The election of Mauricio Macri as Argentina’s next president has brought wide optimism among investors, as the centre-right mayor of Buenos Aires pledged to restore order to the stagflation-plagued economy. Dollar bonds issued by Argentina have continued their winning streak from Macri’s unexpectedly strong showing in October’s first-round presidential elections (1).
It is the first change of government in twelve years, and a sharp shift to the right. Macri has announced a series of radical changes in order to realign Argentina’s place in the world. Macri said he would tear up Argentina’s memorandum of understanding with Iran; seek Venezuela’s exclusion from the regional free trade association Mercosur; and move from a fixed exchange rate with the dollar (2).
The 12 years of Peronist rule by Cristina Kirchner and her late husband Nestor Kirchner were characterised by populist welfare policies resulting in slow economic growth, inflation of over 20%, corruption, and unsustainable government spending (3).
Macri has stated that he will set out policy decisions once he has a clear idea of the state of the country’s finances. That has not stopped the euphoria in markets (4). “We are optimistic,” stated Jody LaNasa, the founder of the $1.5 billion hedge fund Serengeti Asset Management, which owns Argentine securities. “The question is whether this is going to be something like the rebirth of Argentina or another failed dream that people get excited about, but then they can’t overcome the challenges.”
Despite the optimism, analysts know that Argentina’s economic outlook is likely to worsen in the short term, before it gets any better. The challenges Argentina face are substantial: foreign reserves are at a nine-year low; commodity prices are depressed; the budget deficit is fast approaching the widest in three decades; and inflation is over 20% annually (5).