Argentinian voters have tired over the confrontational style and protectionist policies of President Cristina Fernandez, that in the end have impoverished the very people that she purports to want to help. As economic conditions worsened in Latin America’s third largest economy, the government began to fabricate and manipulate the numbers to the point that no one could put any credence in officially posted data. As a result, foreign investors abandoned the country in droves.
The endless spending has proved unsustainable with the end in the boom for commodities. With bankruptcy looming, the campaign of the ruling party candidate Daniel Scioli was doomed. He warned the electorate that if his opponent won, there would be massive cuts in social entitlements including welfare payments and cuts in subsidizes for the economically disadvantaged.
The conservative challenger Mauricio Macri won by a smaller margin than expected at 51.5% of the vote. His opponent Mr. Scioli was able to muster just 48.5%. The ruling Front For Victory Party had campaigned that Mr. Macri would promote the interests of big business over that of the working class. It seemed to be working through the first round of voting in October, with candidate Scioli coming in first place.
However, the opposition tired of the corruption and mismanagement of the economy, united behind Macri which enabled him to gain a small majority. The Lets Change Alliance brought over enough swing voters, to turn the tide against the policies of the government. It brings to an end, the twelve years of the populist Peronist style run government of Cristina Fernandez and her late husband Nestor Kirchner.
When President elect Macri is sworn in on December 10th he faces a daunting task. Argentina needs to regain access to global credit markets. This will remain impossible, as long as the country remains in default on its sovereign debt. He will need to dismantle the present capital controls and trade restrictions, which will help him in the difficult negotiations ahead for new international financial assistance.
The future president will also have to tackle an economy that is in a rapid state of decline. Inflation is running at more than 25% and the central bank is running out of foreign exchange reserves. The massive government spending now at dangerously high levels, will need to be brought back into somewhat more sustainable levels. The deficit this year alone is at 6% of GDP (Gross Domestic Product).
The practical steps that will need to be taken will most likely tip the country into recession, as the enormous government outlays in support of the economy is withdrawn. This is why the new regime may need to take things a bit slower, with the monumental reforms that will be necessary to restore Argentina to economic and financial stability.
The Merval Stock Index in Argentina is already up 25% since the end of October, when investors began to make the calculation that a Macri victory was increasingly likely. The bond market has also been surging. This phenomena is liable to continue, into the beginning of 2016.
A Macri Presidency will see better relations with both the European Union and the United States. He will no doubt attempt to foster better dealings with the rising South American economic powers of Chile, Colombia and Peru.
He might also work to have Argentina become part of the Trans-Pacific Partnership, that will hopefully bring new opportunities for his relatively weak economy. This pact alone will eventually contain 40% of global trade, so it would be a major advantage for Argentina to join the already existing framework of the present nine participating nations.
Now that a center right government will be installed in Argentina, it puts a new spin on the present interactions that exist with the leftist governments still in power in Brazil and Venezuela. These two countries are also wrestling with economies that are dealing with the near collapse in the price of commodities.
The present difficulty with Brazil over issues of trade, is of utmost importance to the economy of Argentina. This is despite the present weakness in the Brazilian economy which is the largest in Latin America. It is why Macri has already stated that repairing that relationship, will be a top priority for his administration.
He is already committed to making his first foreign trip as President, for a meeting with Brazilian President Dilma Rousseff. On the other hand, she has become widely unpopular since her re-election last year. Charges of corruption and incompetence are bringing demands forward for her impeachment.
Brazil is already in recession with the economy contracting by at least 2% for this year alone. The stock market is down 22% from 2014 and the Brazilian real has lost a third of its monetary value. Official unemployment is expected to surpass 8% this year, with the real rate far higher.
Inflation is at 8.2%, but again is in reality much further entrenched. Foreign investment is discarding the Brazilian economy with increasing frequency, given the poor state of the domestic economy.
The economy of Venezuela is far worse. It is now in a virtual free fall. Inflation is already the highest in the world and is expected to exceed 160% next year. The domestic currency as a result, has become practically worthless.
The GDP shrank 4% in 2014, is expected to decline by 6.6% this year and another 2.9% in 2016. The government no longer even posts most economic data, in response to the catastrophic state of affairs.
Shortages and looting throughout Venezuela have lead to riots and increasing civil instability. Parliamentary elections next month are unlikely to be orderly. There will be even more trouble as the price of crude oil continues to drop on the international market. It is the only real export that the country relies on, for its economic survival.
At home Macri will confront an economy that is barely growing. It expanded by just 0.50% in the second quarter of 2015, which may have been the first real growth since 2013. He has pledged to roll back the numerous measures enacted over the years, that had the government becoming increasingly involved in the economy.
These interventionist policies have together, crippled any prospects for growth. What has been created instead is large distortions in the economy. It has also caused many entrepreneurs to decide against making further investments in the country.
A case in point, is the subsidizing of electricity which forces prices far below market levels. It encourages waste and has become a major impediment, to developing a sound energy policy for the country. Not only does it discourage investment in the industry, it absorbs financial resources that could be better spent in other sectors of the economy.
As a sign of increasing confidence with the change in government, is the status of the credit outlook for the country. Moody’s Investors Service has already updated the rating outlook from negative to stable.
Of course, this does not erase the economic mismanagement for the last decade and a half. Millions of citizens will pay the price, as the new regime attempts to wean them off government largess.
A total restructuring of government expenditures will be necessary, to bring the country back into fiscal balance. It is what needs to happen for international institutions to be willing to extend new loans to the dysfunctional economy.
President Macri will have to eliminate a controversial system of price controls that cover over 400 consumer items, if he wants to have the economy return to free market principles. It might in the short run, exacerbate the almost runaway inflation now consuming the economy.
Foreign investors will wait on having the capital and currency controls to be removed. Although profits were practically nonexistent in the present environment, the prohibition of taking any revenue outside the country, had forestalled most new investment.
A number of companies had actually sold their holdings or pared back production in the anti-business atmosphere of the country. It is expected that the further nationalizations of any firms will cease, as well as a number of them returning to private ownership once again.
The heavy taxes on agricultural exports can be also expected to be reduced or eliminated as the new government takes power. This will be made possible as the demand for state income declines with a reduction in overall government spending. The high tariffs on food commodities, helped pay for many of the social programs enacted during the Fernandez-Kirchner years.
Argentina is the third largest global exporter of soybeans and the second largest exporter of corn. The country has become the fifth largest world producer of wine. Now that competition is growing, lower prices will be necessary to maintain market share. The elimination of these duties will be popular with farmers in Argentina and foreign buyers.
The El Cepo that was begun in 2011 to contain the outflow of foreign capital, will now be dismantled in this new era. It will end the two tier Black Market economy in currency and allow the importation of affordable foreign goods, once again.
There will at last, be a return to normalcy for the Argentinian middle class. No longer will individuals need to get a government permit, to buy American dollars.
Argentina a nation of 43 million people will need to go through a difficult transition period to be sure, but the potential of the country remains. The country which is the 8th largest in the world, possesses abundant natural resources and a well skilled population. These two factors will allow growth to return, once the economy has been reformed. The election of Mauricio Macri makes this process far more likely.