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Aug 12, 2017 | 13:10 GMT

7 mins read

Argentina Reaches an Electoral Crossroad Over Reforms

Argentine President Mauricio Macri promised to reform his country's economy. Congressional elections in October will determine the future of Macri's reforms.
  • Legislative elections in October will determine the future of Argentina's economic reforms.
  • A stronger ruling coalition in Congress will allow President Mauricio Macri to move forward with deeper structural reforms.
  • Fears of a populist revival will emerge if the ruling coalition is weakened.

Great expectations accompanied Argentine President Mauricio Macri into office in December 2015. It was hoped that he would liberalize the country's economic and trade policies, and to his merit, he quickly met some of those expectations with action. During Macri's first months in power, his administration reached a deal with bondholders that retained defaulted Argentine debt, lifted restrictions on the purchase of foreign currency, removed bureaucratic red tape on some foreign trade, and reduced energy and public transportation subsidies as a way to bring down Argentina's fiscal deficit. But Macri's initial successes may prove illusory moving forward. With the exception of the agreement with bondholders, Macri was able to implement most of his reforms rather quickly because they did not require congressional approval.

There lies the challenge as Macri embarks on the second part of his agenda to liberalize Argentina's economy before his presidential term ends in 2019. Macri will need congressional approval to enact deeper — and in some cases very unpopular — structural economic reforms that affect pensions, labor laws, taxes and foreign trade. How well his ruling coalition, Cambiemos, does in legislative elections on Oct. 22 will be key for the fate of Macri's economic reform plans.

The Ruling Coalition in Congress

Primaries for October's congressional elections are Aug. 13. One of the main challenges confronting Macri as his government undertakes structural reforms that need congressional approval is the fact that Cambiemos controls only 87 of 257 seats in the Chamber of Deputies and 17 of 72 seats in the Senate. One-third of the Senate and 127 of 257 seats in the lower house are up for re-election, meaning Cambiemos won't win a majority of seats in either house of Congress even if it does well in October. Nonetheless, a strong performance by Cambiemos will signal how deeply Macri's push to liberalize the Argentine economy still resonates with voters.

If it increases its congressional numbers, the government believes it then will be easier for it to reach out to more moderate opposition political parties, such as the Renewal Front led by congressman Sergio Massa, to build enough support to pass some economic reforms. Although Massa has criticized the government's economic policies of late, especially its proposal to increase the minimum retirement age, he has issued statements in favor of discussing certain economic amendments with the government, such as tax reform.

The government already has opponents that are unlikely to negotiate any structural reform it might send Congress after October, including members of the recently created Citizens United Front, led by former President Cristina Fernandez de Kirchner. There are also factions of the Peronist Party and members of Fernandez's former party, Front for Victory, that will oppose Macri's plans. These parties combined hold almost 40 percent of the seats in the lower house of Congress and almost 60 percent of the seats in the Senate. In the lower house, more than 40 percent of the members of the main opposition parties as well as members of the ruling coalition are up for re-election, but in the Senate, only 22 percent of the ruling coalition members will have to run for their seats again. Meanwhile, over 40 percent of the main opposition seats are contested.

Fernandez decided to leave Front for Victory rather than test her electoral capital in the primaries. Instead, she created Citizens United to support her run for the Senate, a move that has fragmented the opposition. The division could help Macri's ruling coalition compete in important provinces like Buenos Aires and gain congressional seats in October.

Economic Reforms

Since Macri's election two years ago, his administration has brought down Argentina's rate of inflation from almost 40 percent annually to a little over 20 percent. It has also lifted foreign currency restrictions without causing any drain to the country's international reserves. The Macri government also reduced energy subsidies to make Argentina's energy sector more attractive to foreign investors. These measures haven't been enough, however, to either significantly improve the business environment or promote widespread economic growth. This is in part because Argentina's main trade partner, Brazil, has reported two consecutive years of economic contraction.

Rigid labor laws, large fiscal deficits and legal uncertainties surrounding energy subsidies are just some of the economic hurdles still in place. Furthermore, Argentina's economy contracted 2.3 percent in the past year and unemployment increased from 7.6 percent in the first quarter of 2016 to 9.3 percent in the first quarter of this year. Still, there are signs the country is leaving economic recession behind, partially because Brazil is also growing once more. But dueling pressures on the government from the private sector to speed up economic reforms and from the public to increase the number of jobs will put the last two years of Macri's administration to the test.

Tax reform will likely be one of the first economic proposals the government sends the new Congress after the October elections. The government would like to reduce the bureaucracy associated with Argentina's taxation system. Cutting the rates of some taxes — such as the value added tax — is also highly desirable. Yet, a meaningful tax reduction would be possible only if the government manages to continue cutting public spending while economic activity shows signs of higher growth rates. Even then, the government still expects its fiscal deficit to reach more than 4 percent of gross domestic product this year.

To help tackle the deficit, the government may send Congress a proposal that reforms pensions. This will be an unpopular move because it could increase the minimum retirement age. According to an April 30 report by the business newspaper El Cronista, government spending on pensions and social programs have increased 40 percent annually. It is not clear what exactly pension reform would involve, since the government is still debating it, but the government has admitted it will require people to contribute to the pension system over a longer period of time before they can retire.

More unpopular than pension reform will be any proposal to make Argentina's labor laws more flexible. The country's powerful labor unions will strongly oppose any reform in this area, which is why Macri's government will need more solid and larger congressional support. Argentina's private sector has been pushing labor reform for years, but the push will become more forceful now that Brazil, Argentina's main trade partner — also famous for its rigid labor laws — passed legislation last month to make its labor rules more flexible.

Argentina's private sector argues that the country must become more competitive if it wants to increase exports and capture more foreign direct investment. Beyond that, there is a longstanding belief that Brazil's liberalization process should be an inspiration for Argentina's government. This is putting more pressure on the country as Macri's administration tries to make the economy more competitive before it can accelerate the pace toward trade liberalization. According to Argentina's automotive factories association, for example, labor and taxation make the cost of producing a car in Argentina 25 percent higher than in Brazil and 65 percent more expensive than in Mexico.

Over the next two years, Macri also will seek to push the Common Market of the South (Mercosur) to conclude trade negotiations with the European Union and Pacific Alliance, as well as advance ongoing trade negotiations with Japan and Canada. However, Macri will have to undertake structural economic reforms to prepare Argentina for more international trade competition. If Argentina does not reduce the costs of doing business in the country, opening up the country to international trade could bring more negative effects than benefits.

October's congressional elections will be key for Macri as he enters the last two years of his presidential term and anticipates running for re-election in 2019. The vote will determine whether his government will have the strength needed in Congress to move forward with structural reforms or will be weakened and unable to fulfill Macri's 2015 campaign promises. Elections will answer the deeper question of whether the political and economic winds of change in Argentina endure or prove to be short-lived.

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