Based on most indicators, the global economy has stabilized following its free fall approximately a decade ago. With economic risk abating our attentions increasingly turn to the systemic risks posed by the political arena. Worldwide it appears that in many countries domestic politics reveals deep divisions over the role of government. In the developed countries rising nationalism and political extremism threaten to upset existing social contracts by altering policies on immigration and trade.
Meanwhile, for much of the developing world, the political situation is just the opposite. Across Latin America, voters have rejected populism, of both the far right and left variety, moving to a more centrist position. A case in point is Argentina. Its recent failed populist experiment has produced change and revived hope for a country possessing considerable economic potential. However, it too faces domestic political challenges which could upend this revival.
Argentina has an opportunity to rid itself of its reputation for political repression and economic fecklessness. The election of Mauricio Macri in November of 2015 was a major step in reversing over seven decades of free-spending, populist governments. His government has enacted numerous policy measures, including tax reform and inflation fighting, to stabilize an economy rocked by years of mismanagement. Nevertheless, it’s not all smooth sailing for Macri.
Many Argentines are not sold on these policies, having yet to experience the economic benefits first-hand. While popular with investors, these reforms are less popular domestically with recent polls suggesting that 48% think the economy will get worse before better. A rise in unemployment paired with cuts to public subsidies, and the perceived failure to deliver greater economic prosperity at a faster pace, has caused Marci’s support to waiver. His public approval rating has tumbled with more Argentines disapproving than approving of his performance. The upcoming October legislative elections are viewed as a mid-term referendum on Marci’s policies of austerity.
The strongest challenge to Macri’s Cambiemos coalition comes from the Peronist Unidad Ciudadana (“Citizens Unity”), led by former President Cristina Fernandez de Kirchner. Kirchner, who is vying for a seat in the Senate, remains quite popular with Argentina’s poor. When president, her populist economic policies of generous social spending and subsidies caused run-away inflation and spurred wanton corruption. Ultimately, she was forced to implement currency controls to stem the flow of flight capital. Positive election results for Kirchner’s party would negatively impact the direction and pace of the market-based economic reforms pursued by the Macri government.
Kirchner is on the comeback trail. Old politicians never die, they just reinvent themselves to appeal to a broader base. She is playing on Argentines’ fears of past political repression. Recently, she spoke of her concern over the return of darkness, a reference to the country’s history of dictators and military juntas. Her statements were in regards to the much-publicized disappearance of Santiago Maldonado. Santiago, last seen on August 1, disappeared after allegedly being beaten and arrested by border patrol officers called to disperse protesters supporting the rights of the indigenous Mapuche Indians of Patagonia. The episode revived memories of the “dirty war” of the 1970’s when 10,000 to 30,000 left-wing radicals and Marxist sympathizers disappeared. Anti-government forces in condemning government inaction have adopted the slogan “¿Donde Esta Santiago?”
While comparisons to the darkness of the past might be questionable, it could be just enough these days to excite political opposition to Macri and promote the case for a return of a Kirchner-like populist to power. Early in September, thousands of citizens participated in violent protests in Buenos Aires demanding the whereabouts of Santiago. The government has looked weak on this matter, failing to offer any information despite recently quadrupling a reward to two million pesos for information leading to Mr. Maldonado’s discovery. But the disappearance of a single person is less about comparisons to the “dirty war” and more about the deep division among the electorate.
Economically, Argentines remain tethered to subsidies and entitlements. Macri’s attempt to gradually reduce dependency on the state holds potential for an improved economy free from foreign creditors, a stronger economic platform leading to less protectionism, more employment at reduced inflation rates, and a stable currency. Macri has successfully eased capital controls and let the currency float. He eliminated the black-market discount to the official rate which had been as high as 40%. He has set aggressive fiscal and inflation targets. He has reduced subsidies to the transportation and energy sectors. However, as is often the case in elections, voters can be mobilized for reasons other than economics.
I remain optimistic that Macri will gain support in the legislative elections and win reelection in 2019. The results of the primary election results, held on August 13, are encouraging. Cambiemos candidates overperformed while Kirchner and her opposition party underperformed.
Argentina is less likely to return to the “dirty war” than the United States’ return to “operation condor” which supported the activities of the Argentine military junta. However, populism and its surrogate nationalism can produce some strange outcomes. A Kirchner/Peronist government would be a step backward, quickly unwinding the progress made to date on fiscal and economic matters. Regardless of the election outcome, the continued presence of Peronists in the legislature ensures that the path to reform is slow.
The progress to date in Argentina is commendable. Aggregate debt levels, particularly debts owed in hard currencies, have been reduced. Earlier debt refinanced in the global financial markets (once again open to Argentina) have been successfully restructured. Its recent sovereign debt offerings, including a 100-year bond, have been oversubscribed by investors. The elimination of the black-market for currency has restored confidence in the peso. The return to positive economic growth looks to be accelerating.
Argentina’s potential has never been greater. It is country steeped in culture, rich in natural resources, and possessing a strong manufacturing base. Politically, it still lacks the confidence to compete globally. The reforms began by the Macri government, if continued, will gradually return the economy to a vibrant private sector where many Argentines can finally reap the benefits. Convincing them politically, of course, remains the challenge. Macri is the right man for the job.
©2017 Northwest Passage Capital Advisors LLC. All rights reserved.
To download the PDF version, click here: Sept 2017 – Donde Esta Santiago