still have considerable power. We’re just going to go through another cycle.”
Macri’s Number-one Priority
What should be Macri’s number-one priority? Guillen suggests that, “In the short run, he needs to bring inflation under control. Unless he gets inflation under control, everything else will fall apart. You cannot run an economy with 40% inflation. The other thing: Macri can be more or less lucky from now on, if demand for Argentine commodities picks up.”
Macri also needs to share power with the more moderate Peronists, Guillen says. “He cannot believe, like the Peronists do, that if you have half of Argentina behind you, you can rule the other half,” Guillen notes. “No one can rule that country by saying, ‘I am going to do what I told my half of the country that I was going to do.’ Macri will need to compromise; unless he does that, he is going to fail.”
“In Argentina, history gets repeated. It’s like a Greek drama.” –Mauro Guillen
Shortly after Macri’s victory, Science and Technology Minister Lino Barañao became the only member of President Cristina Fernández de Kirchner’s cabinet to make it onto Macri’s team, noting that he accepted the position following assurances that the budget for his portfolio would not be slashed. In a radio interview, Baranao said that his decision to accept Macri’s offer was influenced by the fact that “science is something that is not the object of partisan opinions and is rather based on the rigor of data.” He also cited the importance of continuing science programs that started as early as 2003. “That’s the right thing” for Macri to do, said Guillen. “If he ignores the Peronists or clashes with them, eventually Macri will lose because the Peronists have too much power, and power at mobilization [of the public].”
In another promising move toward power-sharing, Rogelio Frigerio, Macri’s new minister of interior, said that one of his goals will be “to recover the importance of federalism.” Guillen said, “I think that may be a good signal. That would be, at the end of the day, power-sharing with the 15 Peronist governors in the provinces. So that is a good thing.” Argentina is a federal system. Being president in a federal system — as in the U.S. — doesn’t give the president absolute power.
A Flicker of Hope
On the other hand, Macri’s other cabinet selections have been more contentious. For finance minister, Macri has appointed Alfonso Prat-Gay, who once ran the currency research unit at J.P. Morgan Chase in London. Prat-Gay said that the Macri administration will move “as soon as possible” to unravel its complex system of currency controls. Only a few days after Macri was declared the winner in the runoff election, American Airlines Group announced that it would stop accepting Argentine pesos for tickets, because currency controls were affecting its ability to repatriate earnings. Although dismantling currency controls could further fuel inflation, and stymie economic growth, Prat-Gay told a radio audience, “This is a tall task but we’re convinced that we’ve got the support of the people.” Prat-Gay has said the central bank hasn’t been independent in recent years and it is unclear how many foreign-currency reserves the bank has on hand.
Macri also announced that his president of the Central Bank would be another internationalist: Federico Sturzenegger, an economist who earned his Ph.D. at the Massachusetts Institute of Technology and has taught at the University of California.
Guillen warns that the lessons of Argentina’s troubled political history cannot be ignored. “Argentina has a highly educated population, and it has natural resources. It should rival countries like Australia and New Zealand for productivity, growth, etc., and yet it’s a mess,” he notes.
Nevertheless, Guillen adds, “Having said that, the fact that Macri is trying to establish some power-sharing formula with the Peronists gives me some hope. Without that, there is very little hope. Because the Peronists really, really hate losing power.”