LatinFinance - March/April 2016 - 19

"Argentina has a fiscal deficit of 7% to 8% of GDP and record tax
pressure, so the government needs to do some belt-tightening," says
Martín Polo, an economist at Analytica Consultora, a consulting firm
in Buenos Aires.
Building confidence
Macri, who won the presidency with 51% of the vote, gained popular
support early on for his economic revamp. He had a 64% approval
rating in the first six weeks of his term, according to Poliarquía.
Macri's tenure is still in question, however. "If the economic
results take too long and inflation doesn't come down and
unemployment grows, then Macri could have only a few months,"
before his approval ratings starts to slip, says Díaz.
Finance Minister Alfonso Prat-Gay is betting that the economy will
start to recover in the second half of this year. Meanwhile, he has set
targets to gradually cut inflation from the 26% recorded in 2015 to
between 3.5% and 6.5% by 2019. The goal is to slash the fiscal deficit
to 0.3% of GDP by 2019 from last year's 7.5%.
Macri has quickly started tackling Argentina's economic
problems. A first step after taking office was to lift currency controls
in place since 2011, and allow the peso to float freely. The December
16 actions triggered a 40% devaluation to 13.76 per dollar, less than
the 16 per dollar that had been predicted.
The devaluation was carefully timed. The finance ministry first
eliminated the 15% to 23% export taxes on beef, corn and wheat,
and reduced to 30% from 35% the duty on soybeans, Argentina's
biggest export crop. Buoyed by a weaker peso made their exports
more competitive, farmers sold inventory. The $5.3 billion in export
proceeds that the farmers brought into the country in the two
months following the devaluation equaled about a quarter of the
total dollar inflows from agriculture exports in 2015, according to
industry groups for grain and oilseed exporters.
Farm exports helped to refill foreign reserves to $30 billion at the
end of January, after having declined 30% over six months to a nineyear low of $24 billion in December. To build reserves further, the
central bank sealed a loan from a group of banks for $5 billion. It also
temporarily raised interest rates on short-term debt to 38% from

Union speech on March 1 that isolationist policies like the lack of a solution to the holdout problem has cost Argentina about 2 million jobs. The
holdout settlement will put Argentina on the map of investors around
the globe.
LF: How will the administration deal with inflation and the
fiscal deficit?
LC: The two are intertwined politically and technically. Reducing inflation and the deficit are priorities. The goal is to have a balanced budget
and low single-digit inflation by the end of the president's term. But the
fiscal bottom line is not the only goal. Minister Prat Gay's efforts to restructure the budget is intended to deliver better public services, carry out
more infrastructure projects and provide poverty relief for sectors that
were squeezed out of the budget priorities by prior administrations due
to mismanagement. In the short term, Central Bank President Federico
Sturzenegger is focused on tackling inflation. He's taken steps to absorb
excess monetary liquidity in the system. The Treasury has also requested

30% (for 35-day notes), spurring peso deposits.
"The market is giving the government the benefit of the doubt,"
says Fernández Medrano, adding that investors want to see how the
Macri administration will resolve the big macroeconomic problems,
"and, for now, they are not betting against the peso."
The inflation trap
The devaluation, however, has pushed the inflation rate four points
higher than 2015's average to 30% - well above the government's
20% to 25% target for this year. Higher prices are fueling wage
demands and souring Macri's popularity, which declined to 58% in
February, according to Poliarquía.
"The government doesn't have a lot of time to get things done,"
Polo says, noting that most unions hold annual salary negotiations
in March and April. "The rising inflation rate has put the unions on a
state of alert."
A survey of 145 big companies by Sel Consultores, a business
consultancy, found that most companies will seek to limit wage hikes
to 30%, or three percentage points less than the average sought by
unions, which could settle for even less.
After last year's 26% inflation boost, "there is a good chance that
wages are anchored at reasonable levels," says Eduardo Levy Yeyati,
an economist at Elypsis, an economic consulting firm in Buenos
Aires.
The threat of job losses could also curb unions. The oil sector, for
example, is facing thousands of job cuts as low global crude prices
deter exploratory and production drilling, despite local incentives.
When faced with rising inflation and recession, unions tend to
fight for job preservation rather than salary hikes, says Federico
MacDougall, an economist at the University of Belgrano in Buenos
Aires. "If Macri can lower inflation, he will gain negotiating power
against the unions," he says.
Capping wage hikes at around 25% is key for export
competitiveness and economic growth, says MacDougall. "If
the devaluation, for example, is 40% and wages go up by 35%,
then nothing will have been gained. The government will have to
devalue again."

less liquidity from the monetary authorities compared to last year.
LF: After the holdout settlement, what are the next big challenges for Argentina's finances?
LC: Everyone in the administration is focused on creating the macroeconomic environment to rekindle growth, create jobs and eliminate
poverty. My priorities also include promoting domestic savings and
broadening the efficiency of the local capital market which, unfortunately,
has been suffocating under high inflation and inconsistent regulations.
Minister Prat Gay is very confident that if even a fraction of the massive
capital flight can pulled out from the mattresses and safety deposit boxes
and put to work in a normalized economy, it will significantly reshape
the economic landscape. It is very important that we see a vibrant local
market because the holdout settlement is not just a step toward achieving
sustainable funding for the state. The efforts are also aimed at offering an
environment to facilitate the private sector's capacity to stimulate economic growth and create jobs.

March/April 2016 - L ATINFINA NCE.COM 19

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