In Argentina’s first ever run-off presidential elections on November 22, center-right candidate Mauricio Macri of the political alliance Cambiemos (“Let’s Change”) defeated current President Cristina Fernandez de Kirchner’s hand-picked successor, Daniel Scioli of the Peronist Frente para la Victoria (“Front for Victory”) party, by a margin of 51.3 percent to 48.7 percent.
This marks the first time in 12 years that the country has not been in the hands of the Kirchners − supporters of a left-wing populist political movement that emerged within the Peronist party founded in the 1940s by President Juan Perón and his wife Eva. Macri will be sworn in as President on December 10, 2015. Macri ran on a platform promising change – principally economic.
Along these lines, we offer the following five key observations regarding the outcome of the election, including potential implications for foreign investors.
(1) Impact on the economy: upheaval likely
Macri inherits an economy with a large government budget deficit (estimated at 7 percent of GDP), high inflation, an artificially overvalued currency and low dollar reserves. He hopes to solve these challenges through a variety of means, including by encouraging foreign investments; re-opening imports; re-accessing the international financial markets; relaxing foreign currency controls (allowing foreign companies to repatriate earnings); devaluing the Argentine peso (to reflect the real devaluation of the Argentine peso that has already occurred and has been artificially hidden), thereby making exports more competitive; and rolling back regulations that have limited foreign investment. Macri also will likely reduce government spending and cut certain export taxes.
Macri’s emphasis on market-friendly reforms is also evident through his cabinet choices. He has already announced a plan to break down the traditionally strong Ministry of Economy into six different ministries and has named individuals with extensive economic backgrounds to head several key posts, including the newly created ministry of production as well as the ministries of finance, transport, energy, agriculture and labor, together with the key posts of Minister of Interior and the Chairman of the Central Bank.
(2) Sectors of interest: energy leads the way
Despite Argentina’s substantial shale oil reserves, declining output and rising domestic demand have led to the country becoming a net importer of energy. In order to reverse this trend and to phase out state energy subsidies, Macri will likely loosen regulations in order to increase investment into the energy sector. Notably, he has selected former Shell executive Juan José Aranguren to head the energy ministry; Aranguren has already publicly committed to improve investor confidence and push for an increase in domestic production.
In addition to energy, Macri’s policies could also result in increased opportunities in sectors such as agriculture, transportation, infrastructure and technology.
(3) Potential challenges: still a need to compromise
Although Macri is intent on reform, his alliance remains in the minority in both houses of Congress. This signifies that he will likely face adamant opposition, particularly in light of the close election results. That is, if Macri is to bring about the changes that he has promised, he will need to develop a strong rapport with the opposition. While this dynamic will not necessarily derail his initiatives, it will likely slow the pace of their implementation.
Macri’s economic reforms, particularly government spending cuts and the publication of current and credible data/information (e.g. economic and otherwise, such as statistics about inflation and devaluation), are also likely to face popular opposition because they could create widespread financial stress in the short term (via reduced energy and food subsidies, for example).
(4) Foreign relations: shifting allegiances?
The selection of UN diplomat Susana Malcorra as Foreign Minister reflects Macri’s desire to pivot away from the Kirchners’ domestic-oriented foreign policy and toward increased international engagement, including with the US. In fact, reports indicate that his recent telephone conversation with President Barack Obama focused on a mutual commitment to deepen cooperation and foster increased business opportunities. Macri’s support for a quick resolution of arbitration claims and the conflict with holdout American bond-holders should also help to improve overall bilateral ties with the US.
Closer to home, Macri has promised to seek Venezuela’s exclusion from Mercosur (a sub-regional free trade block), on the basis of violations of the agreement’s democratic clause. Macri is likely to look to rebuild Argentina’s ties with countries such as Colombia, Chile and Brazil, where Macri will travel for his first official state visit. Meanwhile, Argentina’s potential return to the international bank and debt markets will expand the country’s options for capital, reducing the recently increasing roles of countries such as China, Iran and Russia in its economy. This pivot may also cause a shift in the strategic dynamics of the region.
(5) Bottom line and looking ahead
During his first week in office, Macri is expected to send a package of economic reforms to Congress. While these reforms will not result in an overnight fix, his overall agenda – as well as a business-friendly team of ministers – will seek to stabilize the economy by reducing debt and inflation and relaxing regulations (among them import restrictions).
Although there could be significant growing pains, with time the Macri presidency aims to create a climate more favorable for international engagement and foreign investment. It will thus be important to closely monitor developments over Macri’s first year in office as Argentina makes the transition to a new economic reality.
Thomas Goodman, Cohen Group