Isonomía Consultores en Revista Fortune – 01/06/2016

Argentina’s New Reform-Minded President Is Facing His First Big Test

Mauricio Macri knew he’d soon face pushback against his market-oriented economic reforms.

by: Jonathan Gilbert

When Argentine President Mauricio Macri took office in December, he knew it might not be long before he’d face pushback against his market-oriented economic reforms.

Less than six months into his presidency, that time has already arrived.

“He’s in too much of a hurry,” says Carlos Quiroga, 43, who with his wife runs a small drop-off laundry business in Buenos Aires.

Macri’s center-right administration approached the sputtering economy like a mechanic restoring a beaten-up car. Policymakers moved to fix all of the problems at once, hoping this would quickly foster a sturdy business climate and bolster growth.

One of those problems was the budget deficit. In 2015, under the leftist government of Cristina Fernández de Kirchner, it was the widest in three decades: 5.4% of gross domestic product. To narrow the deficit, Macri has been cutting government spending, albeit gradually. In theory, this will rein in inflation, which—at around 40% following a December currency devaluation—could trigger instability and thwart business investment.

But although such reforms have been met by hosannas among foreign investors, they are inflicting short-term pain at home: stoking poverty, anger, and political opportunism.

Quiroga voted for Macri because he was tired of Fernández. But now he is questioning the new president’s decision to cut energy and transport subsidies. Those subsidies were a burden on government finances but, since they’ve been cut, Quiroga’s water and electricity bills have soared, raising costs even as he has been reluctant to bump up the price of the wash-and-dry service (about $4.70 per bundle) for fear of losing customers.

Meanwhile, with the Central Bank raising interest rates as high as 38% to increase peso savings and cut inflationary consumer spending, Quiroga complains there’s no cheap credit to invest in his business.

“Yes, Macri inherited things in bad shape, but you can’t reverse 12 years so quickly,” Quiroga says, referring to the three consecutive terms that Fernández’s party was in office. “With things as they are, it’s hard to keep supporting him.”

At first, Macri won the support of opposition Peronist lawmakers. Crucially, several weeks ago they backed his settlement of a years-long debt feud with New York hedge funds that had filed claims for billions of dollars in the wake of Argentina’s 2001 sovereign default.

But the lawmakers now appear less pliant. This month they passed a law to prevent layoffs amid a wave of job cuts made as the economy contracts. Macri swiftly vetoed it, saying it discouraged business investment.

In another sign of frustration, influential labor union leaders bristling at Macri’s economic policies also staged a big anti-government rally. And on Tuesday, official economic activity figures from April—which showed an unexpectedly steep 6,7% drop in industrial activity—appeared to sketch an ugly picture.

While Macri is far from a political crisis, he is governing under a dark cloud: no democratic non-Peronist leader has managed to complete his term since President Marcelo T. de Alvear in 1928.

Until recently, analysts say, Macri had been maneuvering skillfully to govern effectively.

But at a time when foreign leaders and financial markets still applaud him, the domestic situation is becoming more taut. His approval ratings dropped from 51% in March to 44% at the end of May, according to respected local polling company Management and Fit.

If his popularity drops too much, there is a danger Macri could cede to political pressure and ease off tackling the budget deficit (often called “slippage”). If he does this while continuing to tap global bond markets at high interest rates, Argentina could veer toward another default down the line, says Fernando H. Narvajas, an economist at FIEL, an Argentine policy research center.

“What I see internationally is a personality game,” says María Victoria Murillo, an Argentine politics professor at Columbia University. “Perceiving a dreamlike time, they rally around. But domestically it’s a different story; difficulties are starting to emerge.”

American President Barack Obama praised Macri as “a man in a hurry” over economic reforms. Paul E. Singer, a billionaire hedge-fund manager involved in the debt feud, wrote a tribute to him in TIME magazine’s list of the world’s most influential people. And when Argentina sold foreign bonds recently for the first time in 15 years, it issued a developing-country record of $16.5 billion. With demand reaching four times that, there has also been room for provincial governments and businesses to begin to tapmarket enthusiasm.

Still, policymakers know Macri’s political future largely depends on signs of a tangible economic recovery in the second half of the year.

“We are at our lowest point now,” cabinet chief Marcos Peña recently told local radio, referring to a report by researchers at the Pontificial Catholic University of Argentina that showed poverty increasing sharply since Macri took office.

But, Peña insisted, “It’s the path we have to follow to start growing again.”

Growth was 2.1% in 2015, an improvement on the sluggishness of recent years, but economists say this was spurred by an unsustainable deluge of government spending before the elections.

To Macri’s advantage, public patience should endure for a while longer, says Pablo Knopoff, a political strategist at the Isonomía consultancy in Buenos Aires.

“Macri anchored his expectations in the future,” Knopoff says. “Argentines are concerned but optimistic that things will improve,” he adds, explaining how widespread disillusionment with Fernández has given Macri extra time. As one of the keys to success, the economist Narvajas points to an amnesty bill announced last week. It is meant to entice Argentines to repatriate billions of dollars stashed overseas, which would boost the nation’s finances and allow it to fund policies like higher pension payouts.

Macri may just be able to orchestrate an economic turnaround before there are heavy political and social repercussions, some economists predict.

Antonio Dip, a street-side flower seller in Buenos Aires, agrees.

“I have blind faith,” says Dip, 82. “With Macri, Argentina is going to rise up.”