Macri Ends “Gradualist” Approach to Reform

On 16 May, President Mauricio Macri announced that his “gradualist” approach to economic reform was over. This came after two weeks of economic and political tension, marked by a run on the peso, and a week after declaring that he will seek a financial lifeline from the IMF.

Macri said that his administration will now accelerate fiscal adjustment. “There will be no more shortcuts,” he stated. However, he also hopes that the federal government, which has a minority in Congress, will not have to bear the burden alone. Rather, Macri said that he would seek “a great national agreement” to meet new fiscal targets.

In the middle of the run on the peso, and in an effort to soothe the markets, Economy Minister Nicolas Dujovne announced a new reduction of the fiscal deficit target for this year, from the original 3.2% of GDP to 2.7%. The government’s plan initially had a 2.2% deficit target for 2019, when Macri is likely to run for re-election. Our contacts in the government now say that under the IMF agreement, those targets will be more ambitious (around 1.5% of GDP). The talks with the IMF for an “exceptional access stand-by agreement” formally start this week.

The government’s desired fiscal agreement will face political obstacles. Macri wants representatives of the country’s 24 provinces, 14 of which are governed by the opposition Peronist party, to convene around a table and commit to cuts. Opposition governors have been skeptical thus far. “The federal government has decided to go to the IMF, so it should be responsible for the consequences of an agreement,” said Juan Schiaretti, the powerful governor of the central province of Cordoba. Meanwhile, the General Confederation of Workers (CGT), the country’s largest union umbrella, is staging an anti-IMF demonstration on 25 May.

In Congress, the government is also facing pressure from the opposition. The Senate is currently debating legislation to freeze the government’s utility rate increases, a cornerstone of Macri’s energy and fiscal policies. The bill has already been approved in the Chamber of Deputies and the Senate is likely to follow suit next week. The congressional effort to quash the utility increases started before the run on the peso and the government’s new drive to accelerate fiscal cuts, but the opposition now wants it to be the first test for the president under the new set of circumstances.

The ruling Cambiemos coalition will make a last-minute attempt to halt the opposition’s move, and the president was clear that he would veto the bill if it clears Congress. Energy Minister Juan Jose Aranguren told ruling party senators that the bill would cost the government $170bn pesos ($6.8bn), an amount that Macri is unwilling to pay while he desperately tries to curb the deficit.

If the opposition goes ahead with the utility-freeze bill in Congress and forces Macri to veto it, the president will know that he will not find cooperation in his struggle against the deficit. We believe that the opposition will pass the bill to let Macri know that, a year away from the start of the presidential race, he will have to pay the political price of advancing the IMF’s requested austerity measures. Nevertheless, the utility rate increases will stand, unless the courts get involved.

The May run on the peso has both potential upsides and downsides for the Argentine energy sector. On one hand, the devaluation improves the cost equation of oil and gas investments. On the other hand, a potentially weaker economy casts doubts on energy demand, both from households paying higher rates and business slowing down their activities. This is particularly true for the natural gas already being produced in larger quantities from the Vaca Muerta play.