In the run-up to Argentina’s October presidential election, ghosts loom large. The economy is again mired in crisis, at times reminiscent of 2001, when Argentina defaulted on its debt and plunged into the worst economic calamity in the nation’s history.
It’s a dramatic turn of events for President Mauricio Macri, whose electoral victory four years ago unleashed investor optimism about Latin America’s third-largest economy. Shortly after winning office, Macri moved quickly to shake up the economy, implementing market-oriented changes to reinvigorate the economy after sluggish growth.
He lifted currency controls, resolved prolonged disputes with creditors over Argentina’s defaulted debt and reduced costly energy subsidies.
But Argentina’s lingering high deficits and stubbornly high inflation, combined with a sharp sell-off last year in emerging markets stocks and currencies that sent the peso tumbling, ignited a currency crisis that forced him to seek a $56 billion bailout from the International Monetary Fund.
Macri now heads into the Oct. 27 vote with his approval ratings at an all-time low and facing the possibility that Argentina’s economy will have been in recession for three of his four years in office.
The economic turmoil has reignited a debate over the best economic policies to cure Argentina’s recurring troubles. In May, former President Cristina Fernández de Kirchner (CFK) announced she would run as vice president rather than mount a bid for a third term.
Her former cabinet chief, Alberto Fernández, will instead take the top spot as the presidential candidate on their ticket in a race where the economy will be front and center. Early polls show Macri and Fernández locked in a close race, with several other potential candidates trailing far behind.
As the race begins to take shape, LatinFinance spoke with some of the potential candidates, their advisors and analysts to better understand their visions for the economy and how they propose to return Argentina to growth, balance the budget and carry out critical reforms.
Among the common themes from Macri’s challengers: many of them suggest Argentina should consider renegotiating its IMF agreement.
Macri’s economy minister, Nicolás Dujovne, has said that while it’s too early to consider renegotiating the IMF deal, it could be a possibility in order to reduce payments going forward. Dujovne has said he does not see think Argentina would need to restructure payments on any bonds held by private investors.
In our examination of the policies of some of the potential presidential candidates, we will not include Macri since his policies are already in place. Dante Sica, Macri’s minister of production and labor, says in a second term Macri will focus on rekindling economic growth, balancing the budget and trimming state spending.
No matter who wins the election, reviving Argentina’s economy won’t be easy. The current economic challenges are significant. Public spending is at 45% of GDP, far more than the country’s 30% historical average, and total taxation is pushing 40% of GDP, says Manuel Solanet, a director of Libertad y Progreso, a think-tank in Buenos Aires.
The tax burden is restricting corporate competitiveness and public debt has nearly doubled under Macri to around $277 billion, particularly after last year’s IMF agreement which the fund characterized as the biggest loan in the IMF’s history.
“The next government will face high spending as well as an increased debt load,” warns Solanet. To break down economic obstacles and lay the path for growth, Argentina’s next president “will need sledgehammers.”
In his first published comments after the announcement of his candidacy, Fernández said one of his priorities is to avert a debt default. “We have never thought about stopping paying the debt,” he said.
However, Fernández has suggested he could explore a debt renegotiation. In an interview with Ámbito Financiero, Fernández said that to keep on top of payments, he may have to renegotiate the debt to buy time to rebuild the economy “to be able to pay.” The creditors “want to get paid, and we want to pay them. So surely we’ll find a point of agreement,” he said.
Any debt renegotiation with bondholders could possibly include an extension of the payment terms for the credit line with the IMF, but not a request for additional credit, which Fernández warned would “aggravate the problem.”
Fernández said he would not reinstate the capital controls used by CFK during her presidency in an attempt to stabilize the peso. While the move halted dollar flight at the time, Fernández said it also stopped dollar inflows. To avert a default, “Argentina has to restart the productive apparatus,” he said. Fernández said any changes in tax policies would have to wait until the economy is back on track.
The first priority, he said, is to avoid default, then rein in inflation and tackle the fiscal deficit. “Let’s hope that we can reactivate the economy and increase tax collections,” he said in the interview with Ámbito Financiero. “But it’s not magic. It’s going to take time.”
CFK’s decision to run as vice president in this year’s election upended the jockeying among potential presidential candidates in the Peronist party.
Fernández, 60, was cabinet chief under CFK’s husband, late President Néstor Kirchner, who held office from 2003 to 2007. Fernández then held the same role over several months under CFK, who succeeded her husband, but he eventually quit after several disagreements. Fernández went on to work as a consultant for her opponents, including Sergio Massa.
CFK and Fernández have since put their differences aside. While CFK, 66, is a fiery populist, Fernández is widely seen as a moderate. Indeed, other moderate Peronists—Massa, Juan Manuel Urtubey and Roberto Lavagna—have been campaigning on more middle-of-the-road platforms.
Lavagna helped steer Argentina out of its 2001-2002 economic crisis, and now he’s making his second bid for the presidency.
A trained economist, Lavagna, 77, has offered few specifics about his economic plan,, but some clues can be drawn from his “Consensus 2019,” a political vision whose broad outlines he has made public and now is the name of his party.
Lavagna has emphasized the need to balance the budget and trade accounts “through growth,” a sign that he won’t focus on taking on more debt, but on supporting ways to stimulate production and exports.
In a June radio interview, he added that effort would also include spurring domestic demand. “There isn’t going to be a recovery, if we don’t rebuild consumer spending power,” suggesting that he favors immediate policies to cut inflation and increase salaries.
A renegotiation of the IMF deal is likely under a Lavagna administration. He has cited Portugal as a good example of a country which has managed its relationship with the IMF. In response to the country’s economic crisis, Portugal defied critics and pushed back against calls for austerity as the answer to its economic troubles. Instead, Portuguese authorities reversed cuts to wages, pensions and social security and offered incentives to businesses.
Lavagna believes labor and pension reforms being sought by Macri should be shelved for now to avoid aggravating social tensions. The focus will be on growth as “the only way out” of the crisis, he said in the interview.
Lavagna’s supporters include a mix of traditional Peronists—his party, moderates and socialists—a sign of how he is trying to piece together a “national unity” centrist government to work to end the country’s chronic boom-to-bust cycles.
Lavagna has vowed to be president for only one term, and the challenge for his administration will be to rally the country behind his economic vision.
“The only thing that the government can do is to show the way,” he said in a speech at the Fundación Mediterránea, a think tank. “If society doesn’t understand and doesn’t have confidence, the best economic policy won’t produce results.”
When Lavagna was economy minister from 2002 to 2005, he not only put Argentina’s economy back on track but negotiated a 75% haircut by restructuring much of the $100 billion debt the country defaulted on in 2001. The deal saved the country billions of dollars, although critical errors meant it wasn’t fully completed until 2016.
Nevertheless, Lavagna, who first ran for president in 2007, is remembered for rescuing the economy.
On the campaign trail, Massa is emphasizing the lack of credit in Argentina as a key issue holding back economic growth.
Argentina needs to expand access to credit, deepen the country’s local capital market and reduce taxes so more companies can invest, create jobs and increase exports, he says.
To help achieve those goals, he proposes a five-year, fixed-rate loan in pesos from the central bank to companies to increase output, instead of issuing more debt to reduce peso liquidity.
Massa has also stressed the need for tax reform to reduce the pressure on small businesses so they can grow. This could include scrapping some direct and indirect taxes. In the short term, he proposes reducing the 21% sales tax on basic goods to revive consumer spending.
Aldo Pignanelli, a former central bank president who is advising Massa, said the lost revenue would be offset by “increased sales” and a hike in the wealth tax.
Massa also plans to strike price and salary agreements with companies and unions to contain inflation. “This doesn’t mean price freezes,” but a joint effort to stabilize inflation, Pignanelli said.
But the big focus for restoring growth and paying down the national debt is to promote production-led growth and exports, helped by a competitive exchange rate with a managed float, Massa has said.
“The road ahead is to export, not to ask all the time for borrowed money,” Massa said. “We can no longer live asking to borrow money. We have to live with what we can produce to sell to the world,” in particular value-added products, not just commodities. “We prefer to export pork over soybeans,” added Pignanell.
Massa, 46, says the agreement with the IMF must be reworked so it isn’t “a noose” for the next government. He suggested extending the payment terms and easing the conditions, including those pertaining to monetary policy, so that the country can generate the dollars to pay—not borrow more money to keep current with debt. This, he said, would only push the country into a deeper mess.
“We are going to talk through the agreement with the IMF so that Argentina can comply with its obligations without creating more poverty, the closure of small businesses and a decline in credit,” he said in a recent published interview. “The IMF loaned us money; it didn’t buy Argentina.”
It is Massa’s second presidential campaign after finishing third in the 2015 election. A lawyer, he entered politics as the executive director of the social security administration in 2002 before becoming mayor of Tigre, a town on the outskirts of Buenos Aires, in 2007.
A year later, however, he gained national attention when CFK, then president, tapped him to be her cabinet chief from 2008 to 2009. He has since severed ties with his former boss and emerged as a critic of her policies. He also criticizes Macri, blaming what he describes as the president’s errant policies for pushing the country into a deep economic crisis.
Massa has also stressed the need to bridge Argentina’s deep political and social divisions which he says have brought “failure after failure.” Instead, he wants to promote dialogue between civil society, political parties, unions and the church to reach a consensus on how to “put the country back on track” so inflation can be stamped out, poverty reined in, and confidence restored in the country’s future.
JUAN MANUEL URTUBEY
Like several other candidates, Urtubey is making tax reform a centerpiece of his economic agenda.
He insists excessive taxes stem from public overspending and inefficient tax collection practices, which combine to deter investment. Instead of improving collection, Urtubey told executives at a business conference in May that the tax agency focuses on the easiest ones to collect. He has described the method of tax collection as “hunting in the zoo.”
His tax reform would restructure taxes so companies and investors have more incentive to reinvest profits in value-added production.
Urtubey also wants to reduce social security contributions, which he says dampen job creation by doubling the cost of labor. To pay a salary of 65 pesos, for example, an employer must pay 130 pesos. By trimming the total labor cost to, say, 100 pesos, more companies would be willing to hire, helping to spur economic growth and reduce social welfare spending.
“Instead of investing so much money in social programs to help those who don’t have work, we should look at how to cut costs so that employment increases,” he told LatinFinance in an interview.
The growth, he added, will increase tax revenue, so the country can make its debt payments.
Even so, he said the next government will face a huge debt liability, and this will require a renegotiation of the IMF agreement to reduce the immediate burden.
“We will have to talk with the IMF and find how to comply with our obligations,” he said during the interview. “But the spirit is to comply.”
Urtubey, 49, is perhaps the most orthodox Peronist in the race. A lawyer, he’s been climbing in politics since 1997, when he won a spot as a provincial legislator and then went on to become the governor of Salta, a northwestern province. Now in his third term as governor, he has collaborated with the Macri government.
In his assessment of the economy, he also talked about the need for the country to lay out a long-term strategy. “In Argentina, we are obsessed with addressing the consequences, never the causes,” he said.
If elected president, Urtubey said he would rebuild institutions so they could serve as a foundation for sustained growth.
The country’s frequent economic volatility “cannot be resolved by a magic economic plan, with a wave of the wand,” he said. “The consequence is the economic crisis; the cause is institutional weakness.”
He has emphasized the need for ending what he considers presidential overreach, arguing it has chronically undermined institutions in Argentina. He has proposed requiring congressional approval for the appointment of the president’s chief of staff.
With more checks and balances from strong institutions, public policies will be able to persist “independently of whoever has the responsibility of governing,” he said.
Even so, “it is going to take many years” to restore Argentines’ confidence in the country, he cautioned.