Mauricio Macri’s election in late 2015 was widely seen as a positive step towards redressing the Argentine economy, but will he be able to see through much-needed reforms? Melodie Michel reports.

The first economic measure taken by Argentina’s new president last December was to lift export duties on beef and grains, and to reduce the tax on the country’s biggest export – soybeans – by 5% per year, from the previous 35%.
The decision to focus on trade first was not just symbolic of Macri’s free-market beliefs; it was an acknowledgment of the country’s urgent need to boost foreign exchange reserves, which have been trending dangerously downwards for years.
Less than a week after being sworn in, Macri once again marked his intention to get the economy back on track by lifting currency controls that had restricted US dollar exchange in the country. The move instantly sent the Argentine peso down from around 9 to over 14 to the dollar – similar to the black market exchange rate – but was welcomed by international markets.
Since then, he has shown many more signs of his resolve. The most symbolic one was his presence at the World Economic Forum in Davos in January – the first time in over a decade for an Argentine president to attend the event. The most recent sign, just as GTR was about to go to press, was the scrapping of a 5% tax on mining exports.
“He’s made quite an impressive start to his term,” says Edward Glossop, emerging markets economist at Capital Economics. “The big question before he was inaugurated early in December was whether he could meet the high expectations of the financial sector, and so far he’s delivered.”
But Argentina’s road to economic recovery is paved with obstacles, not least because Macri came into power at a time of stagnating global growth. Additionally, its close neighbour and biggest trading partner, Brazil, is facing a deep recession, and efforts to turn to Asia and Europe will be tempered by the
two regions’ own economic woes.

Holdout negotiations

On the international side, Macri’s toughest battle has to do with the country’s 2001 US$82bn sovereign bond default, which cut its access to capital markets. Since 2005, the country has been negotiating with bondholders to restructure its debt at a discount, and managed to strike a deal with 93% of them. But a group of funds that purchased bonds at very low prices on the secondary market after the default, earning them the nickname “vulture funds”, have refused to accept the deal, pushing instead for full repayment. These holdouts have managed to use the US judiciary system to block repayments to all bondholders as long as they do not reach an agreement with the government, therefore keeping Argentina’s rating below investment grade.
The new president has vowed to solve the holdout situation and get Argentina back on the international bond market – another much-needed measure to boost the country’s dwindling foreign exchange reserves.
But he has also made it clear that he will not yield to the holdouts’ demands as they are.
At the end of January, days before the start of negotiations, the government secured US$5bn in loans from HSBC, JP Morgan, Santander, Deutsche Bank, BBVA, Citibank and UBS, boosting the country’s reserves to around US$30bn and putting Macri in a stronger position against the creditors.
The deal instilled confidence in international investors, but Glossop warns that enthusiasm could be “premature”.
He tells GTR: “Argentine assets have been growing strongly, particularly in the bond market, since Macri got elected. That seems relatively premature to us (…) because financial markets are expecting a resolution to the current holdouts problem very soon, and I think that’s quite optimistic. This commercial bank loan is potentially a bit of a bargaining chip that bolsters the central bank’s FX reserves so it doesn’t have to stand to the demands of the holdouts as easily.
“The key will be how much FX reserves will rise in the coming months as a result of [Macri’s economic] reforms. If they rise substantially, that puts the chips in Argentina’s favour. If they rise more modestly, a deal might be more likely. So there are still a number of hurdles to be overcome. We don’t think a deal is probable until the second half of this year at the earliest.”
Events that occurred since this interview appear to confirm Glossop’s view: in mid-February, Macri asked US regulators to lift the injunction preventing the country to repay the 93% of bondholders that agreed to the 2010 restructuring as long as the holdouts didn’t get what they wanted. This came after the holdouts rejected Argentina’s early February offer to pay 75% of what they claim to be owed, but was seen by the funds as a belligerent move since negotiations were not over.
On February 19, judge Thomas Griesa, who is overseeing the proceedings, agreed to lift the injunction, effectively allowing Argentina to repay the majority of its bondholders, and taking away the holdouts’ leverage. Following the decision, many analysts believe the country is likely to solve its holdout crisis faster than expected.

Hope for banking

If Macri succeeds in redressing the country’s foreign exchange crisis, he will also revive the banking sector’s participation in foreign trade.
Carlos Alfaro, a partner at Argentine firm Alfaro Abogados in Buenos Aires, explains: “At the beginning of the last government, local banks were very active in trade financing and providing it at very low rates. But in the last three or four years, the situation changed completely. It was more difficult to provide trade financing to local producers because of the lack of availability of foreign currency.”
According to a banker from an international institution present in Argentina, who wished to remain unnamed, the country’s banking system only represents 13% of its economy following “many years of financial repression”. He adds: “Banks are seeing a faster than expected repatriation of prior years’ massive resident capital flight. Liquidity is returning in the form of deposits and credit spreads seem to be on a declining path, which is supportive for lending activities.
“Private sector leverage is among the lowest in emerging economies, which offers significant room for growth. And the local capital market more broadly is being reinserted into the global financial architecture. The government has unified the exchange rate markets, lifted restrictions on a majority of imports and cut taxes on exports. These measures are very supportive for trade, and trade financing is on the rise.”
No Argentinean bank responded to GTR’s interview requests, which reflects the wait-and-see attitude shown in the international banking community.
Natalia Lorena Craig, head of global trade finance in Argentina for BBVA, comments: “We are really seeing a change. The new government has removed several controls implemented by the former administration. However, it is expected in the near future that many other rules will come into force to foster trade and remove the controls in place, and it is soon to estimate their effect.”

Domestic pressures

Macri’s toughest challenges, though, will be domestic ones: inflation has gone from 17.3% at the end of the 20th century to around 27% at the end of 2015 – one of the highest rates in the world. It seems like nothing can stop the increase of consumer prices, but Macri’s ability to contain it will be one of the toughest tests of his policies’ efficiency.
In January the government announced plans to gradually reduce inflation, aiming for 20-25% in 2016 and a single-digit figure by the end of Macri’s term in 2019.
Alfaro tells GTR: “Inflation is by far the biggest challenge. The minister of economy has announced he’s going to implement something very similar to the policy that Chile adopted in the 1990s, which is to reduce inflation gradually. In order to do that, he has to control two things: that the business people do not get too ambitious and increase prices more than they should. And the other is to negotiate in a collective agreement for salary growth of less than 25%.”
According to him, between November and January, many prices increased by 40%, which was followed by union leaders asking for a 30% increase in salary. “Now the big battle is trying to convince the business leaders to stabilise the prices, and then to negotiate with the unions perhaps a gradual increase of salaries, so that the government can really foresee what the inflation is going to be,” he adds.
The government has already started meetings with the country’s major unions, but convincing them to accept a lower salary increase than demanded will not be easy in the midst of growing discontent over thousands of lay-offs.
What makes it even more difficult is that Macri’s republican party, PRO-Cambiemos, does not have a majority in congress.
“He’s got quite a bit to do domestically, including tighter monetary and fiscal policies, which is going to be very unpopular, especially because he doesn’t have the majority in either house of congress. Once congress reconvenes, he’s going to have a bit of a job to push through the measures required to push the economy on a sustainable growth path,” Glossop says.
Some are even worried that opposition forces, specifically from previous president Cristina Fernandez de Kirchner’s Judicialist Party (PJ) party, might prevent Macri from finishing his term. After all, since 1973, all the elected presidents that were not part of the Peronist PJ resigned before the end of their term.
But according to local sources, Macri is in a better position than his non-Peronist predecessors.
Alfaro explains that Macri has many original Peronists within his own party, and that his father has strong links to the Peronist party. He also has a very good relationship with Hugo Moyano, the leader of the General Confederation of Labour, (CGT). In fact, he recently appointed José Octavio Bordón, a former PJ governor of the state of Mendoza, as Argentinean ambassador to Chile.
“He has a very good knowledge of politics and is trying to reach out to certain sectors of the Peronist party. The situation has changed in Argentina: the Peronist party is no longer a monolithic group of people, it’s very divided. One of the heads of the previous administration created a sector within the Peronist party that was confronted by the traditional members of the Peronist party. Those members today are with Macri. They don’t like the other Peronists.
If Macri has a successful economic turnaround during the first four years, he even has very good chances of being re-elected,” he adds.
While it is still early to tell whether or not Macri’s approach will be successful, most in the international markets are optimistic, with some even speculating that Argentina could replace Brazil as Latin America’s new investment darling.
“We know Brazil is in a deep recession which doesn’t look like it’s going to end any time soon.
As things stand, Argentina is probably going to grow faster than Brazil in 2017. If Macri’s reform momentum is maintained, we suspect that he could sustain growth of around 3% over the medium term, which would be faster than we estimate Brazil’s potential growth, at around 2%,” predicts Capital Economics’ Glossop.
But comparisons are hard to draw, and whichever country is in investors’ good books matters very little, considering that Brazil is Argentina’s number one trade partner, representing 28% of exports and 33% of imports.
A source close to the Brazilian government tells GTR that a strong Argentina could only be good news for Brazil. Speaking on condition of anonymity, the source points to a number of diplomatic visits between the two countries since Macri’s election, and explains that “a robust Argentina is of the utmost interest for Brazil, and a stable and strong Brazil is vital for the economy in Argentina”.
“Both countries need to do well because they are so interlinked that if one goes badly the other doesn’t grow. And to grow, you need as many partners as possible, so we very much welcome Argentina’s progress in this regard,” he adds.