The election of Mauricio Macri as Argentina’s president after 12 years of the Kirchner clan in power blew new wind into the sails of South America’s second-largest economy. It also led to a flurry of optimism across the country, and particularly on Wall Street. With hedge funds frothing at the mouth at the opportunity of snapping up Argentine assets at distressed values, a word of caution is in order. Not only is Macri not the freewheeling markets capitalist he suggests he is, but the challenges his administration faces—rampant inflation, a bankrupt central bank, a fractured political system, and a stagnant economy, to name a few—suggest more pain is in the cards before Argentina can spread its wings and become a fully functioning member of the world economy and the global financial system.
“Market euphoria,” read the BBC’s headline in the aftermath of Macri’s electoral victory against Peronist Daniel Scioli, Cristina Kirchner’s handpicked successor. “Argentina fever,” doubled down
While such optimism is not without its reason, it appears excessive and maybe even exaggerated. The current socio-political situation in Argentina, which is intimately tied to the economic situation, can be traced back to 2003, when Nestor Kirchner was elected president. But today’s woes are more closely connected to 2012, the year Nestor’s widow Cristina got reelected with 54% of the vote.
Cristina, or CFK as she’s known in Argentina, vowed to intensify the Kirchnerist model in an attempt to establish a long-lasting political legacy. From an economic standpoint, CFK sought to keep the Argentine peso undervalued to promote agricultural exports, while sustaining a dense network of subsidies and price-setting mechanisms that kept goods and services cheap to promote consumption (and win votes). This was sustainable in Nestor’s days, who counted on rising commodity prices to fuel a dual surplus that financed the populist party, while eventually taking foreign exchange reserves to a record of more than $52 billion in early 2011.
CFK presided over the period in which that system unraveled, eating into the stock of dollars her husband piled, and into her party’s political capital. The tide turned, as an economic slowdown in China led to falling commodity prices, particularly for soybean—which is Argentina’s cash crop. To support the nation's aging transportation system, Cristina turned to even more subsidies and price caps which led to decreased investments, particularly in the energy sector, forcing a hydrocarbon rich-nation to import natural gas at exorbitant prices. As the budget deficit soared to 6% of GDP, CFK resorted to import restrictions, export taxes, currency controls and parallel exchange rates, along with the nationalization of pension funds and domestic energy company
Macri faces a dire financial situation and an even more daunting political challenge. With reserves having dwindled to less than $26 billion, he will be forced to devalue the currency and cut back on subsidies. Amid low productivity and falling economic output, Macri will have to inflict more pain on consumers, who’ve kept the country going, in terms of reduced purchasing power. With a central bank that's broke, his economic team will have to fly to New York and, from a weak position, negotiate a settlement with bond holdouts who have several court judgments in their favor. And then there’s the political struggle.
Macri’s narrow second-round victory was preceded by an intensely contended presidential election that saw the electorate splinter into at least three major groups: loyal Kirchnerists backing Scioli, a broad group of dissident Peronistas behind Sergio Massa, and the President-elect’s own voters—a combination of wealthier conservatives, members of the traditional UCR, and a large contingent of Argentines of all ideological inclinations that were simply looking to oust CFK and her crew.
Thus, Macri finds himself in the uncomfortable position of having to implement tough and unpopular measures by seeking consensus. As the adrenaline of his win fades, Macri will have to deal with stubborn union leaders, mercenary lawmakers, and a hardened political apparatus in the streets—and Congress—that the Kirchnerists know how to use skillfully to make his life a nightmare. All of this in a country that has culturally adapted to political confrontation that all too easily ends up being played out in the streets of Buenos Aires.
Argentina, therefore, provides an incredible opportunity for investors. A nation swimming in natural resources with a well-educated population and a large domestic market in need of foreign direct investment. At the same time, it’s a country that has been in economic decline for decades due to an extremely complex socio-political dynamic that has eroded institutions and fostered bureaucratic inefficiency and corruption. For the sake of everyone, let’s hope Macri is up to the task.
