Years of populist policies have resulted in an Argentine economy beset with structural challenges that Mauricio Macri promised to fix during his successful run for president in 2015. But his attempts to address economic issues through a fiscal consolidation program and a deal with the International Monetary Fund have proved deeply unpopular as another Argentine recession continues to drag on and the central bank struggles to curb inflation. With Macri facing re-election this year, that vote is increasingly becoming dependent on his country's economic fortunes.
A Quick Response by the Central Bank
Surging inflation in Argentina has cast further doubt on the performance of South America's second-largest economy. For President Mauricio Macri, continued signs of economic weakness could spell trouble at the ballot box. On March 14, the country's National Institute of Statistics and Censuses reported that in February, inflation had increased by 3.8 percent, as measured month-on-month. This is the second straight month that prices had increased. The resurgence in inflation followed a slight dip in the rate in the latter part of 2018, but it still hit a 27-year high of 47.6 percent over the year.
The news did not sit well with the Central Bank of Argentina, which quickly announced it would take action to curb the trend, including adjusting the country's foreign exchange rate bands in April and freezing monetary base growth through the end of 2019. The downturn in inflation had convinced the bank that it had room to loosen monetary policy a bit at the end of 2018. Its rapid response to the February numbers was designed to reassure investors that the bank would continue to battle inflation, even as the country enters a campaign cycle for local and national elections, culminating in the presidential contest in October.
Argentina's Economic Slowdown Continues
The inflation data could be a sign that Argentina's efforts to climb out of its long recession will take longer than it hoped. In exchange for the record $57 billion bailout package from the International Monetary Fund, Macri agreed in June 2018 to put in place significant austerity and reform measures that have, no doubt, stunted economic growth in the country. Argentina's gross domestic product declined by 4 percent, year-on-year, in the second quarter of 2018 and declined a further 3.5 percent in Q3. Fourth-quarter GDP figures due out on March 21 are unlikely to show much improvement as tight monetary policy stifles growth.
As inflation continues to surge, monetary policy tightens and the Argentine peso depreciates, hopes of an economic recovery in 2019 are fading.
Buenos Aires had hoped that the worst of its economic crisis would pass in the first half of the year, with a recovery starting later this year. The IMF, however, expects the Argentine economy to contract by another 1.6 percent in 2019, even if a turnaround in the latter half of 2019 manifests. But as inflation continues to surge, monetary policy tightens and the Argentine peso — which has fallen nearly 8 percent against the U.S. dollar so far this year — continues to depreciate, those hopes are fading.
A Referendum on Macri and the Economy
A longer-than-expected recovery means bad news for Macri. The IMF-dictated austerity reforms have proved to be deeply unpopular, weighing heavily on support for Macri, who campaigned in 2015 under a pro-business agenda and was elected with promises to reform and liberalize the economy and boost growth. But Argentina's fifth recession in 15 years is not helping his cause. This could open the door for former President Cristina Fernandez de Kirchner or another populist in October. Despite his sagging support, Macri likely has enough momentum to reach the second round of a presidential election. He still has a shot at re-election, but the coming polls are increasingly becoming a referendum on his economic agenda.
The Risk of Argentine Cycles
A return to office by Fernandez, or another populist, would perpetuate Argentina's cycle of populist backlash, meaning a reversal of Macri's consolidation of Buenos Aires' fiscal accounts after years of high subsidies would be likely. A Macri loss would also likely freeze support from the IMF, whose bailout was to be extended over three years. A populist president in Argentina could also have considerable regional consequences. At present, both Brazil and Argentina are shepherding a slow opening of the traditionally protectionist Mercosur trade bloc. Beyond that, new Brazilian President Jair Bolsonaro has sought to weaken Brazil's commitments to the bloc and pursued bilateral free trade agreements with other countries, including the United States. A populist turn by Argentina would put Mercosur's two largest economies on significantly divergent paths, making a crack in its foundations perhaps inevitable.