Whilst already the 24th largest economy in the world thanks to its GDP of $578.7 billion, the success of Mauricio Macri in December’s presidential elections in Argentina could facilitate the country’s long-awaited transformation into one of the biggest players on the international economic stage.
After representing the pro-business thorn in the side of both Nestor and Cristina Kirchner – his left-wing, husband and wife predecessors – Macri and his Republican Proposal Party have entered office promising wholesale changes to the economy, in order to take advantage of the various characteristics that should be allowing Argentina to thrive on the world stage but on which previous administrations have seemed unable to fully capitalise.
This article will seek to examine those characteristics, the reasons why and the extent to which previous governments under the Kirchners failed to exploit them and whether Macri’s new pro-business approach may set Argentina on the way to economic success.
Argentina’s Investment Potential
The potential for Argentina to carry significant economic clout was demonstrated between the years 2003 and 2007, when its growth rate of 8.8% per year was second only to China in the global world rankings. Indeed, this is an economy already with international prestige: it possesses Latin America’s highest Purchasing Power Parity; it is a member of the G-20 and a founding member of the World Trade Organisation. But if Macri’s pro-business and pro-foreign investment approach is successfully and effectively implemented, these impressive growth figures could be set to become the norm; Argentina represents for many foreign investors a potential goldmine, filled with investment opportunities and all the conditions required to make such investments profitable and sustainable.
For example, Argentina possesses natural resource reserves that appear ripe for exploitation: vast swathes of pampas grassland house an agricultural industry with the highest productivity levels in the world. As unconventional hydrocarbons become ever more in demand to supplement the planet’s dwindling fossil fuel supply, Argentina’s shale oil and gas reserves – ranked 3rd worldwide in terms of exploitable quantity – are attracting the attention of the supermajors (the world’s biggest publically-owned oil and gas companies, including Shell, BP, Total and Chevron) who are seeking to follow the likes of Oil Companies Petronas and YPF, who recently conclude a $550 million deal to drill fields in the Vaca Muerta shale oil basin. The profitability of investing into Argentina has been recognised not only by trans-national corporations, but by national governments too and wealth generated thereby looks set to increase as a result of Macri’s pro-foreign investment policy. The Chinese for example has recognised Argentina’s high development potential for hydraulic energy – which account for more than one third of the country’s total electricity output – and has concluded deals to build and finance hydraulic dams, as well as nuclear reactors, railroads and even a satellite tracking station for China’s eventual mission to the moon.
Characteristics Facilitating Profitable Investments
Whilst a country’s natural resources will always tempt potential investors, Argentina’s status as – for all intents and purposes – a country of development levels comparable to those of most Western European countries means that it is likely for interest to be considerably higher compared to its developing rivals. For instance, the high quality of the country’s infrastructure both domestically – Argentina has one of the longest rail networks in the world – and internationally – Argentina has over 60 ports and 58 airports, with more than 25 airlines offering non-stop flights to more than 40 destinations in five continents – means that prospective investors can be confident of being able to carry out their business efficiently both within and outside the country. Furthermore, Argentina has a workforce renowned for their skillsets, creativity and versatility: more than 98,000 graduates and 11,000 postgraduates from 115 universities across the country enter the labour market each year. Indeed, the country ranks 10th in the Global Entrepreneurship Monitor League Tables, signifying the quality of its schools.
Argentina is also a useful strategic base. With its time zone of GMT -03:00, Argentina allows companies to efficiently serve both American and European markets, while its full membership of the MERCOSUR trade bloc grants those companies who inwardly invest therein preferential access (by virtue of a 0% tariff) to a regional market of 275 million people and a combined GDP of US$ 3.5 trillion.
The decades of Kirchner rule (by both husband and wife) were not without their economic successes. When Nestor Kirchner first assumed office, Argentina had a sovereign debt of $82 billion which – through politically risky decisions – he turned around, and then launched the country into years of sustained economic growth. Cristina Kirchner maintained the growth, and introduced successful social policies including a universal child benefit plan that boosted school attendance and reduced poverty.
But this initial impression of economic success needs qualified; despite the existence of all of its promising characteristics, Argentina has been facing severe economic issues within recent years. The government announced that the primary deficit, which excludes debt payments, jumped to 17.4 billion pesos in March, compared with a 3.6 billion peso surplus just one year earlier.
Cristina’s time in office too was marred by political strife after a string of economic policy decisions were roundly criticised, despite receiving populist support.
The Kirchner policy towards energy was to keep domestic oil, gas and electricity prices lower than those in the international markets, thereby allowing consumers to take advantage of cheap energy prices. Whilst this can help alleviate living costs for households and promote consumer spending, there have been negative effects on the national economy.
S & J described her nationalisation and other energy policies as having the potential to “increase risks to Argentina’s macroeconomic framework, squeeze its external liquidity, and hinder medium-term growth prospects.”
For example, the maintenance of these artificially low prices requires government subsidies, leaving Argentina with a $7 billion energy deficit. Kirchner failed to recognise that this consumption-promoting and production-discouraging price, policy fuels inflation and constantly increases import and subsidy bills. This posed problems for the country which has limited access to international markets, the latter issue compounded by oil, gas and electricity prices being (on occasion) below production costs which deters investment from foreign companies. Cristina’s nationalisation of YPF – on the basis that the company’s activities had to be “aligned with national interests’ and that its lack of investment and development in domestic oil fields represented a failure thereof – drove Argentina’s oil imports up by 110%. A disastrous measure too that forced companies that extracted raw materials like oil, gas, metals and minerals to repatriate their export revenues helped facilitate capital flight from Argentina.
Much of the Kirchners’ success relied on the faith placed in them by the electorate and their populist left-wing policies. Both relied on the largest unionised workforce in Latin America, but as their rule carried on, the powerful leaders of the trade unions eventually turned upon her; she derided them as being ‘worse than oligarchs’ for organising a 24 hour strike at her tax policies. At the time, Argentina arbitrarily increased the range of products that would be liable to import taxes.
Argentina’s anti-corruption watchdog reported in 2013 that the couple’s wealth had jumped from $7 million on election to $82 million a decade later. This marked a 1,172 per cent increase. They stand accused of buying land in their southern Santa Cruz political heartlands at rock-bottom prices, and building a series of hotels and tourism complexes there. The Hotesur complex they run in El Calafate, an attractive tourist town in the south, is being investigated for failing to pay tax and being set up as a “ghost hotel” money laundering scheme, where most of the rooms are empty. She claims that her wealth is from her law firm. The investigators are continuing their enquiries, but since 2012 have not made any disclosures.
In 2010, Mrs Fernandez announced a plan to use foreign debt reserves to pay off debt. The Central Bank president, Martin Redrado, strongly objected – so she removed him on misconduct charges, only for a judge to reinstate him. The spat provided a window of opportunity for “vulture funds”, who used technical details of the judgment to demand a full repayment – with heavy interest – of loans made during the 2001 crisis. The issue of creditors demanding full repayment plus interest from their loans – termed “vulture funds”– has dominated recent years. In 2005 Argentine debt restructuring from the 2001 collapse was accepted by 92 per cent of investors. But three years later hedge funds, led by American firm NML Capital, bought $49 million of bonds. They now seek $828 million in repayment. In 2014 Thomas Griesa, a New York judge, blocked payment for those bond holders who had agreed to settle – turning the dispute ugly. Macri has said he will pay up the debt, now $1.5 billion, in the hope of resolving the lasting and damaging dispute.
Kirchner’s government enacted import controls as the country’s 2011 trade surplus declined year-over-year, hit by economic growth and a strong peso. This meant that only those with proof that they were travelling abroad could purchase foreign currency. As a result the black market rocketed. Today, while the official exchange rate is 9.5 pesos to the dollar, it is possible to obtain 16.10 pesos for one dollar (a 70 per cent margin) on the black market. It also prevented the taking of international loans: when severe flooding hit Buenos Aires in April 2012, Macri – who was coincidentally mayor of the city – was furious that he was not allowed to ask for a loan to rebuild his city.
In January 2014 the peso was devalued by 15 per cent, in a bid to stave off inflation. It hasn’t worked: today the official inflation rate is 15 per cent, while unofficially it is believed to be around 30 per cent. In August 2014, 13 years after the largest default by any country in history, Argentina defaulted again – as part of its dispute over “vulture funds”. The default was only termed “selective”, owing to it being triggered by the repayment argument. The most recent report from the Congress Index – a group of opposition MPs who chart the actual price of items, versus the official prices – found that the cost of a basic basket of goods had risen 23 per cent, year on year.
The country’s current rate of inflation stands well above 20%, caused by higher commodity prices and Argentina’s expansionary policies whilst the subsidies intended to limit it have failed to do their job. Higher commodity prices and Argentina’s expansionary policies have helped its economy grow.
Agricultural production rates have also fallen flat, following conflicts that arose with farmers after the introduction of a sliding-scale tax on agricultural exports. Once the world’s largest soya producer, an export tax rise from 35% to 44% caused massive protests, bringing Buenos Aires and much of the country to a standstill in demonstrations that ultimately turned violent. Although she eventually U-turned on the policy, the issues have remained: wheat harvest is at its lowest levels in decades, as farmers blame export taxes and currency controls and beef – the icon of Argentine agriculture – has suffered, with Uruguay and Paraguay now exporting more.
Macri’s Economic Policies – Heralding a New Dawn?
Clearly therefore, there is a lot for Macri to rectify and a lot of potential for Macri to tap into. As he proclaimed “Argentina wants to have good ties with the entire world. I want to create jobs. I have committed myself to an Argentina with zero poverty. We need investment.” Accordingly, Macri entered office promising to implement a succession of pro-business policies and government austerity that will aim to bring inflation under control and encourage the investment that Argentina needs to grow rapidly and create jobs.
His early measures – including the scrapping and reduction of tariffs on agricultural exports including soya and beef, and the devaluing of the Argentinian currency by 30 per cent in a bid to end rampant inflation – have seen some major changes to the economy and the continued promotion of a free market, and have all been well-received by Argentinian business leaders. Indeed, his lifting of currency controls – thereby allowing businesses to buy as many dollars as they require to successful export goods – have been described by economists at Barclays as “perfectly orchestrated” and economists at London-based Capital Economics has said the new market-friendly administration has made a “strong start” and are “recognising the benefits of long-termism.”
There are also promising signs for Macri’s goal of increasing foreign investment which should be facilitated by the creation of a National Investment Development Agency. Amongst potential investors should be a large number of American companies, with President Barack Obama recently emphasized the longstanding partnership between the United States and Argentina and conveying his commitment to deepen cooperation on multilateral issues, improve commercial ties, and expand opportunities in the energy sector. Large law firms are also turning their eyes towards the country, recognising that Macri’s changes to the economy could lead to increasing levels of work for their Mergers and Acquisitions and their Restructuring and Insolvency departments.
However, there are also signs that some of the problems faced by the Kirchners may persist: Macri has already clashed with unions over his plan to scrap a media law introduced in 2009 which prevented media conglomerates from accumulating too much power. Whilst Mr Macri claims that he wants to have a free press and support small publishing companies, critics have argued that he is looking to expand the power of the press barons in a bid to win their support. It also remains to be seen how effective Macri will be on tackling corruption: whilst promising in his inauguration speech to “be implacable with corruption” and to make the fight against corruption a top priority for his administration by implementing laws and reforms to improve transparency, accountability and oversight of public institutions, it may well be that corruption is a more systemic problem within the country that cannot be overcome by anything but time and gradual reform of practice.
It is worth noting that Argentina had been under the rule of the left-wing Kirchner governments since 2003 before Macri took charge, and that the Kirchners did have some laudable successes, particularly in terms of their social policies. This is therefore a country, and an electorate, who may not be fully prepared to face the full extent of the right-wing policies that Macri intends to enact: many commentators believe it is unlikely that he will see out his full term.
But this may be a good thing. Argentina’s national psyche and society seems to favour left-wing politics; after all, many of the Kirchners’ valuable social policies that helped create a culture of social mobility and the alleviation of poverty have placed Argentina perfectly as a country effectively “ripe for picking”. Therefore, if Macri can keep the influential unions on side and make inroads into the fight against corruption and inflation, a short period of his pro-business government would allow for the influx of foreign investment that could see the potentially potent fulfilment of Argentina’s economic potential.