Fri | Sep 22, 2017

Walter Molano | Argentina in need of a game plan, better message

Published:Friday | May 20, 2016 | 5:00 AM
New president of Argentina, Mauricio Macri.

After 15 years of rampant populism and kleptocracy, Argentina elected a government that offered a new direction.

President Mauricio Macri assembled a dream team of Argentine bankers who immediately executed a series of spectacular financial operations. They devalued the currency, lifted many of the capital controls and settled with the holdouts.

In the process, they issued US$16.5 billion in global bonds, bolstered international reserves and restored the country's membership in the international financial community. Yet, there was a price to pay. To facilitate the reintegration process, they generously lined Wall Street's pockets, leaving a huge pot of commissions for everyone to share.

After treating Argentina as a pariah for more than a decade, sell-side analysts responded with laurels and praise. However, Argentine households had to deal with geometrically rising utility rates, reduced purchasing power due to the weaker currency, ultra-high interest rates and soaring unemployment.

Everyone knew that the country had to go through a painful adjustment process; yet, the new government never articulated the prize. There were snippets about Plan Belgrano, which was a new transportation investment programme. The problem was that there were long memories of other mammoth transportation schemes, particularly in railroads, that had ended in fraud, waste and abuse.

The new government mentioned its desire to invest heavily in renewable energy technologies, such as solar and wind. The downside was that recent experiences in Spain revealed that the renewable energy sector was ripe for corruption.

Economy Minister Alfonso Prat Gay also made several trips to Santiago to mend faces with the country's disgruntled neighbours, which were badly burnt by the previous administration. Furthermore, there were announcements about the government's decision to sell off the ANSES's huge portfolio of equities that were acquired during the nationalisation of the pension fund system to liquidate arrears with pensioners.

Road map to 2020

Unfortunately, the measures were disparate and unco-ordinated. The government lacks a well-articulated plan that will act as a road map. For example, 'Argentina 2020' could be a marketing campaign that lays out GDP growth, investment, inflation and employment targets that could provide a beacon of hope for the people, who are undergoing a great deal of pain, and investors, who are expected to pile billions of dollars into upcoming provincial and corporate issues. In other words, the country is in need of a message that communicates where it is going and what needs to be done.

In reality, the market needs to be prepared for lacklustre numbers. GDP will continue to decline 2016, as the effects of the adjustment process takes hold. Foreign direct investment will probably not materialise until 2017, when local analysts expect more clarity on the economic and regulatory environment.

The government is calling for an annual inflation rate of 25 per cent for this year, but it will be lucky to keep it below 40 per cent.

One of the problems is that the INDEC was destroyed by the previous administration, with former employees stealing computers. Many files and databases disappeared. It will be a while before the government develops a sound framework to calculate the changes in consumer prices. This means that wage pressure will remain strong. It also means that further devaluations may be on the horizon. These are the reasons why a good narrative is essential to keeping the society on board.

Unfortunately, the new administration has not been keen on communicating its intentions or taking advice.

Attempts by industry leaders to share experiences and suggestions have been politely rebuked. The dream team is comprised of several individuals who are very impressed by their own success and who feel that they do not need help. This narcissistic behaviour is self-destructive, because a pack of sharks is circling just below the surface.

Even though President Cristina Kirchner is under a great deal of political pressure due to the unending release of information detailing the rampant corruption that ran through her and her husband's administration, she continues to engender a great deal of public support - particularly among the lower classes.

We cannot forget that President Macri won with a margin of only two per cent. Moreover, the labour unions are coming together to make their demands. Peronists also want to reclaim the mantle of power.

Communicating with the population requires a sense of humility that is beyond the egotism of many of the illustrious notables who comprise the dream team. Failure to come up with a game plan could eventually generate a backlash that could make the Macri honeymoon a rather short-lived affair.

Therefore, an ounce of humility could be the best recommendation for the government to solidify its gains.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com