Last weekend, Argentinians went to the polls and returned the first conservative president in over a decade. The new president Mauricio Macri, who won the election with 51.5% of the vote succeeded in ousting the governing Peronist Party on the promise of turning around the economy which has struggle significantly recent years. However, the new president has his work cut out with the Argentine economy in desperate need of reform.
But what are the challenges facing Mr Macri and South America’s second largest economy? The first very pressing issue is resolving Argentina’s dispute with several U.S hedge funds regarding a debt default last year. The Argentine government, led by Cristina Fernandez de Kirchner, refused to pay interests on $1.1 billion loans to several U.S hedge funds which brought Argentine government bonds in the wake of the 2001-2002 default crisis. The case went to court in the United States with the judge finding in favour of the creditors. The de Kirchner government refuted this and as a result defaulted on it’s financial obligations.
The failure to pay last year has unsurprisingly raised fears amongst international investors that Argentina is not a safe place to invest. Given Argentina’s long history of debt default, this reputation has been difficult to shake off. This is especially true since the 2002 default, in which the Argentine government defaulted on $100 billion worth of government debts held by foreign investors.
However, many Wall Street analysts predicates a rapprochement with the international markets as Mr Macri is not part of the Peronist party and has expressed a desire to work more with international markets. Indeed Moody’s, a highly influential global credit rating agency responsible for assessing the risk of lending to sovereign states, has said that this change of government is likely to lead to a deal with the creditors. Moody’s analysts believe that as Mauricio Marci is more willing to be flexible, and isn’t confined by Peronist Party doctrine, he is more likely to strike a deal unlike his predecessor.
Besides the lack of confidence from international investors, the new president has various domestic issues to contend with. Argentina currently has capital controls to stop a flight by worried Argentinians to the dollar, as the country’s currency depreciates further against the U.S dollar. Mr Macri wants to remove capital control and make it easier for Argentinians to change their pesos into U.S dollars. However, as Macri wants to maintain the current value of the peso, he is ruling out a full currency depreciation saying “I do not think that a devaluation is the solution” indicating that no solution is likely in the short term.
This has been coupled with cripplingly high inflation, the official inflation rate is 14.5%. However, global financial analysts Consensus Economics suggest that the actual inflation rate might be much higher at around 25.7%. The Argentine newspaper El Cronista reports that despite over half of Argentines earning $900 over the monthly minimum wage, most struggle to make ends meet due to the high inflation rate.
However, all these domestic issues could resolve themselves as Argentina has returned to economic growth in the last quarter. But without solving the issue with international creditors and stopping capital leaving the country, even if it’s profits earned by foreign corporations, the situation remains worrying. What is clear is that Mr Macri is going to seize the chance, after 12 years of Peronist party rule, to change the Argentine economy and push for a Nuevo Argentina.