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Argentina: Shoot the Messenger
Despite opposition, the Macri government’s gradualist approach makes sense.
BY WALTER T. MOLANO
From one perspective, Argentina seems to be on a crash course with disaster. Large fiscal and current account deficits, lackluster GDP growth and an insatiable appetite for external debt makes some people wonder if the country is back to its old tricks. Last week’s run on the peso, along with the plunge in international reserves, brought back painful memories. However, a recent trip to Buenos Aires revealed that the situation is not dire. In fact, there is a grand scheme. A jaunt through the downtown financial area has the usual panopoly of protests and marches, but some of the chaos is also due to the massive public works that are transforming the city. Moreover, a great deal of public investment is being poured into places that are far away from the glitzy neighborhoods of Recoleta, San Isidro and Palermo. They are being concentrated in the poorer suburbs, such as La Matanza and La 31. New sewage lines are being dug to counter the pervasive flooding that devastates these low-lying areas. New sidewalks are transforming muddy lanes into proper walkways. Metrobus transit corridors are slashing commute times for the working poor. Not only are these changes improving productivity in a way that will facilitate higher GDP growth, they are creating a base of popular support for President Mauricio Macri and his PRO political party. The problem is that this message is not being communicated abroad.
One of the risks most investors consider when examining Argentina is the possibility that former President Cristina Kirchner, or one of her Peronist allies, will return to power. This is probably the reason why Foreign Direct Investment (FDI) was less than $5 billion in 2017, while Brazil’s was $70 billion, despite the Lava-Jato scandal and the impeachment of the president. However, the initiatives by President Macri are not only improving the chances that he will be re-elected in 2019, it is creating the political momentum that he will be succeeded by the other members of his party, such Maria Eugenia Vidal (Governor of Buenos Aires), Horacio Rodriguez Larreta (Mayor of Buenos Aires) and Marcos Peña (Chief of Staff). This is creating the time horizon needed for FDI investors to make long-term commitments to the country. There are already signs that this is starting to happen. Dow Chemical is considering the construction of a $5 billion petrochemical plant and a new billion-dollar silver mine project by Pan American Silver, a Canadian-listed company, may soon take off in the Province of Chubut. Local economists are forecasting FDI flows of $11 billion in 2018. This number will go up in the following years, given that the government will soon launch a PPP (Private-Public Participation) initiative to modernize the national highway network and other infrastructure projects.
Once these issues are taken into consideration, then the government’s gradualist approach begins to make sense. The Macri Administration is trying to engineer a political transformation that will break the Peronists’ grip on power. Fortunately, the plan is working. The Peronist Party is fragmenting into factions. At the same time, the labor unions are imploding under the dead weight of their own corruption and senseless militancy. Therefore, the unholy alliance between the Peronists and organized labor is crumbling and creating an opportunity for the PRO to move into the vanguard. Polls show that his support among the lower income strata, or the traditional Peronist base, are on the rise. He achieved this by addressing the needs of the working poor and giving them a better quality of life, instead of handouts. Even the recent wage negotiations showed a different attitude by workers. Many of the labor unions agreed to a 15 percent wage increase in 2017, which was significantly below inflation expectations, with the possibility of reopening negotiations if the inflation rate was higher—but without any automatic triggers. As a result, Argentina is on a path that will move into a trend of higher sustainable economic expansion with lower inflation. The only problems with this strategy are that gradualism may lead to fatigue and the other is that this message is not being transmitted abroad. Most of the media’s myopia is on topics, such as the inflation rate, the over-valuation of the currency, the impact of the drought and new issuance pipeline. These are all short-term factors that mean nothing if the country does not convince external investors that it has broken the grip of the Peronist party.
Delivering that message in a meaningful way is what Argentina needs to attract the FDI that will modernize the economy and put it on a trajectory of sustainable prosperity.
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.
