Argentina's Economy Has Turned the Corner, Macri SaysBy , , and
Macri more confident than ever for single digit CPI in 2019
Argentina undergoing ‘deep and constant’ cultural change
After less than two years in office, President Mauricio Macri says Argentina’s economy has turned a corner with single digit inflation now within sight for the first time in more than a decade.
The president’s decision to open up the country after years of isolation, slashing subsidies and import tariffs and freeing up the exchange rate, has produced a “cultural change that is deep and constant,” Macri said in an interview Thursday.
His government has bitten the bullet, backing the central bank in its fight against the highest inflation rate in Latin America after Venezuela. Policy makers have held the benchmark rate steady since April at 26.25 percent as they look to bring inflation to the target of 12 to 17 percent by year end. While it may not achieve that goal, inflation has fallen to less than half its peak of 47 percent in 2016.
“We have turned a corner,” Macri said on Bloomberg Television. “Without a fixed exchange rate, without any type of price controls, we have been reducing inflation. I am more confident than ever that in 2019 we will have single-digit inflation.”
Gross domestic product expanded 2.7 percent in the second quarter from a year earlier, driven by investment and consumption. It was the economy’s best performance since Macri took office in December 2015. Consumer confidence also has rebounded.
The recovery is having a knock-on effect on one of the pillars of his presidency: reducing poverty. The poverty rate fell 1.7 percentage points to 28.6 percent in the first half of 2017 from the previous six months, the statistics agency announced on Thursday.
Macri has committed to narrowing the fiscal deficit after it ballooned in the final years of former President Cristina Fernandez de Kirchner’s administration. Now, he has to step up efforts, with the government pledging to reduce the primary budget shortfall by one percentage point to 3.2 percent of gross domestic product in 2018.
The government’s first goal after the Oct. 22 legislative elections will be to get Congress to pass the 2018 budget, Macri said. Next: tax reform. The government plans to reduce income tax, custom duties and taxes at state and city levels, he said. The objective is to stoke the economy so that any lost revenue is recovered through increased productivity and less tax evasion. Ideally, the plan will have a neutral impact on the budget, but Macri warned that there is little room to increase taxes and no decision has been taken on whether to tax Argentina’s financial industry.
“The problem is that we’re facing a huge deficit but still I believe in many cases reducing taxes may increase the fiscal revenues because we have already reached the productivity limits of taxes,” Macri said. “I really believe that can be a win-win situation and we’re betting on that.”
The peso gained 0.46 percent to 17.48 per dollar, its biggest increase in two weeks following Macri’s comments. The yields on benchmark bonds due 2033 fell the most in a month.
Argentina also plans to tackle labor reform after Brazil, its biggest trade partner, recently approved a law that weakens unions, gives companies more flexibility to hire and fire and allows for temporary employees. Brazil has created a “challenging” situation for Argentina, Macri said. While his government "will try" to do something broader to compete with neighboring Brazil, for now workplace rules will be addressed industry by industry, he said.
Macri’s Cambiemos alliance performed better than expected in primaries last month, scoring large victories in traditionally Peronist strongholds and restricting his predecessor, Fernandez, to a lead of just 0.2 percentage points in Buenos Aires province.
If Cambiemos does as well in October, Macri’s chances of re-election in 2019 will be bolstered and he’ll have a stronger hand to play with Peronist governors as he seeks to push through reforms.
With just weeks until the elections, the president said Argentina would never go back to the past, referring to the Peronist movement of former President Fernandez.
“Peronismo will have to go through a huge internal reform,” Macri said. “Kirchnerismo would be about going to the past, and I think there’s no chance for Argentina to go to the past again.”
— With assistance by Carolina Millan, Pablo Rosendo Gonzalez, and Micha Rondeau