Argentina’s economic reforms have surprised investors around the world. Yet, double digit inflation and an economic recession have stifled progress moving forward for the country’s new president, Mauricio Macri.
As Latin America slowly recovers from a dive in commodity prices, Argentina’s contracting economy is indicative of a changing tide — one driven by reforms for a more business-friendly environment. President Macri’s reversal from more than a decade of unconventional policies has set investor eyes on the Southern Cone.
Yet, Argentina’s history of steep fiscal deficits and uncontrollable inflation remains risky for investors with a long memory. With that in mind, Macri’s appeal for economic orthodoxy has nonetheless presented an exciting opportunity for the region’s third largest economy.
Can Macri’s moment continue?
President Macri’s quick transition to power led to market friendly reforms that included lifting currency controls, slashing utility subsidies, and introducing Argentina back into the international credit market. However, Argentina’s new administration faces an economy bogged down by recession, high inflation, and an increasingly inpatient population. While economists and large companies have lauded Macri’s transition, investors have been wary of the government’s growing unpopularity.
Strong labor groups and mass demonstrations have undone their fair share of reformers in Argentina. In fact, no non-Peronist administration has ever finished their political term. Despite strong international interest, domestic concerns have already started rolling back the government’s initiatives. Recently, the Supreme Court reinstated cut utility subsidies, and Macri’s popularity has dropped to 40% from a high of 60%. Without regaining significant popular support for long-run economic reforms, the future of investment in Argentina depends largely the administration’s political capital.
The political allies of “new Argentina” have benefited by the stark differences between themselves and the prior administration. The fractured opposition has allowed them to continue with their reforms. However, with the looming legislative elections in October, the administration must decide whether to continue their measures or appease their opposition in order to reduce their potential losses at the polls. Strong legislative support is essential to Macri’s government, who depends on legislative cooperation to ensure their competitiveness agenda.
Macri and looking towards 2017
In spite of Argentina’s risky investment environment, analysts agree that Argentina’s economy will expand 3% by next year under Macri. This week, a group of sector CEO’s and investors met in the Argentina capital to discuss opportunities for business and investment. The private sector remains excited about opportunities for inflows and has already begun to pledge their support. The Finance Ministry has collected more than $32 billion corporate pledges, with opportunities in agriculture, energy, and manufacturing.
Already, companies such as Coca-Cola have committed investments of $1 billion dollars, which promise to revitalize an economy which has been ignored for too long.
While the country continues to struggle through its recession and double digit inflation, President Macri’s appeal for a new economy is also an appeal for patience. As Macri said last week: “we can’t change everything in a day or in a year or during one presidency; what’s important is that we’ve started going in the right direction.”
