C&B Notes

Will Argentina Stay the Course?

Argentine President Mauricio Macri, who came to office three years ago with a reformer’s agenda and a clear mandate, has seen his support erode thanks to the choppy economic conditions that were to be expected given the austerity reforms he has pursued.  This tension is predictable, but it leads to a key question:  Will Argentinians be patient enough to give capitalism an opportunity to transform Argentina?

As President Mauricio Macri prepares to host the annual G20 summit in Buenos Aires on November 30, with some 10,000 visitors already experiencing a taster of Argentina’s runaway inflation as hotel prices soar, the favourable reputation that the reformist president still enjoys among world leaders has all but evaporated at home.  When Mr. Macri swept to power three years ago promising to put an end to decades of economic volatility, most Argentines were optimistic about their future.  But this year that optimism has begun to fade amid a currency crisis that saw the peso lose about half of its value, forcing a $56bn bailout from the International Monetary Fund.  Examples of how Mr. Macri’s “Let’s Change” coalition has struggled to change the country abound.  Trade unions remain as powerful as ever — on Monday the state airline went on strike grounding 371 flights in protest against the suspension of 367 employees earlier this month.  With interest rates until recently higher than 70 per cent, small and medium-sized businesses and the lower middle class in particular have suffered from the continued economic volatility.  High inflation means that real wages are expected to fall by 11 per cent in the last four months of 2018, according to Ecolatina, an economic consultancy…

The IMF predicts that Argentina’s economy will contract by 2.6 per cent in 2018, and by 1.6 per cent in 2019.  That has cast doubt over Mr. Macri’s ability to win in presidential elections next year, when he will run for re-election.  Much will depend on how soon the economy begins to rebound, with most economists expecting activity to pick up in the second quarter of 2019, although recovery is also expected to be patchy across the different sectors of Argentina’s diverse economy.  “The economy is more likely to surprise on the upside [next year],” said Enrique Cristofani, executive chairman of Santander Río in Argentina, the country’s largest private sector bank, arguing that the recovery will come sooner rather than later.  Mr. Cristofani explains that despite the economic volatility this year, there are three underlying factors that are positive for the economy in the medium term: Argentina now has a competitive exchange rate; the IMF-backed austerity drive will lead to fiscal equilibrium next year; and positive real interest rates strengthen the financial system.


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