Days into his presidency, Mauricio Macri faces his first big threats as he seeks to fix Argentina’s ailing economy: inflation and recession.
In his first policy moves since taking office on Dec. 10, the free market advocate made good on his promises to eliminate capital controls and cut hefty export taxes, Reuters reported.
But floating the peso triggered an immediate 26.5% devaluation and by making imported goods more expensive it will put further pressure on inflation, which already stands at well above 20%.
Economists expect inflation to accelerate to 35% in 2016, eating into Argentines purchasing power and dampening spending. They predict the economy will contract in the first months of the year, although it could then pick up again if new investment kicks in and a cheaper peso helps exporters.
Argentineans knew the peso was being held artificially strong and many believe the measures are needed, but even Macri’s own supporters are worried.
“It is going to hurt us all,” said Cristina Lopez, 70, who works as a secretary to supplement a pension that she says is not enough to get by on. “I went to get medicine yesterday and it had gone up 30-40% already.”
Lopez voted for Macri’s center-right “Let’s Change” alliance and blames the poor economy on 12 years of populist policies.
“They left us in a bad situation,” she said of the previous government of leftist Cristina Fernandez, who imposed currency and trade controls in Latin America’s No 3 economy in a bid to boost domestic consumption and foster national industries.
As Macri dismantles those policies, he risks tipping the economy into recession and stirring unrest from labor unions linked to the Peronist party he has just turfed out of power.
“The contractive exchange, fiscal and monetary policies at the same time will generate a decline in economic activity in the first half of the year,” said a research note from Buenos Aires brokerage Allaria Ledesma and Co.
Macri believes a mix of pro-business policies and government austerity will bring inflation under control and encourage the investment that Argentina needs to grow rapidly and create jobs.
But in the short-term he has a problem, and little space to maneuver.
Interest rates are already high, discouraging investment. And austerity means reducing utility subsidies and restraining public sector wage hikes, both of which are unpopular.
Macri will be helped if exports start to grow quickly, and some businesses are already hopeful.
The devaluation pushed up the price of imported wares, including consumer goods like televisions and refrigerators but also those used lower down the production chain like auto parts.
Businesses have been quick to hike prices in anticipation of increased costs and some are accused of moving too quickly, using the devaluation as an excuse to increase profits.
Scarred
Argentina is scarred by episodes of hyperinflation that have periodically destroyed the value of the peso, resulting in an obsession with saving in US dollars.
Seeking to end that and lock in currency stability, Fernandez propped up the peso with central bank reserves while restricting access to dollars.
But her controls spawned multiple exchange rates that distorted the economy and made business tricky. The strong peso made Argentine exports expensive and discouraged investment.
Argentina’s business leaders have broadly welcomed Macri’s early measures but noted that his overall plan hinges on whether he can contain inflation and keep the exchange rate from falling much further.
To mitigate the impact, particularly on the poor, and also stave off possible unrest, Macri’s government will keep the Fernandez government’s “agreed prices” program which ensures certain basic goods are available for reasonable prices.
Still, his government will struggle to keep Congress and Argentine society at large on board with its plans if the economy does not pick up next year. Macri’s already fractious alliance does not have a majority in Congress and Fernandez’s party, the Front for Victory, remains a powerful force.
