Inflation puts Macri’s economic reforms at risk

Inflation puts Macri’s economic reforms at risk

Key economic indicators released in May by President Mauricio Macri’s administration illustrated some progress, but ultimately underscored Argentina’s complicated political and economic reality. Macri is making big strides in reforming the economy and is met with relatively little political resistance, but daunting challenges remain.

Macri spearheads a number of notable reforms and political skill

Despite massive flooding sweeping across critical farmland in the northern provinces, agricultural exports increased by 68 percent in the first trimester of 2016, thanks to Macri removing regulatory limits. Moreover, industrial output grew by 6.7 percent in April and oil exports grew threefold to 91,000 bpd in the same month.

Politically, Macri was also able to secure several victories. He reinstated federal payments to provinces, which helped win the support of provincial governors – a decisive factor in Argentinian politics – including provinces controlled by the opposition party Frente para la Victoria (FpV). The oppositions’ major counter-offensive against economic reforms, an anti-layoff bill, was scrapped by Macri’s veto. Furthermore, the country’s major labour unions, Argentina Workers’ Union (CTA) and General Confederation of Labour (CGT) called off a general strike after Macri reached a deal with one of them, effectively dividing the power of Argentina’s unions. To balance out 400% increases in gas, water, telephone or public transportation tariffs, Macri increased minimum wages and unemployment benefits. On another front, not much attention is being paid to the ongoing investigation of Macri’s involvement in offshore companies mentioned in the Panama Papers.

Meanwhile, high inflation and unemployment may affect the popularity of the President

Inflation reached 20 percent in first quarter of 2016, while roughly 100,000 jobs were cut. In addition, GDP is projected to decline by 1 percent this year, according to Moody’s. Unlike credit ratings and bond sales, inflation and unemployment have a direct impact on the population. Understandably, people are starting to lose the hope and optimism that surrounded the election.

The fear of unemployment increased dramatically among Argentines, especially amid massive layoffs and growing inflation. Macri vetoed an anti-layoff law proposed by the opposition that would double severance payments, make it more difficult to fire employees and ultimately discourage employers to hire new workers. It was a significant political victory, but not a solution.

Conflicting reports confuse impressions of the actual state of the labour market, as there are no official data, due to the ongoing overhaul of the country’s statistic agency INDEC, once used by the previous government to manipulate economic indicators. However, until inflation comes under control, job creation is likely remain sluggish, and unemployment likely rise.

Historically, Argentina seems to be unable to get rid of inflation. Prices rose by 6 percent in April, and some estimates place current annual inflation at 40 percent.

The future looks brighter, but hinges on progress in the second half of 2016

At this moment, one would expect the country’s strong workers’ unions and leftist popular movements – the support base of the former Kirchnerist government – to mobilise against the pro-market president. This has not happened, though. The two major trade unions, CTA and CTG, seem to be divided, and Macri gets away with making only small concessions. This is quite an achievement for a right-wing President in a Latin American country with such a strong populist and leftist tradition.

The outlook is not so dismal in fact. Tax amnesty for undeclared sources could bring chunks of the estimated USD500bn stashed abroad. Access to credit is likely to help the ailing construction sector, especially in provinces where infrastructure investments are long overdue. This could, in turn, boost employment.

Meanwhile, if Macri’s promise that inflation will fall to 2 percent in the second half of 2016 proves wrong, his administration will face growing public pressure, and deteriorating consumer and investor confidence. The radical Peronist groups are already mobilising and with continuing problems, the population could join wider protests. If so, mild concessions will not placate the country’s powerful labour unions, nor opposition parties, which could in turn prevent further necessary economic reforms.

The second half of 2016 will be decisive for Macri, who might hope his economic reforms bear fruit as quick as possible, or at least before Argentines with a long history of painful devaluations lose patience with inflation and joblessness.

Categories: Latin America, Politics

About Author

Petr Bohacek

Petr Bohacek is a Political and Security Risk Analyst for Latin America at Riskline, a travel risk management company. He is also a research fellow at the Association on International Affairs, a Czech think tank, where he publishes and comments on foreign policy in local media. He has previously worked as an analyst at the Czech Ministry of Defense. Petr holds an MA in Security studies from Charles University in Prague, a BA in Political Science from St. Norbert College and studied Latin American politics at Universidad de Buenos Aires and Universidade de Nova Lisboa.