Macri: 12 months onFriday, December 9, 2016
What a difference a year makes
compare the rhetoric and the reality
“I got plenty o’ nothing” is one of the most famous songs from George Gerschwin’s Porgy and Bess and as we approach summertime, plenty of nothing would equally sum up what President Mauricio Macri seemed to offer (zero poverty, zero inflation) and what he delivered. With an economic contraction of at least 2.5 percent and inflation topping 40 percent, even according to the estimates of friendly economists it is not easy to describe 2016 as positive.
But the year has yet to end and its data to be finalised. Rather than deliver any final verdict on 2016, let us chronicle what has happened in the economy since Macri began his presidency a year ago tomorrow.
Macri hit the ground running with two huge moves in the very first week of his presidency. On December 14 he scrapped all export duties except for soy (down from 35 to 30 percent) and two days later he dismantled most currency controls, unifying the exchange rate. The devaluation inevitably following the latter move was surprisingly successful in terms of the exchange rate — the official dollar shot up from 9.80 to 14.50 pesos, only to subside quickly to 13.60. Yet the currency liberation was less drastic than it seemed because the 9.80-peso dollar had long been a sparsely available fiction (except perhaps for the well-connected) while the new exchange rate was a “dirty float” with a US$500 cap on cash purchases and import arrears postponed. But prices shot up in the weeks before and after the devaluation — both in anticipation and reaction — with utility bills and transport fares yet to be updated.
Meanwhile the rapid export duty elimination heralded massive tax cuts which flew in the face of a fiscal deficit exaggeratedly estimated at seven percent of gross domestic product (GDP) by the new Finance Minister Alfonso Prat-Gay. Such sweeping action to relieve the tax burden was not matched by any corresponding vigour to downsize the state — the purge of several thousand mostly Kirchnerite appointees provoked an uproar out of all proportion to its real impact on a state payroll of some 3.5 million people. A deficit assumed to be the freak result of populist electioneering was starting to look rather more permanent — Reaganomics back and standing tall.
Man on a mission
The Macri of these early weeks was a man on a mission with few doubts in his mind, enjoying the usual honeymoon surge in presidential popularity and with no Congress to worry about for a couple of months. He was never to move so decisively again — difficult trade-offs over whether to focus most against inflation, recession or the fiscal deficit and conflicting voices within his numerous economic team (while also trying to respect Central Bank independence) pulled him one way or the other.
Yet these vacillations did not immediately appear — December’s blitzkrieg was followed in January by the first trips of Finance Secretary Luis Caputo to New York to negotiate the exit from default, which rapidly became the one-track mind of economic policy. This, it was felt, would square various circles — funding the deficit with overseas loans to dodge the dilemma between austerity and printing money while inspiring confidence in foreign investors. Later that month Macri could thus go to the Davos forum with his market-friendly credentials intact to bask in the glow of being the most exciting novelty alongside Canada’s Justin Trudeau.
The dreaded “vultures” turned out to be less fearsome fowls than generally expected — almost US$12 billion at the end of the line overcame the anticipated various hitches such as Macri needing the deal far more than the holdouts or the denial of pari passu equal treatment to previous creditors. A hostile Congress equally proved a paper tiger when it came down to repealing the padlock laws barring a settlement — international credit was too big a carrot for most provincial governors.
Macri was thus able to open Congress at the start of March (the same day as Super Tuesday in the United States where Donald Trump’s sweep was to have ominous economic implications for the close of the year) with the holdout agreement signed and sealed if not delivered until a few days later. This seemed to exempt him from offering any detailed blueprints — almost half his speech was a 25-minute inventory of the Kirchnerite “inheritance.” US President Barack Obama’s visit at the end of March only seemed to confirm Macri’s impression that he had the world at his feet.
But the clouds were already gathering. The government felt confident enough to start biting the bullet with massive public service hikes of up to 500 percent within a week of Obama’s visit, an abrupt departure from the previous and subsequent gradualism — the adverse public reaction was to find legal expression soon enough.
Such massive percentages meant that inflation simply resumed from where it had left off after devaluation and Central Bank Governor Federico Sturzenegger had to jack interest rates up to 38 percent — a quasi-fiscal deficit was starting to accompany the fiscal deficit with both requiring money to be printed (Energy Minister Juan José Aranguren was transferring as much as cutting subsidies because he was also supporting local oil prices above global levels).
But meanwhile the main political name of the game was starting to become trading graft accusations — “K money” versus the Panama Papers — and whatever the gains in the opinion polls, all this did not help confidence abroad. Which was not too high even at the outset. The post-default euphoria found rapid expression in the April 18 bond issue landing offers of nearly US$70 billion for the US$15 billion sought — but at interest rates of over seven percent, well above regional neighbours (even crisis-ridden Brazil).
Midyear was rapidly approaching with no growth in sight. High interest rates were slowing the productive sector while too much money was going into money (which cost too much, as Ralph Waldo Emerson said) — despite the creation of a Production Ministry, there were not too many signs of an industrial policy from Macri’s economic team.
Meanwhile, the public service tarifazos were pushing many small businesses towards the brink, already struggling with a slumping consumer demand from most people losing the wage-price race (even relatively thriving agriculture suffered from costlier fuel). Already in mid-May Macri was constantly postponing good times to the “second half” — which perhaps helped him to survive the month with his popularity intact, unlike his Brazilian counterpart Dilma Rousseff (replaced by her vice-president Michel Temer).
By the end of May the continuing lack of foreign investment, despite the end of default, made Macri feel impelled to counter that old excuse as to why other countries should bring their money here when so many Argentines keep theirs abroad — he announced a tax whitewash. Capital repatriation has some obvious benefits but it also promised to bring far more greenbacks into the country at a time when the dollar was becoming too tame for the country’s competitive good — but yet a static exchange rate seemed the only way of keeping the inflationary dragon at bay.
Not too many more economic policy initiatives from Macri ahead of the much-vaunted “second half” but just before its arrival he had a rude shock — the Brexit vote to leave the European Union. An Argentina keen on joining the world was swimming against the tide in a planet which was starting to move the other way. Whither an EU-Mercosur agreement?
Shorter and sadder
The “second half” is a shorter and sadder tale — near its close at the other end, it retrospectively looks like that plenty of nothing. Macri and his overpopulated economic team were running out of ideas in an increasingly hostile world — a “second half” already starting with Brazil and Brexit was to bring him Donald Trump.
The key to simultaneously cutting the fiscal deficit and the tax burden was always going to be reducing the subsidy mountain and this was coming apart in the courts and the opinion polls. The inauguration of Peru’s Pedro Pablo Kuczynski at the end of July meant that Macri could no longer claim to be either the newest or the market-friendliest face in the region.
There was some sporadic success in taming inflation as from August — utility rate increases made for some spikes but core inflation was fairly steady at around 1.5 percent, approximately 2015 levels and thus only improving on earlier months of this year. This was rapidly promoted into being the main promise made and kept for the “second half” — it also prompted Prat-Gay to jump the gun in announcing inflation as under control as a prelude to pressuring Sturzenegger over interest rates (a pressure to which the monetarist slowly yielded in part after initial resistance under the guise of introducing inflation-pegging).
September saw plenty of two-way traffic with the rest of the world — Macri attended the G-20 summit in Hangzhou and the United Nations General Assembly in New York while in mid-month some 1,500 top businessmen came to town for the Business and Investment Forum jamboree (although they largely left their investment behind them at home). Back then China (which Trump threatens to convert into the world leader of globalisation by default) was not so big for Macri — he was still looking to Obama’s US as his main capital market while exposed to protectionist noises about Chinese “dumping” from local industrialists.
2017 on the agenda
The 2017 budget was punctually presented on September 15 and approved by the Senate on the last day of ordinary sessions on the last day of November. Here Macri broke little new ground by centring on meaningless forecasts for next year (3.5 percent growth, 17 percent inflation, an 18-peso dollar, etc.) which are on a hiding to nothing in volatile Argentina — instead the debate should centre on far more ambitious tax reforms on the revenue side and on the quality of spending.
A bad year started to look a lot worse with Trump’s election in early November. There were various factors explaining that upset but perhaps the most decisive was one which can also be found in Argentina — namely that the problem seems to be the quality rather than the quantity of employment. For a year with such dire economic indicators the employment figures are not too bad — unemployment actually fell from 9.3 to 8.5 percent between the second and third quarters — but there is no job creation in the private sector while the informally employed could be creeping closer to half than a third of the workforce. As well as perhaps the most damming figure of them all — 32.2 percent poverty instead of the promised zero.