Just How Risky is Macri’s Bet on the 2019 Economy?

por Federico Poore
The Essential, 17-01-2019

A steep devaluation of the Argentine peso. Inflation in an upward spiral. A deep and lasting recession. In the words of President Mauricio Macri, 2018 was the year of “endless storms.”

Fully aware that he needs to get the economy back on track before the October general elections, Macri has begun a race against the clock. He must achieve a quick economic recovery — or at least convince voters the government’s plan is beginning to bearing fruit.

But can he pull it off?

2018 closed on a negative note. Days before Christmas, the government announced it had put all new public–private partnership (PPP) projects on hold, pending a fall in the country risk. This was a huge blow for the Cambiemos administration: public work projects had been one of the key drivers behind Argentina’s economic recovery in 2017 and the government had expected to repeat the trick before October.

This month, things began to look up. “The so-called country risk gauge, which was being flashed on Argentine television screens in late December as it reached 830 basis points, has narrowed to just above 700 basis points,” Bloomberg reported on January 9 (this week, the index broke below the 700-point floor). The Merval, the country’s benchmark stock index, had the best performance in the world for the first few days of 2019, jumping almost 12 percent in peso terms. Because of the strengthened dollar, the country’s international travel deficit narrowed: in November, for the first time in 19 years, the number of tourists visiting Argentina nearly matched that of Argies traveling abroad.

But with no money in State coffers and no PPP projects in sight, the government is placing a huge bet on exports. And huge means huge. According to the 2019 budget bill, the Macri administration estimates a whopping 20.9 percent increase in exports this year. “We expect a great performance from exports due to greater trade integration and the decision to keep a floating exchange rate,” Macri’s economic team told Congress at the introduction to the budget proposal. The government foresees “a rebound in agricultural exports, an improvement in energy exports as a consequence of the development of [the oil and shale gas formation] Vaca Muerta,” as well as improvements in the real exchange rate and in the Brazilian economy, which Macri hopes will “accelerate” in 2019.

The above sectors are strong government favorites and are likely to have a good year (analysts also expect renewables and lithium extraction to support recovery in the months to come). However, their performance is not enough to back the government’s optimism with numbers. The anticipated 20.9 percent hike in exports means the government aims to make $95 billion from exports this year alone, while over the last three years revenues from exports averaged only $60 billion, writes Hernán Letcher, the head of CEPA, a heterodox think-tank. “Such an expansion would mean an all-time record of exports in a context of low dynamism in global trade, commercial tensions and uncertainties over the future of Brazil, our main trade partner,” added CIPPEC, Argentina’s most prominent think-tank, in a report.

Making matters worse, the Macri administration has recently hamstrung its own premise of export-led growth by restoring export duties across the board and establishing a 12-percent tax on service exports.

A year of living dangerously
Ever optimistic, the government believes that most of the dirty work has already been completed and that Argentina will return to growth in the second half of 2019 if it sticks to the (austerity) plan. But that forecast is based on a key premise — that there won’t be another run on the peso.

The crawling band exchange rate regime established by Central Bank Governor Guido Sandleris has worked well so far, and the government expects the exchange rate to keep pace with inflation in 2019. In an op-ed for Clarín last week, Ecolatina consulting head Lorenzo Sigaut Gravina wrote, “If exchange rate calm prevails, inflation will tend to slow and economic activity will recover.” This has been, so far, the timid tendency of the first 15 days of the year.

For Guido Lorenzo, chief economist of the LCG consulting firm, recent improvements in the trade deficit will help the country stay out of trouble during the first months of the year. “However, political uncertainty could fuel demand for dollars and increase their price between the second and the third trimester,” Lorenzo told Infobae. (By “political uncertainty” most observers mean the return of Cristina Fernández de Kirchner to power. The latest polls show the Peronist leader in a technical tie in a likely second-round run-off with Macri, who has announced his intention to run for re-election.)

A scenario that includes a new slide of the peso against the US dollar would further fuel inflation and destroy all hopes of seeing the light at the end of the recession tunnel. To be able to demonstrate some semblance of economic recovery before the election season begins, Macri needs Sandleris and Economy Minister Nicolás Dujovne to proceed with caution.

On December 13, Macri gave a televised speech to his Cabinet, which many analysts considered the first of the 2019 election campaign. The president spoke of the “endless economic storms” faced by his administration and closed with a metaphor. “Even if we sometimes find ourselves having to drive on the shoulder, we must get back on track and keep a steady direction,” he said.

Unless his team steers clear of trouble, 2019 may be the end of the road for the Macri administration.