: SPECIAL REPORT Argentina: The next six months of Macri’s presidency Buenos Aires, June 2016 Barcelona • Bogota • Buenos Aires • Havana • Lima • Lisbon • Madrid • Mexico City • Miami • New York City • Panama City • Quito • Rio de Janeiro • Sao Paulo Santiago • Santo Domingo • Washington, DC ARGENTINA: THE NEXT SIX MONTHS OF MACRI’S PRESIDENCY 1. INTRODUCTION Mauricio Macri’s administration hopes to start with a clean slate 1. INTRODUCTION and launch a new era of governance in the second half of 2016. To 2. INFLATION, ARGENTINA’S do so, the Casa Rosada attempted to consolidate the adjustments PATHOLOGY during the first few months, and with a set of measures and 3. THE COSTS OF ADJUSTMENT agreements in place, it is now focused on completing the 4. THE END OF THE TRAP, framework that will generate the investments that the country NEW ALLIANCES has been awaiting for more than a decade. Positive forecasts 5. THE POLITICAL SITUATION for the period between now and December have become 6. ENERGY, MINING, AND commonplace for government officials, to such a degree, that AGRICULTURE jokes are being made in social media about the matter, like the one 7. CONCLUSIONS referring to the famous rural novel Don Segundo Sombra, which AUTHORS forms part of classic education in Argentina’s schools and should now be titled Don Segundo Semestre. President Macri has completed the first stretch of his presidency with decision. Without a powerful structure of followers like the one of the opposition Justicialist Party (Peronist), he has worked hard to position himself as a strong leader who applies energy, good reflexes and practicality in adopting the measures needed to adjust the economic imbalances left behind by his predecessors. These decisions have been well received by the business world in general—although there is no shortage of mutual disappointment between the President and certain business sectors—and by most of the population. Macri’s role has started to experience the erosion that results from exercising power during times of adjustment. However, a number of measurements have confirmed that he still has enough credit to face the remaining economic reforms, which may be more or less drastic, even if the positive effects on everyday life are not immediately apparent. 2 ARGENTINA: THE NEXT SIX MONTHS OF MACRI’S PRESIDENCY 2. INFLATION, Foreseeable and necessary ARGENTINA’S PATHOLOGY decisions, such as the significant increase in public The government’s main goal service fees, resulted in faster is for the country to move inflation, a lower purchasing towards economic growth by power for salaried employees, the end of 2016. This milestone and a drop in economic date is not fortuitous. There activity, which the government will be midterm elections the has acknowledged. The basis following year, and without of optimistic thinking lies in concrete results, Macri’s the belief that rising inflation government could experience these past few months is the the voting loss that will allow result of relative prices that Peronism to regroup and have readjusted and, with the reposition itself as the threat normalization of the primary faced by other non-Peronist variables, the productive governments between 1983 and investments that Argentina’s now. economy needs in order to begin the path towards recovery will take place. Inflation: Annual comparison 2012-2015 With this goal in mind, Macri INDEC and his economic team have Congress IPC 1 set their focus on creating 38.53 % the conditions capable of attracting capital that 30 %2 29.90 % generates employment in the 28.30 % nation through a program 25.60 % 23.90 % based on reducing the government’s involvement in the economy, which was the most distinctive symbol of 10.80 % 10.90 % the administrations of Néstor Kirchner and his wife Cristina Fernández. 2012 2013 2014 2015 Another priority for the government is to reduce 1 Consumer Price Index released by the National Congress known as "CPI Congress." This inflation, which reached a index emerges as an average of nine private and public index (provincial) inflation. The initiative was a response to the opposition in Parliament to judicial and administrative record of more than 6% in persecution that led the then Trade Secretary, Guillermo Moreno, against private May. To do so, it has lowered consultants. The purpose of it was to provide an alternative number to the official. It began the amount of money being to be implemented from 2011. issued and set interest rates 2 The reference numbers are the ones from, the City of Buenos Aires, which amounted close to 40% in order to inflation in 2015 in 26.9% and the province of San Luis (center west) that stood at 31.6%. Both were established as benchmarks until the INDEC complete the development of a new stimulate the reduction of methodology of measuring price developments. cash in circulation. 3 ARGENTINA: THE NEXT SIX MONTHS OF MACRI’S PRESIDENCY Argentina has experienced a decisions that boosted inflation, number of inflationary periods such as authorizing a number throughout history, and this of fuel price increments. time the task is challenging. Despite the slowdown in rising A UNICEF report published in prices during the second half May stated that four million of the year due to the recessive children in Argentina live impact of the measures in poverty. Although the implemented, private analysts data is from December 2015, predict that inflation will when Kirchnerism departed, reach an average of 35% in 2016. everyone is aware that so far this year, the situation has President Macri's forecast had worsened for disadvantaged been 25%. groups. Rising inflation has a strong impact on the poor, and 3. THE COSTS OF consumption data from major ADJUSTMENT supermarket chains reflects this: in April, sales dropped The government has been by 3.6% in the year-on-year criticized for its shortcomings comparison. in addressing the social consequences of reorganizing Most analysts believe that the economy and for certain the government was late in launching social containment measures. One is a proposed Inflation: Monthly comparison 2015-2016 (%) law to reimburse the value added tax (VAT) for food purchases made by recently INDEC retired individuals and the 3.9 3.8 recipients of direct social aid. 2.08 1.92 2.17 1.92 2.2 2.2 The initiative was approved 1.48 2 2.01 2.02 1.53 1.1 0.9 1.3 1 1 1 1.3 1.2 1.2 1.1 1.1 by the Chamber of Deputies and it must now make its way Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 3 through the Senate. Mauricio Macri has made 5 Congress IPC more public appearances San Luis IPC 84 recently in order to establish empathy with the population 4.8 3.6 4.2 3 3.8 that has suffered the 2.7 3.2 3 2.5 most from the economic readjustments made during January Febreruary Marz April the first months of his presidency. The message is 3 In December, with the change of authorities, the head of INDEC said they could not publish official data, which would be taken as "Alternative CPI" inflation measurements calculated clear: The medicine tastes by the City of Buenos Aires (3.9%) and San Luis (6.5%). bitter, but it is needed in order 4 This figure is an estimate. to create a situation that is 5 Given the lack of credibility of the official CPI other indices were addressed in the analysis. better for everyone. 4 ARGENTINA: THE NEXT SIX MONTHS OF MACRI’S PRESIDENCY There have also been protests the GDP in 2015, and despite in certain cities that have been being lowered, they will still driven by residual Kirchnerism represent 3.9% of the GDP and other disgruntled sectors. according to private forecasts. “Subsidies represent Nearly every day, the President Similarly, although the prices 80 % of the fiscal can be seen on television paid by users rose sharply (on asking the people of Argentina average, by 200% in the case deficit” to believe that the positive of electricity or natural gas), results from the measures the actual costs of services implemented will begin to are still not being covered. For appear sooner rather than example, the price of public later. His cabinet, which is not transportation in the Buenos very diverse, has explained Aires metropolitan area is some of the aspects of these stuck at half its actual value. adjustments with comments that have been rather Today, subsidies represent unfortunate due to their lack 80% of the fiscal deficit, which of sensitivity. continues to remain high (5.4% of the GDP) and the Although reducing inflation government is funding with is one of the government’s external debt. In this scenario, top priorities, public spending the goal of lowering inflation has not undergone significant is expected to be reached, cuts. Direct subsidies for but primarily because of the public services were 5.1% of economic slowdown. GDP: Comparison and forecasts (%) 9.50 9.20 8.40 8.40 8.00 3 2.90 3 1.90 1.70 0.8 0.50 0.70 0.1 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Banco Mundial 5 ARGENTINA: THE NEXT SIX MONTHS OF MACRI’S PRESIDENCY 4. THE END OF THE TRAP, United States, Barack Obama; NEW ALLIANCES the President of France, Francois Hollande; and Italy’s Beyond the attack on inflation, Prime Minister, Matteo Renzi. the freeing of exchange All showed hope regarding controls (“the trap”), the rate Argentina’s new open policy era adjustments, and the agreement and promised governmental and payments for Vulture Funds support to companies from their that allowed Macri to win the nations that intended to do legal battle with Argentina’s business here.