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Business-friendly policies and peso devaluation

by David Smith

Business-friendly policies and peso devaluation

President Mauricio Macri has taken office in Argentina, opening a new era of business-friendly policies after 12 years under left-wing power couple Nestor and Cristina Kirchner. In the short term, Macri and his team have to hope that the Peronist party machine does not replay history, and seek to undermine the new government with strikes and demonstrations. Macri has achieved an historic victory, but he will face challenges to govern from day one.

Macri, a businessman who converted his presidency of the Boca Juniors Football club into a new political movement, with the slogan ‘Let’s Change’, on 22 November won the first run-off in the history of Argentina’s modern democracy.

‘We’ve done the impossible with this election,’ Macri told supporters at a massive rally on the banks of the River Plate. His Peronist opponent, Daniel Scioli, claimed, ‘We leave them a country stronger than ever.’ With that rather limp defence of the status quo, the 12 years of the Kirchner dynasty came to an end. However, the legacy of the previous government represents a poisoned chalice for Macri. Now comes the hard part, and in the words of one of Macri’s lead advisers: ‘There are no good options here, only brutal choices, if we are to take the country out of steep decline, and back to growth.’

The handover of outgoing President Cristina Fernández de Kirchner is stark in economic terms. Inflation running at 25%, unemployment rising, a budget deficit approaching 6% of GDP, foreign currency reserves depleted, and the value of the peso unknown, with an official rate at less than 10 to the dollar, the parallel market rate well over 15 pesos.

Macri-economics will revolve around a devaluation sooner rather than later. Macri has suggested letting the peso float to between 15-16 to the dollar). Next on the list will be cuts in subsidies, particularly of the energy and transport sectors, coupled with instant breaks for farmers, to stimulate an agricultural sector that has been holding on to food exports because the Kirchners imposed crippling taxes.

But given his narrow victory, Macri has served notice that he will not stop welfare programmes that mean almost half the population receives government aid. Nor will he attempt to reverse the nationalisation of the state oil giant YPF, and the national airline, another major drain on government revenue.

David Smith represented the UN Secretary-General in the Americas, 2004-14.