On Jan. 13, the Argentine government opened negotiations with its holdout bondholders, which are demanding payment for the debt Buenos Aires defaulted on in 2001. The meeting is crucial for Argentina's immediate and future economic prospects. Immediately, the meeting signaled to investors that Argentina is willing to settle its obligations to foreign creditors. Longer term, the meeting puts Argentina one step closer to resolving its debt crisis quickly and, in turn, gaining access to more global capital markets.
The Macri administration's willingness to address the government's fiscal imbalances and engage with creditors reflects a policy agenda that is very different from that of its predecessor, led by former President Cristina Fernandez de Kirchner. While Fernandez periodically held talks with the holdout creditors, reaching an actual agreement was never a politically feasible goal. The governments led by former President Nestor Kirchner and his wife, Fernandez, came to power in the wake of Argentina's 2001 default by using populist measures to gain votes. The same measures enabled the Kirchners to subsequently win two more elections, but they sapped the government's finances in the process and made Argentina less attractive to foreign investors.
The Kirchners' strategy was logical: Their administrations' popularity rested on the implementation and maintenance of tremendous subsidy schemes for energy, transportation and food. But it was also unsustainable. Relying on an expansive subsidy program to curry political favor and the continuous use of deficit spending to make up for budgetary shortfalls meant that annual spending regularly exceeded Argentina's income. In response, Buenos Aires occasionally turned to creative but risky economic measures and regularly printed more pesos to meet its spending obligations. While these measures kept the Kirchners in power for more than a decade, they also drained public finances, drove up inflation and turned Argentina into a net energy importer.
Macri has gone in the opposite direction. In the first month of his term, his government has reduced taxes on vehicles in an effort to stimulate domestic purchases and has removed export tariffs on beef, soybeans, wheat and corn, giving exporters greater leeway to sell their products abroad. Macri has also announced his intention to eliminate subsidies on electricity, food and natural gas — a move that will inevitably raise the country's already-high inflation, which is expected to reach 30 percent this year. Still, the subsidy cuts are a necessary part of reversing the inefficiencies that have burdened Argentina's economy in previous years. Without doing so, Buenos Aires' costs would continue to outweigh its income.
Fighting an Uphill Battle
Two major obstacles will stand in Macri's way as he tries to overhaul the Argentine economy. The first is the state of Argentina's trade with its Southern Cone countries, particularly Brazil, as well as with its other major partners outside the region. Argentina depends on exports of soybean and soybean products to China for about 7 percent of its export revenue. However, slowing growth in foreign demand has caused the value of soybean exports and other agricultural commodities to steadily decline since 2011. But the impact of this lost revenue pales in comparison to the damage Brazil's struggling economy has inflicted on Argentina. By value, some 20 percent of Argentina's exports go to Brazil. Over the past year, Brazil's currency has depreciated by more than 40 percent and its consumption has plummeted, driving Argentine exports — especially in the automotive sector — down. With few alternative markets available in its immediate vicinity, Argentina will not be able to shield itself from the effects of Brazil's economic decay anytime soon.
The second obstacle is Argentina's inability to develop its energy reserves, which could someday prove to be a substantial source of revenue. In the near future, though, the country's capacity to tap into its oil and natural gas will likely remain limited. Argentina's state-owned oil company, Yacimientos Petroliferos Fiscales (YPF), lacks the financial resources needed to produce energy on a wide scale. Moreover, low oil prices have lightened the financial burden created by energy imports, reducing Buenos Aires' incentive to reverse its energy deficit, at least in the near term. Therefore, Argentine oil and natural gas production will likely be steady or drop slowly for the next few years, leaving the country a net energy importer until well after Macri's term is over.
Macri is clearly looking to change the Argentine economy, but he is limited in his options. While Macri's administration is laying the groundwork for a fundamental shift in Argentina's stance toward business and trade, the country continues to be hemmed in by international finance barriers. Though Macri's subsidy cuts and domestic policy adjustments will influence Argentina's politics and economy in the short term, the country's long-term economic future is largely out of the new president's hands.