Note: This article originally appeared in Spanish on our partner website esglobal. To read the original piece, click here.
As the son of one of the most powerful businessmen in Argentina, Mauricio Macri was always set up to be successful in life. But at the turn of the century, tired of being known only as the son of his father, Franco Macri, he switched to politics, eventually rising to the Casa Rosada in December 2015. There, he surrounded himself with a handful of former senior executives of large companies and promised a new era in which the great ills of the Argentine economy—inflation and poverty—would be buried forever.
But after almost three years in power, Macri’s Argentina is shipwrecked in a sea of uncertainty. The country is heading towards the feared stagflation (recession plus inflation) as President Macri renegotiates a new agreement with the International Monetary Fund (IMF) that will likely bring more adjustments and greater social tension. Faced with such a bleak panorama, any leader would fear for their political life. Macri, however, is breathing a sigh of relief because of the political anemia of the Peronist opposition, which is in the midst of its own identity crisis.
Given the avalanche of negative statistics, the conservative government of Cambiemos, Macri’s party, has had no choice but to admit that Argentina is in crisis. It’s no longer the “passing storm” that Macri identified after the first devaluation of the peso at the end of April. The crisis has come to stay at least until the second half of 2019, according to official estimates. Without a defined course, the business-friendly government has squandered its international credibility by breaching the agreement signed in June with the IMF. That agreement only lasted two months.
The collapse of the peso seems bottomless. It has fallen 55 percent since the beginning of the year (falling 25 percent in August alone). Most worrying is that the $50 billion package offered by the IMF has failed to allay the distrust of Argentine markets. It was the biggest rescue package in the fund’s history, and according to Cambiemos leaders, it would act as a firewall against the crisis, preventing the vampirism of Wall Street.
But the Argentine economy continues to bleed. The devaluation led to price increases in in a highly dollar-dependent economy and the first fiscal adjustment was not considered sufficiently deep. The specter of a default quickly returned, and Macri had to speak to the nation. It took him only 100 seconds to communicate to his fellow citizens in a dramatic tone that he had agreed with the IMF an advance on the funds provided for the June rescue.
Macri was wrong. As he spoke, an agreement wasn’t yet in place. In fact, the IMF took nine hours to issue a statement showing its support for Argentina. The renegotiation still hasn’t begun. The next day, the markets plummeted during a Black Thursday that will doubtless have sequels in the months to come; the dollar broke the barrier of 40 pesos with an appreciation of 21 percent, and the Argentine Central Bank was forced to intervene once again to stop a further collapse of its currency. A good part of the IMF’s first payment ($13 billion of the $15 billion sent in June) vanished with the intervention, no doubt provoking the ire of the IMF.
To adjust the payment schedule (scheduled quarterly until 2021), the IMF needed new commitments from the Casa Rosada. The new fiscal adjustment, announced four days after Black Thursday, finally included the magical expression that brought joy to the technocrats in Washington. Macri announced the goal of achieving “zero deficit” in 2019 thanks to a new export tax and a significant reduction in public works spending. It is, however, a deceiving promise in that in concerns only what is known as the primary deficit and fails to take into account the interests of the debt, which is the issue that most plagues the Argentine economy. According to the draft 2019 budget presented at congress this week by Minister of Economy Nicolás Dujovne, 600 billion pesos (about $15 billion or 3.3 percent of GDP) are allocated toward the payment of interest on existing debt.
Another specter: dollarization
But will this fiscal adjustment be sufficient for Argentina to emerge from the crisis and for Macri to stake his claim for a second term as president in elections next year? Some experts are skeptical. The one that has made the most noise in recent days been Larry Kudlow, the President of the National Economic Council of the United States and one of Donald Trump’s top economic advisers. Not one to mince words, Kudlow told Fox News that the U.S. Treasury is working “deeply” on the dollarization of the Argentine economy, an idea that has been endorsed by Wall Street Journal columnist Mary Anastasia O’Grady. In just a few days, Argentines have gone from fear of a new default to remembering the serious social consequences brought on by so-called “convertibility” (a peso would be equal to one dollar) in the 1990’s.
Macri’s biggest short-term test will be the population’s response to adjustments that have weakened the purchasing power of the middle and lower classes. With a year-on-year inflation rate of 34 percent and a wage increase of no more than 25 percent, consumption is retracting monthly and economic activity is suffering (GDP will fall 2.4 percent this year, according to the Ministry of Economy). The government has cautiously announced an increase in social spending to avoid an infamous Argentine “hot December.”
It may be too little too late. Tensions are already high, and the center of Buenos Aires is an almost constant protest. One day the teachers march and the next day doctors affected by staff cuts are protesting. A general strike called by the unions will crown a September full of protests against the Macri government’s economic policy and the agreement with the IMF. Some social leaders, such as Juan Grabois oif the Confederation of Workers of the Popular Economy (CTEP) and Daniel Menéndez of Barrios de Pie have warned the Casa Rosada that they are playing with fire. The leaders of the protests, who have not yet broken off dialogue with the government, can non guarantee peace in the impoverished Buenos Aires Conurbano (the pocket of poverty that surrounds that capital) if inflation and unemployment continue to rise.
Macri’s image has also suffered during the crisis (with 60 percent negative perception in polling averages, compared to a 65 percent positive perception when he came to power in 2015). If only five months ago no one doubted that the former Boca Juniors president would achieve re-election in October 2019 elections, the political scenario has now changed significantly. His stay in the Casa Rosada now depends on the opposition’s ability to organize and unify.
At the moment, the state of the opposition seems to be the one thing that favors Macri. His main rival, former President Cristina Fernández de Kirchner (2007-2015) is mostly concerned with conserving her freedom. This week, Judge Claudio Bonadio, began proceedings against the Peronist leader, accusing her of having overseen a massive illicit operation that allegedly collected millions in bribes from businessmen who were awarded public works contracts during her administration. Although Judge Bonadio ordered Kirchner’s preventative detention, it’s unlikely that she’ll spend time in a jail cell unless the Senate revokes her immunity, which is highly unlikely. Despite the judicial offensive (Kirchner is charged with six counts of corruption and also faces other legal trouble), she still retains great popular support (around 30 percent of potential voters according to polls).
On the other side of the scale, the economic crisis won’t affect the most faithful Cambiemos voters. The conservative coalition retains a third of the electorate. The remaining third of the electoral pie is claimed by the so-called moderate Peronists (not allied with Kirchner), who are immersed in a desperate search for a national leader. Without Kirchner in the fray, any Peronist leader anointed by a unified movement would defeat Macri in 2019 if the economy fails to begin its rebound soon. The dilemma of Peronism is that these two sectors seem irreconcilable today. The Argentine electoral system requires a second round runoff if no candidate receives at least 40 percent of votes or more than a ten point difference over the second candidate. According to a recent poll by Synopsis, Macri would defeat Kirchner by five points in a hypothetical second round matchup, but lose to any other Peronist leader. Sergio Massa of the Frente Renovador, and the governors Juan Manuel Urtubey (Salta) and Juan Schiaretti (Córdoba) are potential alternatives to Kirchner.
Macri trusts his good luck to get through the crisis and arrive in October 2019 without any major bumps in the road. But his political future is more in the air than ever before. His erratic economic policy has given wings to a Peronist movement that has always been pragmatic when it comes to seeking power, and has given new strength to the age-old notion that the “children” of Perón are the only ones capable of leading the country.