Isonomía Consultores en The Economist – 16/04/2016

Old whines

The new president has moved fast to reform the economy. The results so far have been painful

By: Jack Aldwickle

MAURICIO MACRI, Argentina’s reformist president, has been in office for just four months. For Constanza Pimentel, who along with her mother and brother runs a small winery on the outskirts of Mendoza, the country’s winemaking capital, his government has so far been a mixed blessing. Bodega Caelum, their 50-hectare vineyard, produces 70,000 bottles a year of Torrontés, Malbec and other wines. Recently it has struggled. Argentina’s previous president, Cristina Fernández de Kirchner, introduced currency controls, which kept the peso artificially strong and made exporting unprofitable. Ms Pimentel was delighted when Mr Macri allowed the currency to float in December: she plans to expand sales in the United States and Britain this year. But for now her customers are mostly Argentine oenophiles, and they are drinking less. In March she raised prices by 12% to keep up with inflation. “Wine is becoming a luxury,” Ms Pimentel laments. “Customers are watching their wallets.”

One can hardly blame them. Mr Macri, whose election ended 12 years of populist rule by Ms Fernández and her late husband, Néstor Kirchner, has been feted by foreigners. He is on the verge of ending a 14-year confrontation with foreign creditors; Barack Obama paid him a visit in March. But for most Argentines, life is getting worse. The annual inflation rate is approaching 40%, according to independent estimates (official numbers are not being published while Argentina overhauls its statistics agency). It is the highest rate in Latin America outside Venezuela. Meat, a staple, is 44% more expensive than a year ago. A study by the Catholic University reports that 1.4m Argentines have dropped below the poverty line so far this year.

Mr Macri inherited high inflation (see chart). During Ms Fernández’s reign the central bank printed money to pay for subsidies, which reached 4% of GDP last year. But the measures the new president has taken to stabilise the economy have made things—temporarily—worse. The floating of the peso, to make exports competitive and reduce a drain on the central bank’s foreign-exchange reserves, pushed up inflation. So did cutbacks to subsidies of electricity, water, gas and transport to control the budget deficit, which reached 5.8% of GDP in 2015. On April 8th bus and train fares in Buenos Aires, the capital, doubled. The public sector has laid off nearly 11,000 workers since December. The economy is likely to shrink by 0.5% this year.

Mr Macri warned that there would be pain, but he was not gloomy enough. His government is likely to miss the inflation target of 20-25% it set for 2016, in part because the country’s powerful unions are demanding pay rises of 30%. The finance minister, Alfonso Prat-Gay, now promises that inflation will fall in the second half of the year and predicts an inflation rate of 17% for 2017. “We are very confident that we can hit” that rate, he told a conference on April 5th.

One reason for his optimism is the prospect of Argentina’s return to the international capital markets. On April 13th a court in New York cleared the way for Argentina to repay bondholders who had rejected earlier debt restructurings. The country now plans to issue up to $15 billion in new bonds. It will use most of that to pay the holdouts. The rest will pay for government spending, reducing the need for inflationary financing of the budget deficit.

The government is betting that the return to the credit markets will encourage investment by foreign companies. There are hopeful signs. Since Mr Macri took office Dow Chemical and American Energy Partners have announced that they will invest alongside YPF, the state-owned oil company, in exploring for shale gas and oil in Vaca Muerta, which holds vast reserves of both. Coca-Cola has promised to invest $1 billion in Argentina over the next four years; Fiat Chrysler, an Italian carmaker, has said it will spend $500m to upgrade its plant in Córdoba in central Argentina.

But investment may not recover quickly enough to provide the lift that the government is hoping for. Brazil, Argentina’s largest trading partner, is suffering its worst recession since the 1930s. Some analysts argue that Mr Macri needs to do more to restore confidence. Martín Redrado, a former head of the central bank, thinks investment will not rebound until prices stabilise. Even with renewed borrowing on the international markets, the government will need to raise a lot of money from local investors to pay its bills or resort to central-bank financing. To shore up confidence, Mr Redrado calls for the president to establish a “council for macroeconomic stability”, which would set inflation and growth targets at least two years in advance.

Ms Pimentel is “confident” that Mr Macri has good intentions and thinks “it will take some time” to heal the economy. The president is counting on the patience of voters like her. According to a survey conducted in March by Isonomía, a consultancy, 72% of Argentines view him favourably and 69% think he can control inflation. Their confidence may have been shaken when Mr Macri’s name appeared among the thousands in the leaked “Panama papers”, showing that he was a director of an offshore company founded by his father. He says he drew no income from it and has nothing to hide; a judge is investigating. Argentines are giving him the benefit of the doubt. If inflation does not retreat by the end of this year, they may turn on him.