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Macri: How Quickly Can He Reform Argentina’s Macroeconomy?

The new president faces political and financial obstacles to his liberalization agenda, leading some to predict a cautious pace of change.

Mauricio Macri enters Argentina’s Casa Rosada with a broad mandate from voters to clean up the country’s troubled economy. Delivering on his campaign promises won’t be easy, though.

A former mayor of Buenos Aires, Macri inherits an Argentina badly in need of reform. After 12 years of heavy-handed intervention by the Peronist governments of president Cristina Fernández and her predecessor and late husband, Néstor Kirchner, the economy has slowed to near-stall speed, inflation is running at an estimated rate of nearly 25 percent, reserves have dwindled, the country remains locked out of international capital markets, and the peso is so weak that American Airlines no longer accepts it as payment.

Macri triumphed in the November 22 runoff election after promising to liberalize the economy and end the country’s long lock-out from global markets. “The Argentinean population has been living with complete macroeconomic dysfunction for quite a few years,” says Monica de Bolle, a senior fellow at the Peterson Institute for International Economics in Washington. “I think people realize there are some painful things coming if they want the country to work well.”

Lingering political divisions will make it difficult for Macri to implement reforms, though. Fernández underscored those divisions on December 10 when she refused to attend Macri’s inauguration. Her Justicialist Party and its center-left allies are in a position to thwart many of Macri’s proposed reforms as they control a majority of seats in the Senate and have the largest bloc in the lower house.

As a result, Macri is likely to phase in his reforms bit by bit, according to Colin Lewis, a professor emeritus at the London School of Economics who specializes in the economies of Argentina and Brazil. One of the changes Macri is likely to implement early on will be a relaxation of export taxes. Farmers have been stockpiling crops for months in anticipation of such a move.

“I think Macri will liberalize, if not abolish, the charges, and we’ll see quite a dramatic flow in exports,” says Lewis. “That will produce a huge surge of foreign exchange earnings.” Economists at Barclays estimate the siloed crops could bring in $5 billion to $6 billion in foreign exchange earnings in the first quarter of 2016, which would give Macri’s government some breathing room to turn to the rest of his economic policy.

Macri has promised to reform the national statistics office, so that the country gets a clearer idea of how high inflation really is. Fernández’s administration was accused of massaging the data to avoid popular discontent. He also vowed to abolish capital controls, in a bid to encourage foreign investment, and to eliminate the panoply of official exchange rates currently in force, which analysts believe will lead to a further, major devaluation.

The prospect of exchange reforms improved on the eve of Macri’s inauguration when Alejandro Vanoli stepped down as head of Argentina’s central bank. Vanoli, a Fernández appointee whose term had been set to run until 2019, had previously been coy about whether he would make way for the new president to appoint his own chief. Macri has said he will name Federico Sturzenegger, an economist and former banker who is a member of Congress from Macri’s PRO party, to the post. Vanoli was facing an inquiry over reports that the central bank sold currency futures, which would generate big profits if the peso is devalued, just before the November election.

The central bank’s reserves have fallen sharply. Economists at Barclays estimates it holds just $1.2 billion in hard-currency cash, a far cry from the $24 billion balance at the end of 2014. Under Fernández, the government passed a law allowing the central bank to use foreign currency reserves to cover the costs of a widening budget deficit, which is estimated at 4.8 percent of gross domestic product.

If Macri succeeds in ending capital controls and triggering a peso devaluation, analysts say that will lead to higher inflation. “It will definitely cause a shock, and I think Macri will err on the side of caution,” says Andrew Stanners, a portfolio analyst at Aberdeen Asset Management in London.

The outlook for Argentina’s economy will depend heavily on whether and how quickly Macri can negotiate a settlement with the country’s holdout creditors. Hedge funds led by NML Capital, part of Paul Singer’s Elliott Management Corp., have refused to participate in the restructuring of Argentina’s foreign debt following its nearly $100 billion default in 2001. The funds scored a coup in 2012 by getting U.S. District Court Judge Thomas Griesa to rule that the country must pay the holdouts at the same time it pays other bondholders who agreed to the restructuring. Argentina has been unable to tap international capital markets ever since. According to Daniel Pollack, a U.S. court-appointed mediator who met this week with a member of Argentina’s Finance Ministry, the Macri administration is ready to negotiate.

Although public opinion supports the idea of reaching a settlement with the holdouts, Macri must push any compromise through Congress, which passed a so-called Lock Law preventing any compromise. Stanners says that Macri will probably have little trouble overcoming opposition in the lower house, but the opposition-controlled Senate could frustrate his efforts to reach an agreement. “Removing the Lock Law is important because if the sovereign is paying, then you have a rating for the sovereign and can judge all the corporate debt below, and that opens the door to international investors,” Stanners says.

If Macri is able to implement the end of capital controls and arrange a slow depreciation of the peso, “I think a lot of foreign investment will flood into Argentina,” says de Bolle. “Everything is cheap and about to get cheaper, especially now that foreign investors are fleeing Brazil and Venezuela, where the economies are going down the tubes.”

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