Weak opposition keeps Argentina’s economic transformation alive

Weak opposition keeps Argentina’s economic transformation alive

From 7-10 October, upwards of 21,000 Argentinians headed for the Los Libertadores border crossing to flee the country for basic goods in Chile amid the staggering inflation in Argentina. This was a remarkable representation of the economic situation in the country, but not of the political one.

Challenging transformation

The main question for Argentina in 2016 was whether Macri’s reforms would deliver promised improvements before their initial adverse effects turned people against the president. There is no real answer yet.

Unemployment remains high at almost 11%. In combination with inflation of around 40%, this should be lethal, politically speaking. Planned dramatic increases in gas and transportation prices as well as Macri’s veto of the anti-layoff bill sent people protesting throughout the year. The deficit keeps growing. It went from 38.9bn pesos (2.5bn USD) in September to 37.2bn pesos in August, and the government was forced to increase its 2017 deficit target from 3.3% to 4.2% of GDP. Persistent bad access to credit further complicates the business environment and foreign capital has not yet made its arrival.

The task of turning the country characterised by invincible Peronism and pro-workers movements would seem almost impossible, especially after years of protectionist measures by the Kirchners. The wait for reforms to yield benefits is getting longer and the promises of growth, acceptable inflation, competitiveness and opportunities by Macri are under ever-growing questioning. However, there have been successes.

What opposition?

The celebration of Loyalty Day on 17 October, which marks the anniversary of Peronism’s de-facto founding in 1945, was a great insight into the political situation in Argentina. Some Peronists celebrated with the ruling Cabiemos party and former president Cristina Kirchner only Skyped in at the rally of the main Peronist entity, the Justicialist Party. But gone are the days when thousands of people and Peronists would flock to the Buenos Aires’ Plaza de Mayo for the anniversary celebration in support of the ruling governments of Cristina or late Nestor Kirchner.

Cristina has become increasingly marginalised and continues to face investigations, as new cases of corruption and mishandling of the country keep emerging. Her former colleagues continue to battle over who voted for the devastating capital controls under her administration. No one wants to take the blame. While the political opposition against Macri’s government is growing, it is anything but united and organised. “You cannot rule without Peronism in Argentina,” they used to say. The new president is now challenging this old saying.

Taking care of the workers’ unions

The country’s largest workers’ unions were for years the most powerful political forces in the country. Macri’s greatest success is being able to curtail their influence by courting the country’s biggest union, the CGT. Meanwhile, the CTA, the second biggest workers’ union, has repeatedly called for general strikes without much success.

In October, the government averted threats of a joint general strike by establishing a major agreement with the CGT and business owners. This is thanks to an unbinding guarantee of an end-of-the-year bonus payment of 2,000 pesos to compensate workers in the private sector for inflation, something already in place for pensioners and beneficiaries of other social programs. The CTA did not partake in these talks and criticised the deal as insufficient and unguaranteed, and called for protests.

The next meetings between the government and the CGT are scheduled for November and December, when the union might try to push for a new form of an anti-layoff guarantee, as the political opposition lacks political power to push it through the presidential veto. The relationship with CGT is tough to maintain, but Macri is expected to do whatever he can to preserve it to avoid losing this crucial political leverage.

More positives

Economically speaking, there are also several positives signs. Foreign reserves keep rising, something almost unseen under the rule of Cristina Kirchner. They have risen from 31.5bn USD in September to 32.5bn October, which also marks a 30% increase from 2015, when upcoming debt payments still threatened Argentina with a default.

The public debt is expected to narrow on year-to-year terms from 5.4% in 2015 to 4.8% in 2016. Its recent increases can be attributed to revitalised public investments. And while they have yet to materialize, the country has secured foreign investment deals in mining and telecommunications sectors.

In August, inflation hit 10-year lows at 0.2%. This was mainly due to the Supreme Court suspending massive increases in energy tariffs as September numbers went back up to around 1%. But the Central Bank set its target inflation rate at 12-17% for 2017 and in the 3.5-6.5% range for 2019. This will likely boost confidence in the economy by providing an important benchmark. Without curbing inflation, the government is in trouble. It is hard to convince Argentinians that things will be better. Bad experiences with inflation are written in the country’s collective memory.

Many other structural changes need to happen and management of government expenditure has to improve. But at least for now Macri seems to be on the right path. He has already removed capital controls, gained access to international capital, avoided a balance-of-payment crisis, and reached a debt-restructuring deal with creditors.

It shouldn’t be left out that some of Argentina’s downfall is due to Brazil’s economic crisis – its biggest economic partner that accounts for 20% of its trade. After the expected economic contraction at around 2% in 2016, analysts overwhelmingly anticipate more than 3% growth in 2017 and onward. Moreover, there is a talk that the fourth quarter of 2016 might show slightly positive economic growth.

The biggest threats to this optimistic outlook continue to be political. With essentially non-existent opposition and well-managed workers’ unions, Macri’s political capital will ensure progress on economic reforms. However, if inflation doesn’t slow down and the economy continues to shrink even in the first months of 2017, the people won’t need a functioning political opposition in order to uproot Macri’s government.  

Categories: Economics, Latin America

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.