[Mac Margolis] Argentina’s Macri has a tough road ahead

Mauricio Macri had a pretty good year. Having settled a sulfurous quarrel over past-due debts with cranky hedge funds, the Argentine president went on to dismantle market-warping energy subsidies, rehabilitate the census bureau, slow inflation, and thwart a Peronist revolt to lead his fledgling Cambiemos political coalition to a major victory in the October midterm elections. Then, just before Christmas, he persuaded Congress to roll back corporate taxes and even tweak old age pensions, the grandmother of Latin American entitlements.

So who’s afraid of 2018? Macri, of course. Political capital is a perishable commodity in Latin America these days -- all the more in Argentina, where economic recovery has been tepid, politics toxic, and expectations fevered. And while Macri has attracted investors with important policy measures -- leading both Moody’s Investors Service and Fitch Ratings to upgrade Argentina’s credit standing -- his compatriots are less enchanted. Macri’s approval ratings tumbled 5 percentage points in December to a personal low of 49 percent, down from 71 percent after his election, while his disapproval rating surged to a record 48 percent.

That’s a troubling sign for the former Buenos Aires mayor and businessman, who campaigned on remaking his country through efficiency, transparency and the charms of a market whisperer.

By far, though, Macri’s greatest charm was that he wasn’t Cristina Fernandez de Kirchner, his mercurial predecessor, whose heavy-handed populism honed by Argentina’s legacy Peronist movement stoked inflation, antagonized everyone from farmers to journalists, larded the economy with untenable subsidies, stonewalled creditors, and imposed capital controls that froze the country out of international financial markets. “Argentine history has been caught in a cycle between populists and technocrats. They need each other,” Federico Finchelstein, a historian at the New School for Social Research, told me.

For a time, playing the foil to Kirchnerismo worked well. Investors warmed to Argentina as inflation tumbled from more than 40 percent to the low 20s. Slower inflation “meant families could borrow again,” said Marcos Casarin, chief Latin America analyst for Oxford Economics. Banks ramped up lending, leading household credit to expand 20 percent in real terms in 2017, according to Oxford Economics.

But this was the easy stuff. To consolidate Argentina’s wan recovery, Macri now must push structural reforms -- starting with the rigid labor law -- by cajoling congress, where adversaries led by the aggressive Peronists hold the edge and have tasted blood.

Consider the December agenda, when a modest proposal to calibrate the way retirement benefits are calculated -- a measure that would barely nick the country’s generous pensions and save the treasury little -- met fierce pushback. Buenos Aires, which is not just the Argentine capital but a political boombox, saw the number of street protests spike 32 percent last year.

The funk took a toll on Macri, whose vow to revive Argentina kept him on the thin line between cooling inflation and strangling growth. Last year he managed that tango well but was bruised by the surly street reaction. On Jan. 9, the central bank lowered its benchmark interest rate after relaxing inflation targets late last year on a clear bet that a bump in prices was the price to pay for higher consumer borrowing and spending.

But goosing growth to tweak the public mood is one of Latin America’s worst temptations, and can easily knock a recovering economy off the wagon. Argentina is running a primary deficit of 4.6 percent of gross domestic product -- far worse than Brazil, which is just emerging from its worst recession in decades. Economic analysts say Macri has little choice but to double down and cut government spending. “If you don’t adjust, it doesn’t mean you get less inflation,” said Alberto Ramos head of Latin America economic research at Goldman Sachs. “If you defer cuts now, you’ll pay more later.”

Of course troubles down the road are a weak rallying cry, especially for a struggling technocrat. “It’s a difficult message to convey to your electorate, which is why populists have such appeal in Latin America,” Ramos said.

For Macri, there’s no easy payoff. To fulfill his mission to return Argentina to normalcy, he must to reassure the world that Argentina once again is open for business. Cue the courtship of Jeff Bezos, whom both Chile and Argentina are hoping to convince to host Amazon’s cloud services. Yet he also sorely needs the political capital he’s now bleeding to leverage a contrary congress and convince public opinion to get behind unpalatable reforms. Tellingly, the controversial labor reform has been postponed to March.

“Playing the technocrat works well for a time, until it doesn’t,” said Finchelstein. “Having spent the anti-Kirchner card, Macri must show who he is.”

If Macri can manage that and still redeem himself to an impatient public, he might just pull off a neater trick -- and become the first non-Peronist president elected in Argentina to finish his term.


By Mac Margolis

Mac Margolis writes about Latin America for Bloomberg View. -- Ed.


(Bloomberg)