Does Argentina’s return to capital markets signal change?
Argentina recently issued USD $16.5 billion in bonds as part of its re-entry to international markets, the largest issuance registered by an emerging economy. The country’s historical proclivity to economic turmoil, however, suggests that Macri’s political changes might not deliver on financial stability.
It has been 15 years of Argentine absence from international markets, so April’s bond issuance is a historical feat. The bond offering is perceived as a major achievement by the new Argentinian government, headed by pro-business President Mauricio Macri. Since Macri was sworn into office in December 2015, he has adopted a range of economic measures in order to re-enter the international, financial system. So far, the changes have been well-received by investors, with existing Argentine bonds rallying since December.
In addition, monetary policy implemented by the government and the latest restructuring of sovereign debt have proven successful in gaining support from relevant international bodies and individuals. President Obama’s visit to Argentina in March 2016, preceded by the visits of the Italian Prime Minister and the French President within a period of four months, highlights the renewed interest in the country.
Nevertheless, the growing optimism about the macroeconomic perspective for Argentina should be seen in conjunction with the country’s inner political dynamics, in order to avoid mistakes from the past. Macri’s attempt to undertake a conservative economic agenda has been widely regarded by international economic institutions as a sound step toward opening the doors to international credit markets. However, domestic support of the measures he intends to enforce is still questionable in the medium term.
Former Minister of Economy Roberto Lavagna, for instance, has already criticized the conditions in which the new government has restructured the sovereign debt, arguing that they actually increased the cost of financial obligations and created a new cycle of indebtedness.
Social spending has been used to consolidate political support
Moreover, as Argentina’s history shows, the implementation of orthodox market measures has traditionally represented a risk in terms of social policies, popular approval, and political stability. Former President Cristina Kirchner’s administration was aware of such facts, leading to its heavy reliance on social spending in order to guarantee continuous electoral support.
Populist, social policies have prevailed since the sovereign debt default in 2001 and public spending has been rising ever since. A number of left-wing administrations have been applying heterodox economic plans to galvanize popular support, and thereby dismantled the neoliberal policies enforced prior to 2001 by former President Menem, supported by the IMF.
Over the years after the 2001 crisis, successive governments led by late President Nestor Kirchner and his wife Cristina, benefited from high international prices in commodities. They also successfully managed to overcome isolation from international financial markets by enhancing relations with ideologically aligned governments in the region and non-traditional partners such as Russia and China.
No indication that the Macri government is a game-changer
Today, in spite of a new administration and recent free-market policies, there are still no indications that the latest political changes would lead to different outcomes than those already observed in the past. The debt boom-and-bust cycles dominating Argentina’s finances are likely to recur, despite Macri’s attempt at cleaning Argentina up for international investors.
The outcome of the contested presidential elections won by Macri in 2015 demonstrates how polarized the Argentinian society remains. The current President reached the office in second round elections by obtaining only 3.5% more votes than the Kirchner-backed candidate, Daniel Scioli.
In addition, former President Cristina Kirchner still has significant popular support from beneficiaries of her social policies. She also maintains important political capital in the national Congress, which gives the opposition more power to block presidential initiatives.
Such a political context indicates that in the medium and long term, economic ventures in Argentina will still face risks associated to political instability, changes in regulatory frameworks, and disagreements over sovereign debt payments.