Argentina: What Next?

Mauricio Macri’s surprise victory in Argentina has brought wild optimism to the Argentine markets. The Merval index of Argentine stocks is up 55% since late September.

Yet, Argentina’s sorry track record since 1943 and Macri’s lack of a Congressional majority suggest his chances of a long-term turnaround in Argentine economic fortunes are somewhere between slim and none.

The reality is that, once policy becomes bad enough, reversing is almost impossible.

Macri’s position is very similar to that of previous Argentine leaders elected after a burst of populism, notably Arturo Frondizi in 1958 and Carlos Menem in 1989. None of these leaders succeeded.

Menem came closest, leaving office in 1999 before the 2001-02 storm broke (he had fixed the peso to the dollar, but overspent on the budget, attempting to cover the deficit by foreign borrowing.)

The fact that Argentina has sunk from a relatively rich country in 1929 to an impoverished wreck today is ultimately the fault of poor economic choices made over the decades, often presumably in the interest of populist policy choices.

Beyond the gullibility and/or wishful thinking regularly exhibited by the Argentine electorate, trends in commodity prices have also played a substantial role. At critical times, these have obscured the effects of economic policy, good and bad.

The “infamous decade”

Before the 1930s, Argentine economic policy was very sound, with only a modest populist hiccup in 1916-22, following the one-man, one-vote Lei Roque Saenz Pena of 1912 .

However, the world economy’s slump of the 1930s forced Argentine conservatives to fiddle the electoral system to stay in power. A decade of low commodity prices and restricted trade produced what populist Argentines know as the “Infamous decade” of considerable impoverishment from the high living standards of 1929.

Then, the post-WWII decade saw populist policies combined with high living standards, as Argentina spent the international reserves it had accumulated during the war years.

The late 1970s were a period of low commodity prices following the 1973 crash, as were the 1990s, when Menem pursued more or less sensible free-market policies, privatizing the energy company YPF, for example.

After the crash of 2001-02, which was blamed on the free-market policies of the Menem years, the Kirchners (Nestor in 2003-07, his wife Cristina Fernandez de Kirchner in 2007-15) gained power and gave Argentina a decade of rising living standards.

High commodity prices allowed the two Kirchners to pursue economic policies that were largely irresponsible, including an effective default on their foreign debt.

However, this has only manifested itself quite recently. Living standards only began their decline in 2015, as commodity prices declined and “Kirchneromics” ran out of money.

Macri’s agenda

Since commodity prices are now fairly low and unlikely to rise (other than through a general surge in global inflation, which is certainly possible), it’s fairly clear what the four years of Macri’s term of office will look like.

Macri will unify the peso exchange rate, alleviating the current shortage of foreign exchange but kindling inflation. Macri will also produce honest economic statistics, demonstrating the damage done by the Kirchners — but allowing the faults of his own government to become apparent.

Macri will furthermore cut public spending and taxes. He will need to do the politically unpalatable if he is going to be, as he has vowed, economically responsible. That means he will have to inflict pain if he is going to balance the budget.

Finally, Macri will likely do a deal with the holdout Elliott Management group of creditors, providing Argentina’s left with a populist issue.

This move will allow Argentina fresh access to international capital markets. However, this will unfold just as conditions there deteriorate in an environment of rising dollar interest rates.

Despite his sound instincts on economic policy, Macri is unlikely to improve the Argentine economy in any fundamental long-term way. He will lack a majority in Congress, so he will be unable to pass legislation that, for example, might privatize YPF, the oil company, again.

Economic future?

Macri will preside over only a modest surge of long-term foreign investment, as the realization of mining and energy projects, for which the up-front investment is large, will face a lot of domestic opposition by the leftist opposition.

The new Argentine president may well suffer further problems if the world economy enters a recession.

Thus, the odds are that, by the time the next presidential election rolls around in 2019, he will have to run on an economic record that has inflicted enormous if necessary pain on much of the electorate and is at best only beginning to show genuine recovery.

At that point Cristina Fernandez will pounce and return to the office she lost in the recent elections.

Thus, unless she has been convicted for one of the many crimes and special deals made during her rule, Argentina is likely to return to the path of economic irresponsibility and decline at that stage.

Editor’s Note: Adapted from True Blue Will Never Stain Blog post by Martin Hutchinson.