It is the end of an era; one that most in Argentina will not look back on fondly. The current president’s handpicked Peronist candidate—chosen to carry on the legacy of the Kirchners—was defeated despite having a solid lead just a few months ago. The new leader, Mauricio Macri, the mayor of Buenos Aires, is the son of an Italian immigrant who built a substantial construction empire. He has been a consistent thorn in the side of Cristina Fernandez as he used his position as mayor of the nation’s largest city to thwart some of her plans. The man he defeated, Daniel Scioli, is head of the province of Buenos Aires and a close confidante of Fernandez.
Macri may soon regret winning this election as he faces a host of issues that will test this new government severely. For the last 12 years, the populists of the Peronists—Nestor Kirchner and subsequently his wife when he died unexpectedly—have governed Argentina. Kirchner came to power when the country was on the verge of collapse after the economic meltdown in the early 1990s. The currency fell; creditors were closing in; and the governments couldn’t find a way to stay in power longer than a year. Confrontations with the international community punctuated his rule, and soon Argentina became something of a pariah state. The country defaulted on its debt obligations to bondholders and has been in the courts ever since. Under Fernandez, populism expanded; there were endless confrontations between the business community and the government. Laws that were supposed to ensure cheap food for the urban poor by restricting food exports backfired as farmers refused to produce it for prices less than it cost to plant and harvest. The second-largest economy in Latin America is now a shadow of what it once was and much of the investment that once flocked to Buenos Aires has fled.
Macri will still have to deal with a legislature that is chock full of Peronists, and they will be in no mood to assist him. Massive economic issues are not going to be dealt with easily. The good news is that he may get some breathing room from institutions that have been battling the Fernandez government, as they may finally see some progress on debt repayment.
Among the issues he faces right away include a widening deficit, double-digit inflation and a severe currency crisis. The country has had no access to speak of when it comes to foreign currency and especially dollars. This was the impact of the default in 2003. The central bank just ordered the banks in the country to sell two-thirds of their foreign currency reserves to support the grossly overvalued Argentine peso. Macri declared during his campaign that he would lift currency controls as soon as he took office and that would be part of a very steep devaluation of the currency. Such a move would affect inflation as well, but it will hammer the population hard—the majority of the population will see the value of their money collapse. The reality is that much of the population is already poor and essentially living a hand-to-mouth existence so it may not make all that much difference to the bulk of the population.
There will be opposition to this move and that could challenge his government almost from the start. The expectation is Macri will start talks with the banks that Argentina owes as well as the International Monetary Fund (IMF) and the bondholders that were stiffed at the start of the Kirchner regime. The country is in no position to pay these obligations right away, but Macri needs to unlock support and aid from the IMF and others so he is expected to make some promises and issue assurances to those that were burned over 10 years ago.
- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence