Argentina and its crucial months aheadThe 22nd of April marked the first full day of trading of Argentina’s mammoth $16.5bn bond issue, the largest ever by an emerging markets nation, and signalled the country’s emergence from the shadows into euphoric interest from foreign investors, who oversubscribed the issue by 5 times. President Macri had moved swiftly to put an end to the long ‘holdouts’ conflict that had plagued the previous administration; leading to the big three credit agencies lifting the country’s local credit ratings significantly. In the eyes of the investor, Argentina is back.
However, foreign and local perceptions of the new administration are on two different pathways that are beginning to edge further apart. Macri’s narrow victory (by 51.5% to 48.5%) in a runoff last November speaks of both deep divisions within society and a large number of opposition who voted against his policies that have done much to sooth foreign investors but have had little positive impact at home.
Mauricio Macri understood the social challenges he would be facing locally as he attempted to convince the public to believe in necessary short-term pain, but, those who are suffering the most are beginning to waiver at the patience Macri is urging with regards to economic improvement. The argument that no government should be judged on a mere 6 months might hold true for those on the outside looking in, but it holds little value for the 32% currently in poverty. Coupled with the embarrassment of being exposed by the Panama papers, the devaluation of the peso, a hike in utility prices (although necessary) have led to an increase in the cost of living, a fall in disposable income, and a sharp slide in approval ratings. The initial calm that has met his reforms is beginning to be replaced by protest and concern. Concern that was notably touched upon by Cristina Fernandez Kirchner - as she delivered a rousing return1 to politics in a speech outside the Buenos Aires City main courthouse in April having earlier refused to testify in a fraud inquiry - calling Argentines to “ask themselves” if they are doing “better or worse.” A reported increase in poverty of 5%2 since Macri took office perhaps answers her question.
Honeymoon period at an end
- Increase in protests: Firstly in February thousands of public sector workers protested against job losses, demanded better salaries and working conditions. Secondly on April 29th, five of the leading national unions brought thousands of people to the streets in a sign of strength to further protest job cuts and rising inflation. In early April, whilst little reported in the local media, teachers from public and private schools took to the streets to protest the government's failure to comply with agreements reached with teachers' unions earlier in the year.
- The return of CFK: When Cristina Kirchner was called to testify by the Judicial Power in April, it was used as a grand return to politics with thousands rallied outside the courthouse as Cristina called for a broad “citizens’ front” to oppose Macri. Cristina has a powerful voice and is still immensely popular outside of the city of Buenos Aires and will use this to lead the opposition.
- Opposition regrouping: Macri took advantage of his honeymoon period and fractures within the opposition to hurriedly enact a wave of economic reforms. However, the recent emergency labour bill proposed by the opposition and passed by Congress signals Peronist politicians and allied unions are beginning to regroup and set the agenda after their painful electoral defeat. Macri plans to veto the 'Anti-Layoffs' Bill, prompting a response from unions who have stated they are ready to mobilise and take industrial action.
Whilst mass popular protests are certainly not uncommon in Argentina, Macri’s Wall Street educated economic team is overtly focused and comfortable dealing with the very people they used to share corridors with, but are perhaps unfamiliar with these issues.
Argentina is undoubtedly rich in promise and has the potential to reposition itself as the standard bearer for the region, but despite initial encouraging signs from a foreign investor perspective, this is still “potential” however. Inflation, estimated to have risen by seven percent last month alone, and the impacts of Brazil’s economic crisis are the biggest threats to the economy. The government would do extremely well to slow inflation to its 25 percent target in 2016, but a marked downturn would go a long way to convincing that the economy is on the right track and for foreign investment, which Macri is pinning economic growth on, to kick start.
It does seem like Macri is pushing the country in the right direction, unlocking the potential in healthcare, technology, energy and mining sectors, but if a more placatory approach is not taken at home within the next 6 months, the danger in the short-term could be punishment at the legislative elections in 2017, where half the seats in the Chamber of Deputies and a third of the seats in the Senate are up for vote. This would cripple the government’s ability to enact further structural reform as Macri already holds a minority in both Congress and especially the Senate.
In the longer-term, Peronism and its mythical ideology will return, as it has a history of doing, but popular dissatisfaction will increase the chance of a return to a more radical wing of Peronism, perhaps even kirchnerism under a new figure. A softening of touch by Macri could have a lasting effect in ending Cristina Kirchner’s political movement and shift Peronism towards a moderate form such as Sergio Massa. Investors should be keenly monitoring the domestic policies of Macri over the next 6 months, they are likely to be crucial to whether he will be a one term President as many fear.
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1. Whilst she will struggle to return to higher office with the criminal charges being alleged, Cristina Kirchner still holds power within the opposition and regularly meets with FPV Senators and Congress members.