Since taking office in December 2015, Argentina’s President Mauricio Macri has undertaken significant economic and political reforms, which have won widespread praise at home and abroad. He has led Argentina to play a global leadership role, highlighted by its current presidency of the influential G20 forum. Now Mr. Macri and his government need support from international partners to help manage a run on Argentina’s currency and to continue on the reform path that many see as key to unlocking Argentina’s potential.
President Macri, a businessman turned politician, took bold steps early in his tenure, including resolving Argentina’s long outstanding dispute with foreign debt holders. However, he also adopted a gradualist approach to making structural economic changes, which many see as vital to getting Argentina back on a firm footing for growth after a long period of populist and state-dominated policies by his two predecessors. Macri’s choice of a gradualist approach was aimed at maintaining domestic support (he does not have a majority in Congress), while encouraging a massive cultural shift away from government subsidies and toward a more private sector-oriented economy. Up until recently, the people of Argentina seemed to accept slow growth, continued inflation (over 20 percent annually), and a reduction in subsidized prices for electricity, train tickets, and other public goods as part of a transition to a new Argentina. International markets also seemed to accept the government’s reliance on short-term borrowing. It sold several billion dollars’ worth of 100-year bonds last year, for example. Until just weeks ago, economic growth was forecast to be 2 to 3 percent for the year ahead.
More recently, however, Macri’s gradualism and dependence on international markets to help finance this transition have run into rising interest rates in the United States. Investors began to worry that Argentina’s deficits are still too big and that its inflation remained stubborn. The government was forced to spend billions of dollars to try to defend the value of its peso. It also raised short-term interest rates for government bonds to 40 percent. Forecasters began talking about near-zero economic growth for the year ahead.
With markets spooked, Macri asked the International Monetary Fund (IMF) for a “Stand-By Arrangement” that would offer Argentina access to additional money to help reassure markets while it adjusts to its short-term balance of payment problems. This was an audacious move. Many people in Argentina have very negative views of the IMF’s role in the painful economic crisis that swamped the country in the early 2000s that was brought on by a combination of poor financial and fiscal policies, over borrowing and external shocks.
Macri and his team, however, hope that the IMF (as well as other international partners) will signal their confidence in Argentina’s reform path. In particular, investors apparently would like to see the IMF offer significant funds, which Argentina could draw upon as needed to reestablish market confidence.
Important questions remain. What will the IMF seek as conditions for such a program? Will its monetary package be sizable enough and quick enough to reassure markets? Will the people of Argentina accept an IMF program given their critical view of how the IMF treated the country in the past?
These are complex issues. But the stakes are big.
Argentina has long been known as a country of unrealized potential, given its abundant natural resources and a talented, well-educated population. Macri’s government has created hope that Argentina can implement international best practices and move away from the cronyism, poor governance, bad economic practices and populist policies of Macri’s predecessors. The Peronist opposition in Congress, however, is looking for opportunities to use this crisis to rally popular support against the government and its market-oriented approach.
Argentina’s willingness to pursue regional and international leadership has been widely welcomed, especially at a time when other Latin American countries are experiencing political and economic crises. By all accounts, for example, Argentina is seen as an able leader of the G20, a grouping of the world’s largest economies. What would be the international impact if the rest of the G20 were not to support the current chair as it works to manage this crisis and to continue its reforms?
The image of the IMF in the region is also in play. If the IMF quickly reaches agreement with Argentina on a substantial line of credit and conditions that reinforce reforms but don’t appear onerous, it will send a good signal to other reforming economies about the IMF’s role.
Finally, for the United States, Macri has worked hard to restore and expand cooperation on a range of issues far beyond debt, to cooperation against drug trafficking, terrorism, and illicit financial flows, for example, while encouraging US and other private sector investment and commerce. By supporting a friendly partner in the Western Hemisphere, the US can win good will beyond Argentina.
Argentina needs help now. If the international community can work constructively and rapidly with Argentina to forge solutions to its short-term problems, then that will encourage the country to stay on a path to fulfill more of its potential.
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