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The direction of the Argentine economy was already improving at the end of the year, and should continue to do so in 2017. Here the 9 de Julio Avenue in Buenos Aires. (Photo: Buenos Aires Government)
Wednesday, January 18, 2017

Argentina: Green Shoots

Argentina is starting to see the fruits of its economic reforms.


With President Mauricio Macri completing his first year in office, all eyes are fixed on what lies ahead. The firing of Economy Minister Alfonso Prat-Gay provided us with a clue. The former Wall Street analyst racked up several victories during his short tenure. In addition to lifting the draconian capital controls, helping to restore the national statistics agency (INDEC), coming to terms with the holdouts, repairing the country’s access to the international capital markets and shepherding through the tax amnesty program, he helped stabilize the runaway inflation rate and reduced public sector tariffs. Given his track record, it seemed illogical how he was unceremoniously shown the door.

However, his demeanor was often interpreted as arrogant and uncooperative, particularly with other cabinet members. It was said that his relationship with Chief of Staff Marcos Peña was particularly tense, with the former supposedly refusing to show up to cabinet meetings unless the president would be present. There was also the issue of unexecuted budget items. Many infrastructure spending programs remained on hold in 2016. This was one of the reasons behind the country’s lackluster economic performance. A lack of coordination between ministries and a prioritization of social expenditures was one of the reasons why the Argentine economy contracted this year. The IMF’s estimate was a recession of 1.8 percent y/y in 2016, but it may have been closer to -2.5 percent y/y. Hence, despite his many accolades, it was clear that Prat-Gay had to go.

The Ministry of the Economy was subsequently split into two cabinet positions, with Nicolas Dujovne, a well-respected junior economist who served as an economic adviser during the presidential campaign, appointed Minister of the Treasury and Luis Caputo named as Minister of Finance. Officially, the splitting of the roles was to improve efficiency and break some of the logjams. Unofficially, it was done to smooth over some of the egos involved.

Whatever was the case, the direction of the Argentine economy was already improving at the end of the year, and should continue to do so in 2017. The main driver of the recovery was the massive injection of liquidity, mainly through the payment of Christmas and year-end bonuses. A recovery of the Brazilian economy in 2017 and the expansion of the agricultural sector will also help.

The market consensus is that the Argentine economy should grow about 3 percent y/y in 2017. With midterm elections slated for the fourth quarter of this year, the government will keep the fiscal taps open. Minister of Treasury Dujovne seems to be intent on taming the runaway fiscal deficit, but this will be difficult in an election year. The Peronists are fighting hard to consolidate their control of the congress, and there appears to be a bloody struggle between the Massa and Kirchner camps. Yet, there is an old Peronist saying that could be appropriate to the current situation. Juan Peron was known to say, “Peronists are like cats. When they sound like they are fighting, they are actually reproducing.”  There is no doubt that the faceoff between the two Peronists camp will lead to the emergence of a stronger party. 

Yet, the risk of the Kirchners returning to power is one of the factors keeping FDI at bay. The former president remains very visible. Of course, the government is doing everything it can to keep the former president’s image alive as a way to make sure that she does not return to power. However, this nuance seems to be lost on the multinational community. This year, Argentina attracted about 5 percent of the FDI that flowed into neighboring Brazil, which was also in the throes of a severe political and economic crisis. Argentina needs FDI to increase in order to grow the 3 percent y/y that everyone hopes for. Unfortunately, failure to attract more FDI will result in  growth rate which will be closer to 2 percent, which is our projection.

Nevertheless, the departure of Prat-Gay and the reorganization of the Ministry of the Economy into two cabinet seats will consolidate the role of the Chief of Staff. Marcos Peña emerges as the single most powerful member of the cabinet, and provides him with the levers needed to better coordinate the president’s agenda. Clearly, there is a great deal of momentum. The highly successful tax amnesty program will boost the economy. The outgoing Minister of the Economy reported that it had reached $90 billion by the end of the year. Many analysts expect that it could exceed $130 billion in early 2017, when households begin to declare the property holdings they had abroad. This will be particularly good news for retirees. The government wants to use part of the windfall to settle pension arrears.

Therefore, with much of the heavy lifting out of the way during the first year in office, we are starting to see the first green shoots of a much more vibrant economy.

Walter Molano is head of research at BCP Securities and the author of In the Land of Silver: 200 Years of Argentine Political-Economic Development. 


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