Argentina recovery: Private sector must lead the charge

Now that Argentina’s presidential election is over, pressure will slowly start to mount on incoming leader Alberto Fernández to fulfill his commitment to steady the ship. 

Fernández will need to keep one eye on the demands of his cash-strapped voters - who will not forget his campaign pledge to put more money in their pockets - and the other on the government’s balance sheet.

Poverty rates have risen and purchasing power has fallen in Argentina under the watch of center-right President Mauricio Macri, whose fiscal consolidation efforts were derailed last year, knocking the economy into a tailspin. 

“The main challenge of the Fernández government will be to stabilize the economy,” Francisco Castañeda, an academic at Universidad de Santiago de Chile, told BNamericas.

Some believe Fernández - whose defeat of incumbent Macri was largely expected – will indeed deviate from the latter’s fiscal consolidation path and open up the spending taps.

In a pre-election debate, Fernández said getting Argentines spending again was vital to efforts to strengthen the economy. 

Fernández said at the time: "Argentina is a country that consumes 70% of what it produces, so when you impact consumption, you directly affect production. And when you affect production you affect unemployment. And when you affect unemployment, you make people poor.” 

Among the thousands cheering last Sunday near Fernández's campaign bunker in downtown Buenos Aires was Nadia, a young woman who said her expectation was that with the new president, her fridge would be "full".

Private sector role

With little fiscal wiggling room and without the benefit of booming commodity prices – like what his vice-presidential running mate Fernández de Kircher enjoyed – Fernández cannot rely on the state to pull the country out of the mire.

This means the new administration must woo investors and issue clear rules of the game, something it will likely do at least in the oil sector, a shining jewel in Argentina's tarnished economic crown.

With vast resources, a large population and a well-educated workforce, Argentina holds much potential. 

“It's important that Fernández is clear that it is the private sector that will lead the economic recovery of Argentina,” said Castañeda.

“Inflation must be lowered, but the strong depreciation pressure of the peso hampers efforts. This also increases the prices of regulated services, unless the new government freezes rates, like Macri, with the consequent fiscal cost. It’s in a difficult situation.”

While the private sector could reverse the country’s fortunes, crippling interest rates and currency controls – which were tightened this week and are expected to remain in place for some time – will dampen investor sentiment.

The benchmark interest rate stands at 68%, according to central bank data. 

“These rates are so high that they discourage investment in the real sector,” said Castañeda. 

 A question mark hangs over how Fernández will work with the IMF, which granted Argentina a US$57bn standby credit line last year. The latest tranche has been withheld following the August primaries, where Macri was crushed, spooking investors. 

IMF chief Kristalina Georgieva indicated a willingness to work closely with the incoming administration. She said in a tweet: “Congratulations to President-elect @alferdez on his election! We look forward to engaging with his administration to tackle #Argentina’s economic challenges and promote inclusive and sustainable growth that benefits all Argentines.”

British research firm Capital Economics, meanwhile, said “there appears little prospect of a swift agreement with the IMF.”

It added: “The Fund will presumably step up talks with Mr. Fernández’s camp over the withheld tranche of Argentina’s bailout and a possible augmented deal. 

“But the new president’s preference for higher public spending is at odds with the IMF’s condition to pursue significant fiscal austerity to bring down Argentina’s debt burden.”

Castañeda said cash-strapped Argentina has no choice but restructure its debt.

Staring into the abyss

Steve Hanke, a professor of applied economics at Johns Hopkins University, told BNamericas recently that Argentina’s next president will be “staring into the abyss.” He cited various factors behind Argentina’s woes, principally, a tendency in the country to knock on the door of the central bank when the state coffers are empty. And that is something former president Cristina Fernández de Kirchner did in 2010, after firing the bank's president at that time, Martín Redrado.

“Once that happens all hell breaks out and the peso ultimately collapses and inflation goes up, and so forth. They can’t keep the money supply under control,” Hanke said. “Ultimately, the fiscal authorities, the political authorities will get into the central bank.” 

Fernández, who takes office on December 10, will face biting headwinds in the form of high inflation, high interest rates and a hefty debt pile which stands at around 100% of GDP. In 2015, when Macri took office, debt stood at around 53%. 

Business-friendly Macri will also leave an economy in recession and with a poverty rate at over 35%, up from 30% in the second half of 2016.