Publish in Perspectives - Wednesday, March 20, 2019
Argentina's economy is set to play an important role in the October elections. Here Calle Florida in capital Buenos Aires. (Photo: Buenos Aires City Government)
Will Argentina’s economy determine the election?
BY LATIN AMERICA ADVISOR
Argentina’s industrial output decreased by 14.7 percent in December, as compared to the same month a year earlier, marking the eighth consecutive month of decline, according to data from state statistics agency Indec. What factors are influencing industrial production in Argentina, and how might these trends shape a broader economic recovery from last year’s recession? How big of a role will the country’s economy play in the presidential elections scheduled for October, and to what extent are the elections influencing the government’s economic policy decisions now?
Sergio Doval, managing partner at Taquion Research & Strategy: Industrial production in Argentina is in a tailspin, and in this electoral year, it is fundamental to analyze what the causes are. The factors that influence the decline in industrial production are related to a sudden drop in consumption, given the base imbalance between prices and wage and the extremely high tax burden that exists (one of the world’s highest). Other factors include the excessive increases in prices and costs for public services, which have become unpayable; high interest rates that make financing difficult; and a lack of both national and international investment and capital. According to Taquion’s latest survey, Argentines perceive that the country’s main problem is the economy at national, local and family levels. The fear of losing their jobs, the constant economic instability, the lack of certainty and the unmeasured price increases have made the economic factor a decisive one in the upcoming 2018 presidential elections. The possibility of the government’s reelection depends—almost 90 percent—on whether it succeeds in turning around the economic situation that has overwhelmed all social classes. Today, Mauricio Macri’s government does not have a defined action plan. Inflation, the shuttering of businesses and small- and medium-sized enterprises, and the loss in productivity are all consequence of bad political and economic decisions that will be difficult to reverse, all of which are undoubtedly worrying the ruling party amid an electoral campaign.
Agustín Crivelli, economist, professor at the Buenos Aires University: For Argentina, this year begins just as 2018 ended, with the real economy in a free fall, and an artificially stabilized exchange market. The numbers speak for themselves: industrial activity plummeted 14.7 percent last December as compared to the same month a year earlier, while construction fell 20.5 percent in that same period. It’s the eighth consecutive month of decline for industrial activity. External policies of stabilization (abrupt devaluation, high interest rates and sharp increases in public service tariffs) brought a deep fall in the purchasing power of the population, combined with a strong disincentive to invest in productive activity. As if this wasn’t enough, the cuts to public spending, particularly for public works, was the ‘coup de grace’ for Argentina’s economic activity. Considering that there will be no change in policies, it is not possible to forecast an economic recovery for Argentina in 2019. On the contrary, in the context of an election year, with precarious exchange-rate stability (and with clearly unsustainable post-2019 debt maturities on the horizon), it is expected that as the election date approaches, the immense stock of financial placements in pesos—which grows exponentially due to the high interest rates in pesos—will seek to dollarize, ending the already-fragile stability of the foreign-exchange market and opening the doors for a new economic and social crisis in Argentina.
José Luis Lupo, manager of the Southern Cone department at the Inter-American Development Bank and the bank’s country representative in Argentina: Argentina is undergoing necessary processes of price stabilization and of adjustment of its current account that are having a temporary cost in terms of economic activity, but which augur enhanced macroeconomic sustainability that in turn lay the foundations for durable economic recovery. External developments such as weak growth in Brazil (Argentina’s main trading partner) and heightened global trade and financial tensions also had an impact in 2018, but their reversal in 2019 bodes well for economic recovery in Argentina in the next quarters. Other factors that will cement recovery include the rebound in agricultural output following last year’s severe drought, the positive impact of the competitive real exchange rate on exports and regional economies, and the expected increase in real wages. The consolidation of this recovery will work in favor of improving the government’s chances in the upcoming elections, but even if it is not strong enough, the government will remain committed to ensuring price and exchange rate stability, along with improved macroeconomic sustainability.
Carlos Fara, president of Carlos Fara & Asociados in Buenos Aires: Since Argentina’s industry is globally uncompetitive, and it’s very much oriented toward the domestic market, the high inflation of 2018 triggered a loss of wages’ purchasing power. This, as a consequence, depressed overall consumption. The outlook is negative at least until mid-year, although the recovery will be very slow. The economic situation will undoubtedly play an important role in the elections since, in this context, the previously high approval ratings of President Macri will be very difficult to regain. Nevertheless, the fear of a return of Cristina Fernández de Kirchner will work as a compensator for that economic factor. The proximity of the elections has played in favor of the government and its decision to pay the cost of a severe anti-inflationary plan while the price of the U.S. currency remains quite stable after last year’s devaluation of the peso. With the exchange rate mostly stable for the foreseeable future, the electorate will lower its level of anguish, giving further chances to the ruling party.