Building a New Argentina

How Argentina's new president is putting the country back on the world stage
June 21, 2016 Updated: June 30, 2016

MEDELLIN, Colombia—After almost six months in office, the honeymoon between the international community and the new Argentine president Mauricio Macri isn’t over. In fact, it just seems to get better in spite or maybe because of the messy state of affairs left by his predecessor Cristina Kirchner.

“Our starting point is very complex. We still have a long way to go. We are leaving behind a series of populist political practices that have not transcended in an improved standard of living for our people,” Macri said at the World Economic Forum (WEF) on Latin America in Medellín, Colombia, on June 16.

Macri’s appearance at the forum, which represents the global political and economic status quo, is the second one after attending the main meeting in Davos, Switzerland, in February this year. His message is clear: “Argentina decided to become an active participant in the 21st century,” after the country had shunned the forum for 12 years and with it the international community of business and finance.

Kirchner’s Mess

After Kirchner took office in late 2007, she almost made a point of alienating the international community, probably best represented by her personal fight with hedge fund billionaire Paul Singer. He successfully sued Argentina for not fully repaying bonds that were restructured in the aftermath of the 2001 sovereign default. As a result, the country was shut out of the international bond market.

The world is opening the door to Argentina.
— Mauricio Macri, president, Argentina

She introduced foreign exchange controls, confiscated billions in private pension savings, and took a leading role in the nationalization of YPF, an Argentine energy company majority owned by Spanish company Repsol before it was expropriated. Kirchner also introduced heavy taxes on exports of agricultural goods, virtually removing  the country as a player in these markets.

These policies resulted in even higher inflation (more than 30 percent when Kirchner left office), low GDP growth, and high government budget deficits, peaking at 5 percent after Kirchner’s term ended.

Internationally, she sought close ties with socialist Venezuela and Sharia Iran, both enemies of the United States. As a result, diplomatic relations with the world’s largest economy were lukewarm at best.

Inflation in Argentina over the last ten years (Trading Economics)
Inflation in Argentina over the last ten years. (Trading Economics)

In the six months since Macri took office, all has changed. He abolished currency controls and import-export taxes with few exceptions, sought and brokered an accord with the hedge funds, and successfully sold a record $16.5 billion in U.S. dollar debt which the country will use for new investments.

In politics, he immediately affirmed a commitment to South American free trade according to the Mercosur free trade initiative and the Pacific Alliance and distanced himself from Venezuela and Iran. Diplomatic relations with the United States were reinvigorated when President Obama visited the country in March.

Focus on Investment

“The world is opening the door to Argentina. We are starting to see initial results. We saw increased exports as soon as we eliminated restrictions on exports,” he said. “We can offer the world an American continent in peace, … the way it was planned by Simón Bolívar and General San Martín,” the two great heroes of Latin American independence.     

On the ground, however, it looks as though the situation will get worse before it gets better. Inflation will get worse before it gets better, partially because the currency dropped 30 percent against the dollar after exchange controls were lifted last December.

There is no shortage of critics of Macri’s pro-business policies as well as austerity drive: “Macri’s administration has already cut more than 10,000 public sector jobs since taking office, and the ongoing and far-reaching review of state labor contracts is expected to result in more layoffs,” broadcaster teleSUR writes in an editorial. The media organization is funded by the governments of Venezuela, Cuba, Ecuador, Nicaragua, Bolivia, and Uruguay.

I am convinced the fundamental pillar to overcome and defeat unemployment is education; we have to invest in education.
— Mauricio Macri, president, Argentina

This will not deter Macri, however, who is a long-term thinker and shrewd politician. “I am asking the Argentinians not to listen to them, not to believe them,” he said.

Although he will probably never lose his reputation as a rich kid who mostly worked for his dad’s company, he successfully ran Buenos Aires soccer club Boca Juniors from 1995 until 2007, a period during which the club won 7 national and 11 international trophies. This is not inconsequential, as Argentine soccer is as rife with politics and corruption at least as much as the country itself.   

At Boca, Macri invested in the renovation of Boca’s stadium La Bombonera, which isn’t pretty, but it boasts one of the best atmospheres on planet soccer. During his career at his father’s construction company and at the credit department of Citibank Argentina in the 1980s, Macri learned that investment in infrastructure pays off.

This is why he stresses investment and infrastructure and education above everything else. This is what the billion dollars in foreign money is for, not government spending.

(Trading Economics)
(Trading Economics)

“We have not worked on education and infrastructure that will help to consolidate quality of life. I am convinced the fundamental pillar to overcome and defeat unemployment is education; we have to invest in education. We need to invest in these areas a great deal, and the state has to be the leader. The governments need to understand at all levels what will change the history of a country is investment, and not just current spending,” he said.

After his successful presidency at Boca (the club has failed to win the South American Copa Libertadores since Macri left in 2007), Macri persisted with his investment philosophy also as mayor of Buenos Aires. During his term (2007 to 2015), he invested heavily in public transportation, railways, as well as a bike-sharing operation.  

It’s not easy to clean the economy up; I had to make difficult decisions.
— Mauricio Macri, president, Argentina

Overall, Argentines are still happy with Macri, giving him a 50 percent approval rating in May, despite his featuring in the infamous Panama Papers as a director of a Bahamas company his father opened a long time ago. Macri says the company never started to conduct business as intended and that he never received any income from it nor does he hold any shares in the company.

Macri, who vowed to slash public deficits and government subsidies, also has to live with the effects the reductions have on inflation, as out-of-pocket prices for utilities and public transports are going through the roof.   

“It’s not easy to clean the economy up; I had to make difficult decisions, but I am convinced these are the actions that allow us to grow,” he said in Medellín, where meeting participants received him with overwhelming support according to WEF board member Philipp Rösler.  

If he is right, there will be more good news when Argentina hosts the next World Economic Forum on Latin America in Buenos Aires in 2017.