Argentina will be an interesting country to watch for investors in 2016. Like the rest of Latin America, Argentina faces a difficult external environment for commodity exports. Argentina has published a $ 3 billion trade deficit in 2015. Argentina’s northern neighbor, Brazil, also continues to struggle. General Motors has made the decision to reduce automobile production in Argentina. Global automotive production in Argentina fell to double digits in 2015 with exports down by more than 50%. Citigroup also recently announced a plan to sell its retail units in Brazil and Argentina. With a new president backed by business, Argentina looks set to open a new chapter. On February 19, a US court lifted an injunction that barred Argentina from issuing new bonds. “In simple terms, the election of President Macri changed everything … The Republic has shown a willingness in good faith to negotiate with the recalcitrant”, judge Thomas Griesa. Explain. At the same time, although there are some signs of optimism, Argentina are still struggling with one of the worst inflations in the world. Argentine businesses have experienced impressive growth in e-commerce, but global online retailers such as Amazon and Wal-Mart still seem to be paying more attention to Mexico than Argentina when it comes to e-commerce. To get an idea of what investors should expect from Argentina in 2016, I contacted Jason marczak, the Director of the Initiative for Economic Growth in Latin America at the Adrienne Arsht Latin America Center in Washington, DC
Nathaniel parish flannery: There seems to be some optimism about the new President Macri. How different is Macri from Cristina Fernandez de Kirchner?
Jason Marczak: In electing Mauricio Macri, Argentinian voters chose the antithesis of Cristina Fernández de Kirchner. Fernández de Kirchner’s eight years excluded Argentina from the global economy, while at the national level institutions weakened, insecurity worsened and cronyism raged. Macri pledged during the campaign to take the necessary steps, some unpopular, to restore Argentina’s economy and address the root causes of the deep unrest in society. He is already acting on this promise.
Ultimately, Macri’s mandate is not just to revive his country’s declining economy, but to restore the credibility of its economic institutions after years of patronage and abuse of power. Of course, we have to remember that he also faces a litany of non-economic domestic issues.
Four key decisions of Macri have already improved the attractiveness of the administration to foreign investors: a repositioning of international links, a focus on the removal of capital controls, reappointment credible accountants for processing inflation data and building a cabinet of experienced technocrats.
Other long overdue reforms could help shake off Argentina’s introverted, state-of-the-art model of the past decade and raise its visibility in the region. This creates a timely opening for new foreign trade and direct investment. Beyond Argentina, a Macri presidency represents a potential moment for the Mercosur trade bloc to grasp Brazil’s problems – turn crisis into opportunity – and also become more outward-looking.
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Parish flannery: What are the biggest challenges Macri will face as he struggles to get Argentina out of troubled waters?
Marczak: Macri’s biggest challenge will be reaching a deal to end the long-standing legal dispute between Argentina and its “resilient” creditors who refused to restructure the remaining bonds from its historic 2001 default. Without a deal, the This country will effectively remain excluded from most international credit markets: it has limited borrowing capacity and its foreign exchange reserves are at their lowest for nine years. Unlike his predecessor, Macri will likely manage to strike a deal with the holdouts. Just weeks after taking office, his government made a first formal proposal to end the stalemate with American creditors. Yet he faces a greater struggle to sell any deal with the so-called “vulture funds” to Congress and to the Argentine public.
Macri’s narrow electoral victory – barely 2 percentage points over his opponent, Daniel Scioli – also means the president has limited maneuverability in choosing painful but long overdue reforms. It will have to balance the implementation of the necessary economic adjustments while maintaining popular support. This will be his biggest national challenge.
Already, the immediate decision when taking office in December to lift the strict exchange controls resulted in a 30% drop in the peso. The abolition of the peso’s artificially high rate promises to attract both US dollars and foreign direct investment when both are needed most. The inflated value was not sustainable. But letting the markets decide the currency’s price came at an immediate political cost just before the Christmas season. More adjustments will mean more pain in the short term, but with medium to long term benefits.
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Marczak: Compared to Brazil’s indecision in the face of its own economic challenges, Argentina deserves a healthy dose of optimism for medium-term growth. Macri’s appointed young and well-qualified technocrats. I pay attention to people like Finance Minister Alfonso Prat-Gay and Central Bank President Federico Sturzenegger who should be able to work well together while facing daunting internal challenges. Their local knowledge, commitment and political acumen bode well for Macri’s chances of effectively changing the exchange rate, shifting the pace of budget spending, and lowering inflation over the medium term.
It won’t be easy, but a revived Argentinian economy could overtake its neighbors with investments pouring into sectors such as energy and agriculture. Macri will seek to diversify Argentina’s trade beyond agricultural products popular with China by strengthening value-added exports. His move to deepen frayed ties with the United States and Europe will also help ensure the economy is not tied to volatilities in the Chinese market.
Closer trade ties with the United States and the European Union, either through a coordinated Mercosur deal or on its own, would consolidate Argentina’s international presence both economically and politically. But signing new trade deals isn’t the only way Argentina can show the world it’s open for business. The better business climate that will come with a Macri presidency is emblematic of a global change he seeks to bring to society. The good of the Fernández de Kirchner era – social programs for the needy – is here to stay, but what will change is to restore institutions to the credibility and independence they once enjoyed.
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