Argentina: Cleaning Up the Mess

Tough year ahead, but hope because the country is going in the right direction.

LATINVEX EDITORIAL

Argentina’s President Mauricio Macri deserves praise for the efforts he has made in trying to turn around his country’s economy.

After succeeding Cristina Kirchner eight weeks ago, Macri and his team of widely respected professionals discovered that the economy and state finances were in an even worse shape than first assumed.

While undermining private local and foreign investment, Kirchner hiked the number of state employees and systematically siphoned state funds to whatever personal pet project she and her allies promoted.

Take Aerolineas Argentinas, the flag carrier that Kirchner nationalized eight years ago. The airline now needs a $1 billion bailout from the government after its previous CEO mismanaged it completely. During Kirchner’s government, Aerolineas was used as a piggybank for La Campora, the political youth group controlled by her son Maximo, and despite having clear potential to make money, there was not even an effort to run the company efficiently.

Macri has brought in a professional manager, Isela Costantini, a former General Motors executive who is expected to overhaul the airline through cost cuts and boosting efficiency.

The Aerolineas mess is replicated throughout state companies and state agencies, which were staffed by Kirchner loyalists who typically were not qualified and only became a drain on public finances. 

However, even worse than public waste, was the mismanagement of general economic policies, which have led to Latin America’s second-highest inflation after Venezuela.

The rate – estimated around 25 percent – was caused by a combination of factors, including printing more money to finance government mismanagement, price controls, a weakening currency and a general distrust among merchants and brokers alike.

Kirchner tried to keep the true rate secret (including by forcing the official statistics agency to lie and by fining independent economists who reported the true figures), but indirectly acknowledged the reality by accepting yearly salary increases of 25 to 30 percent.

The high inflation is one of Macri’s key challenges. Although his government reversed Kirchner’s money-printing policies and currency controls and is now in the process of providing true statistics on inflation (which will help reduce distrust), by lifting the price controls it has also made matters worse in the short term.

After years of artificially low prices (especially in the electricity sector), prices are now jumping. The Macri administration has been able to reach a deal with pharmaceutical companies to avert price increases (they even agreed to a 5 percent decrease), but the electricity companies are now hiking up prices to recover years of losses.

The government is now in the midst of negotiating the official rates for salary increases and is trying to set a limit of 20 to 25 percent, but several sectors – especially the teachers’ unions – are opposed and are demanding rates of 30-35 percent instead.

Macri has to thread carefully. While trying to avoid salary hikes that undermine his inflation policy, he also wants to avoid social unrest at this crucial time when he is trying to garner enough support – both in congress and among Argentines – for his turnaround reforms.

Meanwhile, just as tough a challenge is negotiations with US bondholders. Macri is trying to reach an agreement, but is trying to reduce the penalties demanded by the US bondholders. Finance Minister Alfonso Prat-Gay said Tuesday that the bondholders in New York have asked for an "unacceptable" amount in interest, Bloomberg reports.

The Argentine government has just reached an agreement with Italian bondholders, but a similar deal with the US bondholders will likely still take some time.

However, most experts believe the two parties in the end will reach an agreement and so during the next two months.

Such a deal will help Argentina return to international capital markets, a move that not only will help the government as it seeks to turnaround the economy but even more so help the many Argentina companies that have been forced to stay away from the capital markets due to unfavorable conditions.

While it is no easy task to clean up the mess created by Kirchner’s mismanagement, we believe Macri and his team will succeed. This year will generally be tough, but the real fruits of the government’s business-friendly reforms will clearly be seen starting next year.

After years of senseless policies, Argentina is finally going in the right direction.

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