Argentina's Macri Moves Quickly to Unwind Kirchner Policies

  • Macri announces plans to lift export tariffs, reduce subsidies
  • Plans to end currency controls by end the of this week

Argentine President Mauricio Macri has hit the ground running. Less than a week since taking office, he has started to unravel a system of currency controls, trade restrictions and subsidies implemented by his predecessor.

Macri announced an end to taxes on most agricultural exports on Monday and now is moving ahead with plans to reduce subsidies on utility bills, which have contributed to the the country’s widening fiscal deficit. While his pledge to lift currency controls and let the peso float "from day one" has not yet happened, newly appointed Central Bank President Federico Sturzenegger brokered a deal to cut the bank’s liabilities from futures contracts. That move is seen as a first step toward letting the currency trade freely.

Macri is betting that a series of sharp shocks will generate investor confidence and help revive the country’s economy. Argentina has been stifled by a shortage of foreign currency since former President Cristina Fernandez de Kirchner introduced controls in 2011 and began using reserves to pay foreign debt obligations. So far, it seems to be working.

“You have some goodwill at the beginning and they’re tackling a few things that would be complicated to do in the future,” said Diego Ferro, co-chief investment officer at Greylock Capital Management. “They have to look proactive on the domestic front first and they’re doing everything according to the textbook.”

The government is working toward lifting currency controls as early as this week, Macri said. On Monday, the central bank ordered financial institutions to unwind their foreign-currency positions as part of an agreement with the futures exchanges. The central bank wants exchanges to rewrite the terms of some derivatives that may have handed holders a windfall profit and after Sturzenegger’s predecessor, Alejandro Vanoli, sold currency forwards at below-market rates in a bid to prop up the peso. Without that help, analysts estimate the central bank would be liable for about $10 billion of contracts payable in pesos.

The peso, which currently trades at 9.8060 per dollar in a crawling peg controlled by the central bank, may weaken to about 13 per dollar by year-end, Banco Itau BBA said in a report. In the black market, the currency trades at 14.55.

International Reserves

Boosting international reserves is another key point of Macri’s broad plans for the peso. At $24.5 billion, reserves are at the lowest level in nine years. After eliminating most taxes and with free-floating currency, grain exporters may begin to sell dollars to buy crops off farmers in coming days, Agriculture Minister Ricardo Buryaile told Radio Mitre on Tuesday. The tax agency, known as AFIP, estimates that as much as $11.4 billion of soy, corn and wheat are being held by farmers waiting for better conditions to sell.

An additional $500 million investment between YPF SA and Dow Chemical Co. in shale gas was announced Tuesday at the presidential residence after a meeting between Macri, ministers and company executives.

Macri has also moved to fill key positions in government, including a new director of the statistics agency that has come under fire from private economists and the International Monetary Fund for misreporting economic data.

Not all of Macri’s moves were welcomed. The former mayor of Buenos Aires came under criticism, even from his own allies, for bypassing Congress and appointing two new Supreme Court judges on Tuesday. His government argued that the decision to name Carlos Rosenkrantz and Horacio Rosatti was taken because the Senate is in recess until March 1. Julio Cobos, a senator for the Radical party that formed an electoral alliance with Macri, said the government could have called for a special congressional session to approve the nominations.

Greylock’s Ferro said that while the move doesn’t break the law, it may erode the goodwill Macri is currently enjoying.

“Let’s hope that he keeps these actions limited because a big part of his goodwill comes from the belief that he has a respect for institutions,” Ferro said.