GIS Dossier: Argentina digs itself out of a hole

President of Argentina Mauricio Macri
President Mauricio Macri’s foreign policy has helped Argentina regain clout internationally, but he has not delivered the economic recovery he promised four years ago (source: dpa)

GIS Dossiers aim to give our subscribers a quick overview of key topics, regions or conflicts based on a selection of our experts’ reports since 2011. This survey reviews our coverage of developments in Argentina, a crucial player in South America, as it has tried to get its economy back on track and regain clout in the international arena.

GIS’s coverage of Argentina began in 2011, when it seemed to be stepping out from the shadow of its 2001 default, having enjoyed the longest period of growth in its history. The country’s economy had grown at an average rate of 7 percent per year between 2002 and 2011, on the back of high prices for key Argentinian commodities such as oil and agricultural products, especially soybeans.

The commodities exports pumped revenue into the state budget that paid for extensive social programs. These, in turn, helped lift millions of Argentines out of poverty and made the country’s president, Cristina Fernandez de Kirchner, extremely popular.

The good times would not last, however. The global financial crisis that had begun in 2008 finally fed through to China, a major importer of Argentinian commodities, and the world’s largest buyer of soybeans. Argentina’s exports slowed and income into the federal budget sank. President Kirchner had a choice: do the responsible thing and begin cutting social programs or keep her political popularity high by finding ways to let the gravy train run a little longer.

Irresponsible economic policy

President Kirchner chose the latter option and the results were predictable. As the central bank began printing money to fund the budget, inflation rose rapidly. GIS Latin America expert Dr. Joseph S. Tulchin wrote in June 2011 that unions – an important element in Ms. Kirchner’s Peronist voting base – were demanding a rise in wages of between 22 and 25 percent. Those figures mirrored private agencies’ inflation estimates, while the government’s official rate was around 10 percent. “This discrepancy portends increasing social conflict over the coming months,” he predicted.

A growing web of government regulation was holding investment back

By October of that year, Ms. Kirchner remained popular enough that she won a resounding reelection victory, with her Front for Victory political alliance taking more than half the seats in the legislature. As GIS guest expert Alberto Fohrig wrote, her solid majority in both chambers of the National Congress allowed her to push through new, controversial policies. Central among these were currency exchange controls aimed at keeping Argentines from moving their capital out of the country (a phenomenon that had begun gaining momentum with the high rate of inflation and a raft of new taxes Ms. Kirchner had introduced to patch budget holes). The controls only created a panic that sucked more money out of the economy. Moreover, the “growing web of government regulation on prices and exports” was inhibiting investment and holding the private sector back. The central bank began selling off its dollar reserves to prevent a free fall.

By December 2011, Dr. Tulchin was suggesting that Argentina’s spending spree could be coming to an end. The government had cut $1 billion in subsidies on fuel, utilities and other goods and services – but only on high-income families and profitable businesses. The best scenario for the government, wrote Dr. Tulchin, “is that it can maintain subsidies to the poorest of the poor, while slowly reducing them on more basic services such as electricity, heat, and fuel.”

Energy mismanagement

The Kirchner administration’s attempts to manipulate the economy created especially difficult problems for the energy sector. Argentina sits on huge reserves of oil and gas, and is Latin America’s fourth-largest oil producer (behind Mexico, Brazil and Venezuela). Yet, investment and production were shrinking. Chile had to scramble to increase hydroelectric power when Argentina suddenly could not meet commitments to supply that country with gas. “There is little doubt that the government’s policies of consumer subsidies, limiting exports and price controls have deterred investment in exploration and production,” wrote Dr. Tulchin in June 2012.

Buenos Aires took matters into its own hands, nationalizing a 51 percent stake in YPF, the national petroleum company, which at the time had been controlled by Repsol, a Spanish firm. The idea was to force YPF to invest more and boost production. Instead, the move would “almost certainly mean that Argentina will lose the war for energy self-sufficiency and will alienate foreign investors,” Dr. Tulchin presciently predicted.

As a result of these policies, Argentina went from $12 billion in energy exports in 2008 to an import bill of $13 billion by 2013. Argentina would end up having to pay Repsol some $5 billion for the stake it nationalized.

Conflict with the ‘holdouts’

Adding to Argentina’s economic woes was its continuing dispute with the so-called “holdouts” – a group of bondholders that had rejected the debt restructuring deal the country made with its other creditors after the 2001 default. The Kirchner administration dubbed these investors “vultures” and refused to negotiate with them, arguing that they should be forced to accept the 70 percent haircut that the vast majority of its creditors had agreed to take. Courts in the United States continually ruled in the holdouts’ favor.

These court rulings effectively locked Argentina out of international financial markets until it came to terms with the holdouts. This lack of access to capital was likely costing the Argentine government more than $15 billion per year in excess interest payments on its loans. Argentina was paying the price for violating the rules of the game. “The international financial markets cannot function without some measure of predictability. The U.S. courts, in defending legal contracts, represent that measure of stability,” wrote Dr. Tulchin.

Former President of Argentina Cristina de Kirchner
President Cristina de Kirchner’s policies set Argentina on a ruinous economic path (source: dpa)

By June of 2014, the economic mess and the lack of progress with the holdouts was beginning to take a toll on Ms. Kirchner’s popularity. “The current political mood in Argentina shows a growing sense that President Cristina Fernandez de Kirchner’s government is a lame duck,” Dr. Tulchin pointed out. At the same time, “the market [was] desperate for whatever stability and framework for exchange can be found.”

In an Expert View from September 2014, Dr. Tulchin pointed out that Argentina could get its economy on track by simply adhering to the court decisions and paying the holdouts. “In doing so, it would regain access to the international credit market and save itself a huge amount of money. This would more than make up for whatever payment it makes to the holdouts,” he wrote.

Corruption increasingly visible

As the economic situation worsened, the Kirchner government’s manipulation of national accounts and its moves to limit transparency became more and more apparent. As early as 2011, Dr. Tulchin wrote, “Argentina’s government is widely recognized as cooking the national books. No one trusts government data on inflation and monetary supply and now the government is playing with the exchange rate and making matters worse.”

Six months later, he pointed out that such moves were risking Argentina’s reputation and economy. Buenos Aires had allowed the central bank to print money without going through congress and created a new national database administered by the national police, who were given increased powers to gather information about “suspicious” people.

“The fear of corruption puts virtually anything the Argentine government does under the microscope,” Dr. Tulchin said. “This government hates transparency, which only makes suspicions more profound.”

Dwindling support

It was only a matter of time before the popularity of the Kirchner administration began to wane. In November 2012, more than a million demonstrators took to the streets of Buenos Aires to protest government policies. In the August 2013 primaries for legislative elections, supporters of President Kirchner’s wing of the Justicialist Party took 26 percent of the vote, half of what she had garnered in the presidential elections of 2011. Dr. Tulchin wrote that the “resounding defeat is a clear message that the electorate does not support Ms. Kirchner’s efforts to change the constitution to allow her to run for a third term as president.”

By November 2013, pressure was mounting on Argentina’s embattled president. The popular mayor of Buenos Aires, Mauricio Macri, had put together a coalition that looked likely to support him in a presidential bid, while Ms. Kirchner’s political faction had only received 32 percent of the vote – far less than she got in presidential elections two years earlier.

Argentina will not cry for the Kirchners

In August 2014, GIS chairman and founder Prince Michael of Liechtenstein wrote that everybody was waiting for President Kirchner’s term in office to end.

The Kirchners’ rule in Argentina has been left-wing, populist and quite authoritarian. Their typical left-wing politics have seen nepotism rewarded within the party and policies favoring nationalization, price controls and government meddling in business. Corruption has flourished and investments have stopped resulting in high inflation levels.

As the end to President Kirchner’s rule came closer, with an election in October 2015 that would bring the country a new president, wrote Prince Michael, optimism for the future was growing. “Argentina will not cry for the Kirchners,” he concluded.

Macri era begins

Businessman Mauricio Macri, the former Buenos Aires mayor, won Argentina’s 2015 presidential election on an anti-Kirchner platform. Headlines around the world heralded a reversal of the swing to the left in South America. However, Dr. Tulchin posited that the enthusiasm was “overstated,” and failed to recognize the difficult political environment that Mr. Macri faced. Though Ms. Kirchner’s social programs were expensive, they were also extremely popular. Simply pulling the plug on them was not an option. Instead, Mr. Macri would have to strike a delicate balance between implementing policies to slow inflation and bring Argentina back to international financial markets, while preserving enough of the social safety net to keep protests out of the streets.

Mr. Macri also faced a congress and provincial governments that were controlled by his opponents. He would have to throw them enough bones to earn their cooperation if he was to implement any of his policies. Fixing the country’s economy would prove a herculean task. Most probably, Dr. Tulchin concluded, President Macri would have to proceed slowly.

Argentina reemerges

In March 2016, Dr. Tulchin wrote that the Macri government had made an ambitious start. Mr. Macri used executive actions to cut away the extensive web of Kirchner-era price controls, subsidies and exchange-rate restrictions.

However, the administration’s most significant moves were aimed at ending Argentina’s semi-isolation from the international community. First, it worked out an agreement with the holdouts: Argentina recognized 100 percent of the face value of the bonds they held and promised to pay about half of the total interest they claimed.

President Macri seemed ‘totally flummoxed’ by the economy

Moreover, Dr. Tulchin predicted, Argentina’s foreign policy was likely to move toward a more pragmatic approach, with the country taking a more active role in international organizations.

Economic frustration

Mr. Macri’s fast start did not translate into immediate economic gains. The ending of exchange-rate controls spurred agricultural exports and put a lid on inflation, but domestic investment and economic growth were slow to pick up. Consumer confidence was weak, and efforts to reduce energy subsidies had run into legal hurdles. The deep-seated tradition of crony capitalism remained the economy’s biggest structural problem.

By March 2017, Mr. Macri’s honeymoon with the voters was over. Though he had made impressive moves in foreign policy, he had also been tainted by accusations of crony capitalism, hampered by incompetence in his own administration and “totally flummoxed” by the economy. He was likely to continue to muddle through, wrote Dr. Tulchin, but desperately needed a comprehensive plan to nail down political support so he could implement his reforms.

Move to ‘gradualism’

When President Macri first came to power he wanted to be “transformational.” His time in office, however, had showed him the limits on his ability to govern. He adopted a new strategy of slow-moving economic reform, dubbed “gradualism.” With the economy stuck in slow motion, President Macri focused on winning the midterm elections by simply attacking the opposition. The gambit worked to help him shore up political support, but the the economy remained sluggish.

“Mr. Macri’s central dilemma is how to get the economy growing faster,” wrote Dr. Tulchin. “Until this happens, he will not have the tax revenue to pay for his ambitious infrastructure programs.”

Argentina’s quarterly GDP growth, 2016-2018
Wary of the political consequences of cutting popular social programs, President Macri took a “gradualist” approach to reform. The strategy has not resulted in strong economic growth (source: macpixxel for GIS)

Nothing Mr. Macri did, however, seemed to work. By April 2018, annual inflation remained stuck above 20 percent. The Central Bank of Argentina was forced to dump dollars onto the market, several times in excess of $1 billion per day. By the first week of May, these interventions totaled nearly $10 billion. Soon after, President Macri announced that Argentina would ask the International Monetary Fund (IMF) to backstop its efforts to stabilize the economy.

The IMF agreed to provide the country with a credit line of up to $57 billion – the largest bailout in the history of Latin America. In return, the Macri government had to agree to implement tight fiscal and monetary policies. In essence, it now had to put in place the very economic shock therapy it had tried to avoid with its “gradualist” approach – in an election year. Voters will want President Macri to finally deliver his long-promised economic rebound, but expectations are for the Argentinian economy to contract in 2019.

Mr. Macri still has a chance to win, but much depends on the 2019 harvest, which experts predict could be far better than previous years, even potentially producing a historic yield. The extra income into the sector would bring a significant increase in the government’s revenue from export taxes, shoring up finances. Mr. Macri could also claim to have at least tried to govern responsibly – and compare that to the Kirchner era to defeat any opponent allied with the former president.

Dr. Tulchin will write a special report on Argentina to analyze its scenarios for the future, ahead of its presidential election on October 27, 2019.


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