2. 2
PURPOSE
Argentina has historically been and currently is an excellent case study for the effects of
drastic macroeconomic policy shifts. In contrast to the previous Kirchner administrations, the
incumbent administration is implementing a new macroeconomic order. The purpose of this
paper is to examine the macroeconomic policies carried out under President Mauricio Macri’s
administration since the new government took office in December 2015.
The paper analyzes the effects of the most salient macroeconomic actions that the new
administration has taken: letting the Peso float, lifting tariffs, implementing austerity measures,
regaining access to global capital markets, and revamping the national statistics agency in an
effort to understand the real inflation rate. The actions taken by the government, in turn, effect
Argentina’s economy and the government’s economic institutions, such as the central bank’s
federal exchange (FX) reserves, the current account, the fiscal balance, and inflation, among
others. The paper applies macroeconomic theory to better understand the likely results of these
policies and the logic behind them. Lastly, the paper examines future economic challenges.
SOURCE QUALIFICATIONS
The sources used in this paper include business articles, other newspaper articles,
corporate investment report, economics book, and an economics database. The angle of the
articles is fairly objective, as both the Latin American and North American sources use the same
rhetoric to refer to the previous administration (Kirchner) and refer to Macri’s administration
with caution. The business and news articles represent most of the sources used for this paper
because due to the recent chronological nature of the material studied: The current government
has only been in office for several months, leaving little time for scholarly work to be published
on the matter.
3. 3
INTRODUCTION TO THE ANALYSIS
The only thing predictable about Argentina is that it is unpredictable. From Maradona’s
“hand of god” to the invasion of the Falkland Islands to the biggest default on debt the world has
ever seen, Argentina never fails to surprise the global audience. Again, Argentina has changed
course, but this time there is hope for an enduring and stable positive outcome. On November 22,
2015, Mauricio Macri’s political party Cambiemos barely won the presidential election. As the
party name suggests, Lets Change attracted a majority of votes on the promise of better
economic management, among other components of the campaign platform. Barely four months
later, Argentina has witnessed a transformation in the macroeconomic policies that gear the
country towards the prospect of a better economic future.
The government has changed the exchange rate system, lifted tariffs on key exports,
implemented austerity measures, regained access to global capital markets, and revamped the
national statistics agency after alleged interference and distorted data reports. All of these
changes were implemented quickly as the government attempts to restore economic order in a
country with dwindling federal exchange reserves, current account and fiscal deficits, isolation
from global capital markets, and a high estimated level of national inflation.
THE KIRCHNER INHERITANCE
When the former president, Cristina Fernandez de Kirchner, left office in December of
2015, the new administration inherited a country that was heading toward an economic paralysis.
The exchange rate system was fixed and Argentina’s current account deficit was worsening, both
of these factors kept the peso overvalued and exerted increasing pressure on the already
dwindling federal exchange reserves in the central bank. The overvalued Argentine Peso was
making the export sector, which is largely agricultural, less competitive in the international
4. 4
market. Furthermore, both Cristina Kirchner and Nestor Kirchner continually increased tariffs on
exports during their terms in office, making the export sector even less competitive. The tariff on
exports provided the government with more revenue, which was needed due to increased
government expenditures.
The government created a fiscal deficit because of lavish spending, mostly attributed to
expanding the public sector and subsidizing both energy and transportation. The bloating of the
public sector was viewed by some as a result of clientelism, which created a highly inefficient
work force. The expensive energy and transport subsidies were supposed to target the poor, but
many wealthy Argentines benefitted from these subsidies as well. Thus, the subsidy was wasteful
as it did not exclusively benefit its target population. The previous administrations, especially the
second presidency of Cristina Kirchner, exacerbated the current account and fiscal deficits,
leaving Argentina with twin deficits. To make matters worse, the national statistics agency,
INDEC, was accused of producing unreliable economic data. The IMF censured Argentina in
2013 for the statistical inaccuracy of economic data, specifically false inflation and economic
growth rates.1
THE ECONOMIC BLITZKRIEG
After only a week in office, Macri’s administration fulfilled one campaign promise:
letting the Peso float and putting an end to the fixed exchange rate regime.2
The Argentine peso
has lost 34% of its value against the dollar when compared to the pre-float value in November,
2015.3
The devaluation of the Argentine peso will have the effect of improving the current
account balance, which stood at a deficit of US$4.76 billion in December, 2015, since it makes
1
"IMF 'Censures' Argentina over INDEC Data."
2
Millan, "Peso Drops 30% as Macri Propels Argentina Into New Currency Era."
3
“Frontier Markets Semi-Annual Outlook,” 2.
5. 5
imports costlier and exports cheaper for international buyers.4
It also has the effect of improving
the foreign exchange (FX) reserves of the central bank, since it doesn’t have to sell foreign
assets, decreasing the money supply, to keep the currency overvalued. The FX reserves has
reached an alarmingly low level of US$20 billion in November 2015.5
The flexible exchange
rate will also allow the economy to absorb economic shocks, rather than having the government
implement sterilization policies.
4
Dube, "Argentina to Remove Export Taxes on Some Agricultural Products."
5
"Argentina Foreign Exchange Reserves April 2015-December 2015."
6. 6
Macri’s administration has changed the fiscal policy as well, in order to correct the fiscal
deficit, which was consuming 5.8 per cent of the GDP in 2015.6
Argentine Finance Minister
Alfonso Prat-Gay said “there has been wasteful spending and when there is an expense it’s not
well done,” when asked about the fiscal policy of the former administration at a news conference
in January, 2016.7
The new administration has diminished government revenue by lifting tariff
on key exports, which has also had the effect of making the export sector even more competitive,
increasing the likelihood of a current account improvement. While cutting the government from
a much need source of revenue was a bold decision, the administration has taken steps toward
correcting the fiscal deficit by resorting to austerity measures. The government has fired
thousands of public sector employees, as well as cutting energy and transportation subsidies.8
While these reforms are not popular as large demographics are feeling the economic pain of
these austerity measures, it is imperative for the new administration to correct the fiscal
imbalance sooner rather than later.
The reduction of hefty government expenditures along with increased economic activity,
which will increase tax revenue, is expected to reduce the fiscal deficit. Both the improvement of
the fiscal and current account deficits, also known as the ‘twin deficits,’ will position Argentina
in a better economic standing. In some instances, twin deficits are sustained by financial inflows,
as the balance of payments adjusts towards equilibrium.9
However, Argentina lost access to
global capital markets due to a default on debt and a recurrent legal battle with ‘holdout’ hedge
funds. Under Macri’s administration, Argentina is in a less vulnerable economic position, as it is
6
"Argentina Says Wants Debt Deal as Fiscal Deficit Balloons."
7
"Argentina Targets 25% Inflation and Fiscal Deficit of 4.8% of GDP This Year."
8
"Old Whines."
9
Krugman, Obstfeld, and Melitz, International Economics Theory and Policy, 353-56.
7. 7
relieving the demand for financial inflows, while simultaneously recuperating access to global
capital markets by successfully negotiating with holdouts and fulfilling its commitment to paying
off large sums of debt.
The Macri administration has also taken the first step towards lowering inflation:
understanding what the real inflation level is. Immediately after taking office, President Macri
declared a “statistical emergency” and boosted efforts to revamp INDEC, the national statistics
agency.10
The former administration allegedly tampered with INDEC by misreporting data to
keep inflation levels artificially low. The government will likely reduce the inflation to a
manageable level once the currency appreciates due to a rise in exports and when the cost of
goods reduces due to an increased production of goods, reducing the price level of the basket of
goods.11
FORMIDABLE CHALLENGES REMAIN
President Macri’s administration has worked tirelessly to restore the Argentine economy.
After intense negotiations at home and abroad, the government has secured its re-entry to global
capital markets, a milestone lauded praised by politicians and businessmen alike. As of April
22nd, 2016, he central bank reported having $35.85 billion in total reserves, showing a drastic
improvement compared to the mere $20 billion reported only a couple of months ago.12
Argentina is moving in the right direction, but many challenges still remain. Argentina’s
largest trading partner, Brazil, is in a political and economic state of disarray. Corruption
scandals, a pending impeachment of President Rousseff, and an economy that has spiraled into
10
Millan and Smith, "Argentina President Macri Throws Open the Books."
11
"Argentina Says Wants Debt Deal as Fiscal Deficit Balloons."
12
Haynes and Bronstein. "Argentina Says #CiaoDefault, Paying Holdouts after 14
Years."
8. 8
contraction have left Argentines concerned about their ability to sell their services and products.
Argentina’s second largest trading partner, China, has also experienced an economic slowdown
which has drastically reduced its demand for Latin American commodity products.
Turbulence in emerging markets is not the only factor that may hamper Argentine
growth. Cristina Kirchner has returned to the political arena and to Buenos Aires, after having
retreated silently to her political stronghold in the Patagonia. She has ignited the loud support of
her party militants, reminding Macri that he does not have a majoring in congress and that he
may not have control of the streets.
CONCLUSION
As mentioned in the introduction, Argentina is unpredictable. Few expected Macri’s
Cambiemos political party to win the presidential election. Even less imagined a rapprochement
with the international financial community within the first semester in office. The new
administration has applied a Washington consensus prescription in an attempt to revitalize the
Argentine economy. The question remains, will the pro-business, pro-Washington economic
prescription fail once again? The traumatic experience of the 2001-2002 crisis still resonates
within the Argentine psyche and many blame former president Carlos Menem for applying
neoliberal economic reforms in the 1990’s. Challenges remain for the new administration, but a
new economic order may possibly pull Argentina out of the dark and back into the spotlight.
9. 9
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"Argentina Foreign Exchange Reserves April 2015-December 2015." Trading Economics.
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Dube, Ryan. "Argentina to Remove Export Taxes on Some Agricultural Products." The Wall
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<http://www.wsj.com/articles/argentina-to-remove-export-taxes-on-some-agricultural-
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argentina-debt-idUSKCN0XJ1OO>.
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argentina-over-indec-data>.
Krugman, Paul R., Maurice Obstfeld, and Marc J. Melitz. International Economics Theory and
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macri-fulfills-free-float-promise>.
10. 10
Millan, Carolina, and Michael Smith. "Argentina President Macri Throws Open the Books."
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<http://www.bloomberg.com/news/articles/2016-01-14/argentina-s-new-president-unlike-
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