Argentina: Change Brings Hope
- After 12 years and two different Kirchner presidents, it is time for change in Argentina
- The next administration will have to attack the current macroeconomics imbalances
- I am optimistic that a change in government will lead to better medium-term prospects
After 12 years and two different Kirchner presidents, it is time for change in Argentina. The October 25 presidential election will mark the end of an era, a time of abundance for an economy endowed with natural resources, but also a period full of policy mistakes that have kept Argentina from setting the stage for sustainable development.
An Influx and Outpouring of Hard Currency
To be fair, officials have made some positive policymaking decisions. Thanks to elevated commodity prices, Argentina’s terms of trade skyrocketed and a trade surplus generated inflows of hard currency in a country with chronic balance of payment problems. Those U.S. dollar inflows were used to significantly reduce the country’s external debt to unprecedented levels. Achieving the lowest debt-to-GDP ratio in decades is probably the current administration’s most important contribution.
Misguided policies, however, created macroeconomic imbalances that have risen to uncomfortable levels over time. A model that has stimulated only the demand side without promoting investment generated price pressures that gradually eroded the country’s competitiveness. Elevated inflation led to a real exchange rate appreciation that made imports cheaper and exports more expensive, reducing the trade surplus and the needed inflows of hard currency. Further, the government imposed export taxes and quotas on grains—an engine for the economy—and implemented erratic energy policies that translated into an energy trade deficit similar in size to the overall trade surplus reached five or six years ago. As a result, exports dwindled and imports rose.
Instead of attacking the root causes, the government imposed import restrictions and limited capital outflows to stop the drainage of hard currency. But that led to a sudden stop in foreign investments, a plunge in foreign exchange reserves, and slower economic growth as import restrictions on intermediate goods negatively affected production.
After achieving a 7% annual growth rate during 2003-2011, the Argentine economy will end the 2012-2015 period with an average growth rate barely above 1%. Starting late last year, government spending has climbed sharply in order to prop up the anemic economy ahead of the election. Although the government successfully stimulated activity, the mounting macroeconomic imbalances, Brazil’s crisis, and a challenging global economy are headwinds. Lower commodity prices negatively affected terms of trade.
The Arduous Road to Macroeconomic Stability
The next administration will have to attack the current macroeconomic imbalances by adjusting the artificially strong currency, eliminating export taxes and quotas, cutting unnecessary subsidies, solving the holdouts issue to tap international credit markets, and proposing a credible plan to lower inflation. I am not sure, however, that the next administration will be willing to go through the short-term pains these policies will generate in order to be on solid footing for a more sustainable growth in the medium term.
Since whoever wins the election will not have the political capital to implement unpopular measures, their government will have to walk a fine line to rebalance the economy without generating disruptive social conflicts that may risk governability. The three candidates’ top advisors understand Argentina’s economic picture, but they may have limited freedom to enact solutions.
Reasons for Positivity
Despite the challenging backdrop, I am optimistic that a change in government will lead to better medium-term prospects. Argentina may have a difficult 2016, but once the storm clears, I think that more reasonable policies will bring tremendous opportunities in this country endowed with rich natural resources and relatively strong human capital.
I expect that Chinese consumers will continue to demand agricultural-related products from Argentina. If oil prices recover somewhat, vast untapped unconventional oil and gas resources should bring excellent development opportunities. Science-oriented industries (such as health and biotech), financial services, software development, business processing outsourcing, agricultural machinery, and numerous other sectors and industries should also shine under improved policymaking.
All candidates for the presidency seem to embrace change, though some more than others. I am hopeful that Argentina will start a new era, a time in which consensus-building and pragmatism will prevail.