4 things to know about Argentina’s economy

Economic growth
Macroeconomics - Economic growth - Monetary Policy
Politics and Economy

Opposition leader Mauricio Macri has secured victory in Argentina’s presidential run-off, but the business-friendly mayor of Buenos Aires will have his work cut out turning around Latin America’s third biggest economy.

Macri’s relatively narrow win over the ruling party’s candidate Daniel Scioli on Sunday puts an end to 12 years of left-leaning government under the departing president Cristina Fernández de Kirchner and her late husband Néstor Kirchner.

Macri, 56, a former president of Boca Juniors, one of Argentina’s most popular football teams, inherits an ailing economy with a ballooning fiscal deficit, one of the highest inflation rates in the world, capital controls and economists warning of unsustainable government spending.

The end of ‘Kirchnerism’

President Fernández was elected in 2007 and re-elected in 2011; her late husband, who died in 2010, served one term from 2003 to 2007. Under “Kirchnerism”, Argentina’s economy saw a dramatic uplift after the 2001 financial crisis, but recently the recovery has been stalling. Economists have estimated the fiscal deficit stands at about 7-8% of GDP, and inflation is above 20%. Meanwhile, capital controls have left foreign reserves at nine-year lows.

Liberalizing trade and the economy

Macri has said he plans to roll back state control over the economy and introduce more pro-business policies such as cutting hefty taxes on agricultural exports.

Source: Heritage.org

Liberalizing the economy would be a popular move with big business but not necessarily among smaller domestic enterprises and poorer Argentines, who have benefited from the social and trade policies of the outgoing government.

Removing capital controls that have restricted access to foreign currency would make it easier for Argentines to change their local pesos into US dollars. But Macri suggested he would tread carefully with a staggered lifting of currency curbs to avoid a sharp devaluation.

Talking to ‘holdout’ creditors

To plug Argentina’s deficit, the government needs access to global credit markets. But it has been unable to borrow abroad because of a dispute with US hedge funds that sued for unpaid debts. The so-called “holdout creditors” bought “distressed” bonds after Argentina’s 2001 default and want to be paid their full face value.

Macri says he intends to reach a deal with the creditors, whom President Fernández describes as “vulture funds”.

Shaking up regional partnerships

Macri plans to shake up Argentina’s foreign policy by forging closer ties with the United States and cooling relations with Venezuela. He will also push for Venezuela’s suspension from the South American trade bloc Mercosur because of alleged human rights abuses by President Nicolas Maduro’s government.

Source: World Bank

This article was published by World Economic Forum, on November 23, 2015.

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