Glow of Victory Fades for Macri as Reforms Start to Bite

  • Macri facing increasing social unrest as inflation persists
  • Argentina’s president has had to backtrack on some reforms

Mariano Arruzzoli’s glass factory outside Argentina’s capital is at a breaking point. Sales fell by a quarter in May, and costs have soared since President Mauricio Macri took office in December and started overhauling the flailing economy.

Arruzzoli’s monthly gas bill jumped 500 percent in May after Macri scrapped subsidies to narrow the fiscal gap. And clients are spending less as they balk at borrowing costs that peaked at 38 percent, Arruzzoli said. Production costs jumped 40 percent after the fuel price increase.

Mauricio Macri
Mauricio Macri
Photographer: Diego Levy/Bloomberg

“We can’t raise our prices because there aren’t any sales. The domestic market is frozen,” Arruzzoli said in a telephone interview Tuesday from the offices of San Rafael Cristaleria. “I understand that there needed to be an adjustment in prices, but a 500 percent increase in one month is a real hit.”

Six months into his presidency, Macri is finding that his early successes, including ending a 15-year legal battle with creditors, mean little to many local investors and consumers still grappling with 40 percent inflation and a recession. He’s facing social unrest and with mid-term elections next year, he will need to narrow the widest budget deficit in two decades while also keeping his countrymen happy.

“They underestimated the costs,” said Daniel Kerner, head of practice for Latin America at Eurasia Group. “Now they’re dealing with the fact that they thought this was going to be a painless process and it isn’t.”

Ivan Pavlovsky, Macri’s spokesman, didn’t respond to e-mail and phone messages seeking comment about whether the government has underestimated the costs of the reforms.

Macri assumed office promising that inflation would slow to 25 percent and growth would recover in the second half of the year. He pushed back the time line and backtracked on some of the measures, causing concern among investors who would like to see him make meaningful inroads into cutting a deficit of 5.4 percent of gross domestic product. Concern is also growing that a strong peso will discourage investors and crimp exports. The currency has surged 15 percent since February.

“I know this process hasn’t been easy for everyone, because correcting five years of stagnation, of an overwhelming inflation that contaminates everything, has been difficult,” Macri said on Friday. “This transition is proving costly to many but be secure in the knowledge that we are on the right path.”

The signs aren’t good for a recovery in the next few months. Tax revenue rose 23 percent in May, far below inflation, according to the tax agency. Industrial production fell 6.7 percent in April compared to a year earlier and construction activity tumbled 24 percent in the same period, the national statistics agency said. The World Bank revised its forecasts for the country and now estimates that gross domestic product will contract 0.5 percent in 2016. In January it had foreseen growth of 0.7 percent.

Declining Support

Many Argentines like Arruzzoli understand that the measures needed to be taken after four years of stagnant growth and high inflation under the government of former President Cristina Fernandez de Kirchner. However, their patience may not last long.

“There doesn’t need to be growth this year, but what’s needed is for the trend to reverse,” said Andres Malamud, a political scientist at the University of Lisbon. “The government needs to know how to sell the numbers because people don’t know how to read numbers.”

Macri faces mid-term elections in October 2017 in which he must bolster his alliance’s numbers in Congress. At the moment, he’s having to govern without a majority in either house. Macri needs to win those elections in order to be able to govern in the second half of his term, Malamud said.

Argentina Looks to Future After a Go-It-Alone Past: QuickTake

The president’s approval rating stabilized after plunging from 77 percent in November, suggesting that his government has already absorbed the brunt of negative opinion from the reforms, according to Raul Aragon, a Buenos Aires-based pollster. Macri’s government had a 49.9 percent positive rating in a poll of 706 people carried out by Aragon June 2-7.

“It’s impossible to estimate the limit of tolerance or how long expectations last,” Aragon wrote in the report. “However, one could make an assumption that if the economic situation doesn’t get any worse, those expectations could give the government the necessary time to put the economy back on track.”

Still, the number of strikes more than doubled this year, according to an index compiled by Tendencias Economicas y Financieras. Macri has had to recant on some of the reforms, limiting gas tariff increases to 500 percent for small and medium-size companies and 400 percent for residential bills. He’s also promised pensioners an average 45 percent increase.

Buying Time

That may buy him some time, but it will also raise concern among investors worried about the deficit. By back pedaling on the reforms, Macri is betting he can count on more patience from the market than from his countrymen, Eurasia’s Kerner said. In Argentina’s first foray into capital markets in 15 years, Macri managed to raise a record $16.5 billion.

“If they don’t do the adjustments now, they’re not going to continue doing them next year,” Kerner said. “The issue is that if you haven’t really fixed the problems, especially on the fiscal side, and then the market loses patience then they’re going to have to make a more painful adjustment.”

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