Argentine Expects Normalcy by 2017
World Economy

Argentine Expects Normalcy by 2017

Argentina’s new conservative government is setting the groundwork for sustainable economic growth after four years of stagnation and high inflation, economists say.
Since taking office on Dec. 10, President Mauricio Macri, a 56-year-old businessman, has removed taxes on farm and industrial exports, lifted capital controls and raised interest rates, Anadolu Agency reported.
The lifting of the capital controls brought a 38% devaluation of the peso against the dollar last week, but it has not caused a flight to dollars.
“Everybody had thought the devaluation would be greater,” said Federico Thomsen, an economist at the E.F. Thomsen consultancy in Buenos Aires.
“But it doesn’t sound like things are out of control,” he said. “The public is calm, and this is very positive.”
The previous government of President Cristina Fernandez de Kirchner, whose populist-left party ruled from 2003 to 2015, put capital controls in place in 2011 after dollar reserves plunged. Her government wanted to protect the reserves for paying the national debt and covering essential imports like energy and food.
But as the dollar reserves continued to drop to a current $24 billion, the restrictions got tighter, and this wound up “choking” the economy by driving up inflation and deterring investment, Thomsen said.
This left the country with a fiscal deficit of 6.5% of gross domestic product and inflation of 25% after four years of economic stagnation, he said.

  “Inflation a Scam”
After lifting the capital controls, Macri said he would work to gradually lower inflation.
“Inflation is a scam that hurts the poor,” Macri said in a televised press conference last week. “Every week they see things go up and their salary is the same as at the start of the month.” But it will take time to return the country to growth.
“The expectation is that there will be at least a first semester of adjustment,” Thomsen said. “The hope is that if everything goes well then by the middle of 2016, things will start to turn around and the country will be on a positive trend for 2017.”

To help improve expectations, the Macri government has arranged between $15 billion and $25 billion in investment in Argentina over the next month from crop exporters, foreign banks and investors. Part of this will also come from the Chinese central bank, which has a currency swap program already in place.
“Argentina is on the road to normalize its economy,” said Gaston Rossi, an economist at LCG, a consultancy in Buenos Aires.
He said Marci has resolved two urgencies for Argentina by lifting capital controls and reducing an overvalued peso. Both of these were deterring investment by making it expensive to bring dollars into the country with no certainty of ever getting them out.
“By taking care of the urgencies, the patient has been stabilized,” Rossi said. “The challenge now is for the economy to recover so that it can run again.”

  Risks Persist
There are risks. The weaker peso will cut consumer spending power and raise prices, led by those imports that will now cost more due to the devaluation.
The result could be a recession in the first quarter, worsened by government plans to remove subsidies that have kept gas and power rates among the world’s cheapest, Rossi said.
Another damper on consumer spending will come from an increase in interest rates by increasing the incentive to save, he said.
“It is inevitable that consumption will decline this year, and the economy will contract moderately in the first quarter,” Rossi said. “Fewer people are going to run out to buy a new TV or change their car.”
Another challenge is to return to global financial markets. Argentina lost access after a $100 billion default in 2001, and it has failed to fully settle the debts. About $20 billion is still in arrears and a US lawsuit by creditors is preventing the country from selling new bonds on foreign markets.
However, with no major debt payments due this year, there is less urgency to borrow abroad, Rossi said.
“Argentina can sit down to negotiate [with unpaid creditors] without the urgency that would force it to be more flexible in the terms of a settlement,” Rossi said.
With more stability, companies are expected to take a fresh look at Argentina.

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