Argentina: can Fernández capitalise on Macri’s failings?

Argentina: can Fernández capitalise on Macri’s failings?

The economic crisis has opened the door to a possible return to power for Cristina Fernández de Kirchner

“So good to see you back again,” says Gustavo García, warmly embracing a young man with fresh cuts on his face and torn clothes, as he welcomes him to a drug rehabilitation centre in Puerta de Hierro, one of the grittiest slums on the edge of Buenos Aires, the Argentine capital. “You are always welcome.”

The centre was set up by Father Nicolás Angelotti, the local Catholic priest better known as Padre Tano, who founded the parish two years ago, hoping to alleviate a drug epidemic which barely existed two decades ago. Puerta de Hierro, which is now overrun by drug-trafficking gangs, has been hit especially hard.

“Paco is the cruellest face of marginality [caused by] many decades of neglect,” says Father Angelotti, referring to the name given to a crude form of cocaine that has taken hold in the shanty towns around the capital. “The state is absent here,” he adds, explaining that more help is needed for addicts, as well as more jobs.

The failure of the state to solve the problems of the poorest Argentines — many of whom are worse off after utility tariffs were raised over the past four years — is endangering the re-election prospects of President Mauricio Macri. A currency crisis last year that forced him to seek a record $56bn bailout from the IMF was especially damaging for a president struggling to reverse a grinding recession and rocketing inflation.

The centre-right leader swept to power in late 2015 promising to put an end to poverty and more than half a century of recurring economic crises. His pledges prompted some to ask whether Argentina could even return to its former glories. One of the 10 richest countries in the world a century ago, it is unique in modern history in its regression to developing country status.

Although many Argentines are severely disappointed with what Mr Macri has achieved since 2015 the blame goes back further. The last 10 years are now being described as yet another “lost decade” of minimal economic growth and many query whether the next decade will be any better.

“Argentina today is not a feasible economy,” says Guillermo Nielsen, an economic adviser to Alberto Fernández, Mr Macri’s main rival in October’s presidential race, pointing to “incredibly high” taxes and public spending. Mr Fernández’s running mate is the former populist president Cristina Fernández de Kirchner (no relation). She left office in 2015 amid economic chaos after a presidency marked by tub-thumping nationalism and economic interventionism.

Ms Fernández — who is facing a series of corruption charges from her time in office including bribery, embezzlement and money laundering — took the electorate, and her opponents, by surprise, opting to run for vice-president and hand-picking her former cabinet chief to campaign for the top job. But few doubt that it is Ms Fernández, who remains popular with voters in places like Puerta de Hierro, is pulling the strings.

“Everyone is scared to death of Cristina coming back,” says Mr Nielsen, mocking the hysteria that surrounds her campaign. He is tipped to run the economy ministry if the Fernández duo triumphs, and served as finance secretary under Néstor Kirchner, Ms Fernández’s husband and predecessor. “The government is pushing very strongly to depict what is coming as [a bunch of] very irresponsible people — as if they had behaved responsibly themselves.

“Macri has inflicted an incredible loss on bondholders and shareholders,” he adds, ridiculing the issue of a 100-year bond at the height of market euphoria over Mr Macri’s reformist, “supposedly” investor-friendly government in mid-2017. The bond has since lost a quarter of its value and is trading at 73 cents to the dollar.

Whoever wins the upcoming elections, “it is going to be very difficult to run this country,” says Father Angelotti, a disciple of Pope Francis I, who is said to follow closely the 34-year-old priest’s ambitious project that also includes schools, a health clinic, and a sports and recreation centre. “Argentina is in a very complicated situation, with much division and confrontation,” says Father Angelotti gravely. “We never learn.”

Inaugurating a $700m underpass that connects two main highways feeding into opposite sides of central Buenos Aires in May, Mr Macri crouched down and laid an open hand on the asphalt.

“This paving that I am touching is not made up, it is real,” he said. It was a less than subtle nod to the accusations of corruption that dogged the Kirchner years and which many Argentines blame for the failure to finish multiple infrastructure projects promised by the old administration. Numerous projects in her husband’s home state in Patagonia were never even started.

With campaigning under way, the underpass project was also an attempt by Mr Macri to deflect attention from his failure to deliver on a 2015 campaign pledge for “zero poverty”. The poverty rate remains roughly the same as it was when he took office — around 32 per cent — although it did dip to 25.7 per cent in mid-2017 before the currency crisis struck.

Some critics say he has over-promised and underdelivered. Mr Macri boasted that he had put in place “the best economic team in the last 50 years” when he came to power. It enjoyed important early successes, such as putting an end to a seemingly intractable decade-long bondholder dispute. Yet the macroeconomic statistics are disappointing: inflation is running at 57 per cent, more than double the unofficial rate in 2015, and the economy has shrunk by 4.1 per cent over the same period.

In his defence, say his backers, Mr Macri inherited an economy in a dire condition. Argentina was on the brink of a balance of payments crisis, with central bank reserves running on empty; it relied on unsustainably high subsidies to keep supporters on side, creating a big fiscal deficit; and inflation was so high that the former government stopped publishing reliable statistics.

The Macri administration has also been hit by misfortune. Last year it suffered the worst drought in half a century, devastating for a country that relies heavily on agricultural exports. And when investors began to withdraw funds from emerging markets after US interest rate rises last year, Argentina was hit particularly hard, given that it relies on international borrowing to keep the economy afloat. Without those two factors, the currency crisis — that halved the value of the peso last year — might have been avoided.

But even those close to the Macri camp admit that the government has made mistakes. “We sold too much optimism,” says a senior official, pointing to inflation targets that aimed to bring price rises down to single digits this year. “There were serious problems of co-ordination and implementation, but the general direction was always correct.”

The issue now is whether the next government can do any better. “No matter who wins, the great question is whether Argentina is ever going to grow again, after four decades of stagnation,” says Ignacio Labaqui, an analyst at Medley Global Advisors.

Markets worry that an opposition victory would represent more bad news for the economy — especially if it means a return to the free-spending ways of previous Peronist governments, designed to maintain support in areas like the Buenos Aires slums. That could throw Argentina’s IMF programme off track and, at worst, trigger another default.

Macri supporters argue that he has overseen a period when the country’s fiscal and current accounts were finally put in order. Having inherited a fiscal deficit of around 8 per cent of gross domestic product, the primary budget deficit will be all but eliminated by the end of this year.

That is largely thanks to a hugely unpopular drive to eliminate subsidies and make public spending more efficient. The flipside is that Argentina’s debt burden has ballooned from about 53 per cent of GDP in 2015 to 89 per cent today. And the country is now locked in an IMF programme that will mean more austerity and unpopular reforms.

Luis Secco, an Argentine economist, says the next government will face the challenge not only of stabilising the economy and restoring short-term growth, but also solving structural problems such as a chronic lack of competitiveness. The problem, he warns, is that even under the supposedly market-friendly Mr Macri, short-termism has always trumped long-term economic reform in Argentina.

He believes that the best outcome for Argentina in the elections would be a victory for the ruling coalition, but warns that this on its own will not be enough. “To escape the current paralysis and change expectations effectively, we need an integral [economic] programme,” says Mr Secco. That would involve shrinking the state, making it more efficient and introducing tax and labour reforms.

“The risk is that, just as happened after [Macri’s] electoral triumphs of 2015 and [the midterms of] 2017, we slip back into the complacency of believing that it is possible to produce a shock of confidence to correct 70 years of decline and economic failure, just because Argentina avoided becoming Venezuela or because the ‘least bad’ option won.”

Little more than a year ago, victory for Mr Macri seemed assured. But last year’s currency crisis changed the political picture.

Polls now show no clear advantage for the incumbent over his Peronist challenger, Mr Fernández. They do, however, show that Ms Fernández, who many believe will wield considerable power if her candidate wins, retains hardcore support. A recent survey by Management & Fit, an Argentine polling group, showed 36 per cent of voters backed Mr Macri, a whisker ahead of Mr Fernández on 35 per cent.

Mr Macri has chosen Miguel Ángel Pichetto, an influential Peronist senator, as his running mate in a bid to woo those who have previously backed Ms Fernández. But the battle is likely to be fierce for the third of voters yet to commit to one of the main candidates, many of whom are either disappointed, or angry, with the government’s failure to deliver on its promises. Some fear a return to power for the populist Ms Fernández, with Macri supporters claiming she would put Argentina on course to matching the economic plight of socialist Venezuela.

For Mr Macri, much will depend on whether he can maintain stability in the peso. Any repeat of the currency volatility that dealt a body blow to the economy last year would fuel inflation further, eroding real salaries and hitting voters’ pockets at a critical moment.

Just for Mr Macri to complete his presidential term would be “historic”, says Jesús Rodríguez, a former economy minister who supports the ruling coalition. Thanks to repeated military coups and economic crises, no non-Peronist president has ever completed their term in office since well before General Juan Domingo Perón rose to power in 1946, establishing the political movement that has dominated Argentine politics ever since.

“There is a direct link between institutional quality and economic output. Just as 1983 [when the last military dictatorship fell] was an inflection point, 2019 will be too if a non-Peronist citizen completes their mandate,” says Mr Rodríguez. Coups d’état and populism are the greatest threats to institutions and economic growth in Argentina, he says, but while the former may be a thing of the past, he warns that the latter is not: “Populism is just around the corner.”

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