Macri Miracle Ends in Default
When Mauricio Macri was elected in 2015 it seemed to herald a new era for Argentina. Now it looks like being more of the same. In August Buenos Aires announced that it would reprofile its debt. In effect it’s another default, with investors having to take a write down for having lent to the Argentine government for the fourth time in the last 30 years and the ninth time since independence from Spain.
It’s a sad culmination to a presidency that began with such hope. When Macri came to power his early moves, such as cutting capital controls, exchange rate restrictions and export taxes, delighted the markets. Many analysts, including this magazine, hoped a period of orthodox economic policy would allow Argentina to make the most of its incredible natural resources.
But investors shouldn’t be surprised, says Neil Shearing, Chief Economist at London-based consultancy Capital Economics, the latest default was predictable. “A sharp rise in the issuance of dollar debt combined with a failure to get to grips with runaway inflation was always likely to be a recipe for disaster. This is because the very high rates of inflation erode external competitiveness and will tend to put downward pressure on the exchange rate. At the same time, however, a fall in the exchange rate raises the local currency cost of servicing foreign currency debt – leading to balance sheet vulnerabilities that raise the risk of default.”
The latest default was predictable…
Macri became stuck in an economic-political negative feedback loop as each challenge exacerbated the other. He managed to convince the Argentine lower-middle class to accept austerity measures, such as the removal of electricity subsidies, but he was unable to reward them with strong economic growth. The influx of job-creating international companies never arrived either while the poverty rate, which Macri always asked to be judged upon, remained stubbornly high. That led to his heavy defeat in the primary election to left-wing Alberto Fernández. Investors took fright at the result, triggering a 22% collapse in the peso against the dollar. This then pushed up the value of foreign-denominated debts, causing the public debt to GDP ratio to rise to almost 100%.
His political failings cemented his economic ones, notes Capital Economics. “The peso depreciation, coming alongside a surge in bond spreads forced the government to announce maturity extensions on some short-term debt and plan to extend maturities on longer term debts”. This prompted ratings agencies, Fitch and Standard & Poor’s, to downgrade some Argentine paper to default. Argentina’s government quickly persuaded them to reverse the decision by revising some of its new terms on short-term local debt. But the market is pricing in a more comprehensive default further down the road.
It now looks likely he will lose the presidential elections in October…
In a final ignominy for Macri, the political defeat forced him to resort to some of the unorthodox economic measures of his predecessor, such as capital controls and fixed prices for staple goods. It now looks likely he will lose the presidential elections in October. Less certain is the future economic path of his successor. Investors fear Fernández will return to the chaotic economic mismanagement of his running mate, ex-president Cristina Fernández de Kirchner. But perhaps the financial constraints of Macri’s IMF deal will persuade the new president to follow a more moderate path.