Can Mauricio Macri Save Argentina’s Economy?

“If something should happen to me, don’t look to the Middle East, look north,” former resident Cristina Fernández de Kirchner said in October 2014, alluding to a purported conspiracy orchestrated with “foreign help.” Of course, that foreign help was a none-too-subtle dig at the United States, which Kirchner insinuated was behind a plot to overthrow her government and even threaten her life.

Kirchner made the comments during her first public appearance after U.S. Judge Thomas Griesa declared the country in contempt of court for failing to pay its creditors, two months after Argentina’s second default in 13 years. In June 2014, following an appeal, the U.S. Supreme Court left intact Griesa’s ruling, which ordered Argentina to pay holdouts who rejected 2005 and 2010 debt restructurings on the country’s bad bonds. At the time, Argentina was mired in economic limbo and political international reclusion, combined with rampant inflation, a colossal budget deficit, and currency restrictions.

Today, President Barack Obama’s visit to Argentina occurs in a much different context. The December election of center-right President Mauricio Macri, which ended 70 years of Peronist governments, has breathed new life into a frosty relationship. And Macri has hit the ground running. In his first 100 days in office, Macri set a clear departure from his predecessor’s approach, making a series of major economic and political measures to bring his country back into the good graces of international markets, putting an end to 12 years of isolation.

Macri rapidly sought to end a decade-long dispute with holdout creditors, reaching an agreement with the largest funds led by Elliott Management. Although the conclusion of this process is still open — as the Argentine Congress moves forward without any significant delay to support an accord with bondholders — the central government is close to gaining market access to finance macroeconomic adjustment. Having addressed key structural issues, such as the lifting of currency controls and the reduction of administrative restrictions to international trade, Macri intends to attract investment flows that will make Argentina globally competitive again.

The president’s effort to revive the country comes with a clear shift away from populism, putting distance between Argentina’s government and Venezuela’s leftist regime over the deterioration of democracy and human rights and launching an agenda to normalize relations with the United States and the rest of the world. Argentina’s more independent geopolitical role in the region also comes as Brazil is mired in a deepening economic crisis and President Dilma Rousseff fights to stay in government.

In this sense, Obama’s trip stands as a critical opportunity to support positive change in Argentina and re-inaugurate bilateral ties with a state that plays a key role in Latin America, particularly as the global economy turns less favorable for emerging markets. Macri’s pro-market turn was welcomed in the World Economic Forum, where he was the first Argentine president in 12 years to speak at the most important meeting of global investors. He later received support from the visits of French President Francois Hollande and Italian Prime Minister Matteo Renzi.

Macri’s macroeconomic challenges are vast, however, and success will depend on his administration’s ability to curb a 5.4 percent GDP budget deficit (the biggest since 1982), temper soaring inflation (current annual levels are about 36 percent), and stimulate economic growth. But necessary fiscal and monetary tightening could actually hurt economic improvement in the near term, risking the government’s ability to pay for the costs of implementing longer-term reforms. Already, Argentina’s economy is set to contract 1 percent this year.

The country’s return to the capital markets will come with an initial $15 billion bond issuance from the central government this year. It could be difficult for the markets to absorb such an issuance but not impossible if the pricing is attractive, at a time when bond spreads have increased in emerging markets. Argentina will issue in bonds this year as much as Colombia, Mexico, and Peru did altogether in 2015.

The fact that emerging market sovereign issuances were flat last year also signals the rate Argentina would have to pay investors — as high as 7.5 to 8.0 percent, according to economists — which will be higher than its neighbors. Consider that Chile — its last bond issuance of $2.54 billion was in January — paid a rate of 1.96 percent. So, while being able to float bonds on international markets is a step in the right direction for Argentina, it could come at a pretty heavy price.

There are also structural issues that need resolution and depend on internal decisions. For instance, there’s the unresolved definition of what sources of foreign exchange earnings the government will prioritize after honoring its debts with creditors. Argentina’s debt profile and investments defined by the government will ultimately determine whether the money raised in international markets will be used to promote sustainable growth or to avoid making the much-needed macroeconomic adjustments.

In the long term, the government should prioritize foreign exchange earnings through sources that do not seek to capitalize on high interest rates. Instead, obtaining lower rates through long-term debts will be essential; one avenue is through infrastructure programs financed by international organizations, with the possibility of refinancing. Macri also faces the conundrum of how to encourage foreign direct investment while minimizing the risks of the inflow of speculative capital.

For now, at least, Macri seems to have a bit of a runway. After lifting currency controls, the economic team rapidly devalued the Argentine currency, the peso, around 28 percent, but Macri’s popularity still is high, according to recent polls. But Argentines are greatly concerned about the state of the economy — and rightly so — especially the rise in prices. The troubled economy requires a host of decisions that won’t happen overnight and may cause some pain.

The question everyone is asking is whether Macri has enough time and support to push his bold agenda forward. Unlike Fernandez before him, Macri doesn’t have a majority in Congress to back him up when his current popularity takes a hit. And you can bet that the Peronists will be on alert, waiting to pounce.

Photo credit: Argentine Presidency Press Office/Anadolu Agency/Getty Images