Argentina shuns magic
With the election of Mauricio Macri, things are looking up for Argentina, with voters opting for realism over the "magical thinking” of the Kirchners.
A century ago, Argentina was set to join the global elite. It was richer than France, Germany and Italy. Its income per head stood at 92% of the average of 16 rich, developed states at the time. But "it never got better than this", says The Economist. Income per head is now 43% of the same 16, and Argentina is an object lesson in how poor governance can squander potential. A succession of coups ended 30 years ago, but relative stability has not helped growth, because governments have succumbed to protectionism and populism, resulting in constant crises, recessions and a bout of hyperinflation in the late 1980s.
Things may be looking up. Over the last month, the stockmarket has risen by 25% to a record high ahead of last weekend's presidential election victory by Mauricio Macri. The centre-right, market-orientated mayor of Buenos Aires aims to deliver a dose of orthodox economics after 13 years of interventionism and overspending by Christina Kirchner, and husband Nestor.
In the 2000s, Argentina rode the commodities boom, with high prices for soybeans, its chief export, helping to finance lavish public spending: 40% of the population gets a pension, salary or welfare from the government, notes The Economist a share that has doubled since 2007. But as the boom subsided, the budget deficit grew; it is set to hit 6% this year. All this spending, plus loose monetary policy, drove up inflation. The official figures deliberately underestimate this, under government pressure, but private economists say it's about 30% a year. The official exchange rate is overvalued as a result, but the government props the peso up, because it doesn't want to fuel inflation further or admit the economy is in trouble.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
As a result, foreign-exchange reserves are falling. Strict capital and exchange controls hinder money from fleeing the country, while restrictions on trade are choking growth and productivity. High taxes hurt competitiveness further, and the country can't attract international money until it reaches a deal with its bondholders, because it has been frozen out of debt markets after stiffing foreign creditors.
So voters have opted for "realism over the magical thinking" of the Kirchners, notes BreakingViews.com's Martin Langfield. But achieving more sustainable growth will hurt. Interest rates will have to rise to squeeze out inflation as the peso declines. Necessary spending cuts will also hit growth. But as exchange controls are dismantled and a deal with creditors is reached, confidence and money should return. But Macri faces "an unfriendly Congress and may struggle to carry out all the reforms", warns Langfield. The Argentinians could tire of his medicine and elect another populist in a few years. "The temptation of magic is powerful. Investors should exercise caution."
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
-
Do you qualify for the Winter Fuel Payment if you live abroad?
The Winter Fuel Payment will be means tested for expats living in Europe, in line with the new rules impacting those in the UK. But a quirk in the system means not all countries are eligible.
By Katie Williams Published
-
What the Employment Rights Bill means for your job
New workplace reforms are set to give employees new rights to benefits and flexible working
By Marc Shoffman Published