Econ_Sep_22

The Economist

September 22nd 2018

N 1991 Mauricio Macri, son of a wealthy

industrialist, was kidnapped. His captors

bundled him into a coffin, drove to a hide-

out and held him for two weeks before his

family paid a $6m ransom. Mr Macri, Ar-

gentina’s president since 2015, says the or-

deal persuaded him to abandon business

and contribute to society by taking up poli-

tics. His second career has proved hardly

less traumatic. Argentina’s plunging cur-

rency led Mr Macri to confess on Septem-

ber 3rd that “these were the worst five

months ofmy life sincemy kidnapping.”

Another recession, the second since Mr

Macri tookoffice, nowseems inevitable. In

May the central bankraised interest rates to

40% to tackle a currency crisis that has seen

the peso lose more than half its value

against the dollar since the start of the year.

The next month the government secured a

$50bn credit line from the

IMF

, the largest

in the fund’s history. In August, as the peso

continued its slump, the central bank

raised rates to 60%. None of these mea-

sures bought more than temporary relief.

Mr Macri has appealed to the

IMF

to accel-

erate the loan payments. A new round of

negotiations with the fund began on Sep-

tember 4th and have yet to conclude.

With a presidential election due in Oc-

tober 2019, investors fear that the crisis will

precipitate Mr Macri’s departure and a re-

turn to the disastrous populist policies of

his Peronist predecessor, Cristina Fernán-

dez de Kirchner. Mr Macri is entitled to feel

terest rates to tackle 25% inflation, but after

that the economy rebounded. In 2017

GDP

grew by 2.9%. Mr Macri’s coalition won

mid-term congressional elections in Octo-

ber. Yet despite his efforts to defuse it, the

fiscal time-bomb bequeathed by Ms Fer-

nándezhas detonated this year. InApril ris-

ing yields on

Treasury bonds hit Latin

American currencies as investors sold

risky assets. Argentina’s fiscal and current-

account deficits, along with its pile of for-

eign-denominated debt, singled it out for

punishment. The peso slumped, along

with approval ofMrMacri (see chart).

In response, the government an-

nounced its latest plan to regain the confi-

dence of investors on September 3rd. It has

promised to balance the budget in 2019, a

year sooner than agreed on in June with

the

IMF

. It plans to eliminate the primary

fiscal deficit, which is forecast to reach 2.6%

GDP

this year, by levying a new tax on

exports, and reducing subsidies on public

transport and electricity. As well as ap-

peasing investors, the measures are aimed

at persuading the

IMF

to disburse credit

earmarked for 2020 and 2021. But the fund

may seek“modifications in return formore

financing,” says Edward Glossop of Capi-

tal Economics, a consultancy.

The crisis inflicts onMrMacri botha po-

litical, as well as an economic, headache.

The newspending cuts require the approv-

al of congress, where his coalition is in a

minority. Hewill need the support ofmod-

erate Peronists in both houses to vote in

October and November to pass the 2019

budget. Most seem willing to lend their

support. The moderates would have noth-

ing to gain fromprovoking a political crisis.

Even if that succeeds, however, the

coming months are unlikely to offer Mr

Macri respite. The government expects the

economy to shrinkby 2.4% this year and in-

flation to reach 42%. Next year it predicts a

dizzied by his fall fromgrace. Until recently

he appearedassuredofa second terminof-

fice as reward for his efforts to repair the

economic damage inflicted by Ms Fernán-

dez. Soon after taking office, his govern-

ment slashed export taxes, lifted currency

controls and resolved a disagreement with

bondholders to restore access to interna-

tional capital. Spending cuts were imple-

mented gradually to protect the third ofAr-

gentines below the poverty line.

The strategy worked. There was a pain-

ful recession in 2016, the result of raising in-

Argentina

Shrinking pains

An economic crisis casts doubt overMauricioMacri’s hopes of re-election

The Americas

Also in this section

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32 Populism backfires in Quebec

32 Cuba’s healthy honey bees

Macri-economics

Sources: Isonomía; Thomson Reuters

Argentina

Mauricio Macri, approval rating

Peso against the $

Inverted scale

2017

2018

2017

2018