By the Editorial Board
27 November 2015

Even by the operatic standards of Argentine politics, the upset victory of Mauricio Macri, the mayor of Buenos Aires, on Sunday was a stunner that is likely to set in motion a transformational era at home and in the region. Long considered the underdog, Mr. Macri narrowly beat Daniel Scioli, the Peronist candidate endorsed by President Cristina Fernández de Kirchner. Mr. Macri’s motto, ”Let’s Change,” gained traction as Argentines soured on Mrs. Kirchner’s bumbling management of the economy and abrasive style.

Mr. Macri’s most urgent task is to untangle the web of economic controls and unsustainable subsidies established by Mrs. Kirchner and her husband, Néstor Kirchner. Mr. Kirchner governed from 2003 until 2007, when his wife was elected. The couple dug Argentina out of an economic crisis, buoyed by a commodities boom, and adopted protectionist policies popular with the working poor.

Reforming the stagnant economy will be painful in the short run, but could make Argentina more attractive to foreign investors. Inflation has been soaring in recent years and the country is running low on foreign reserves. Borrowing abroad to make reforms palatable will be tough until Argentina manages to restructure its foreign debt.

Mr. Macri needs to level with Argentines about the depth of the economic problems, which the Kirchners went to great lengths to hide, and offer a sensible path forward. Weaning Argentina from its decades-long habit of spending more than it earns will require deftness, because Peronists and other opposition parties that dominate Congress are likely to stand in the way of reforms.

On foreign policy, Mr. Macri could have an immediate and profound impact. The Kirchners aligned Argentina with the leftist flank in Latin America, supporting authoritarian leaders in Cuba and Venezuela, and cultivated strong ties with China, Russia and Iran. Mr. Macri has signaled he intends to chart a new course by expanding trade with the United States and Europe. American officials are eager for cooperation on law enforcement and energy policy and are hopeful the president can be an ally, or at least a reasonable actor, in regional diplomacy.

On Monday, Mr. Macri took a bold and principled stance against Venezuela’s despotic leader, Nicolás Maduro, vowing to seek Venezuela’s ouster from the regional trade group Mercosur if Venezuela keeps opposition politicians in prison. By taking on Mr. Maduro so forcefully in a region where leaders, by tradition, tend to air grievances privately, Mr. Macri could galvanize the political opposition in Venezuela in the leadup to the Dec. 6 parliamentary election there and embolden other leaders to isolate Mr. Maduro. That would be healthy for a region where entrenched leaders and systems of patronage have made victories like Mr. Macri’s relatively rare lately.

By Jonathan Gilbert
29 November 2015

BUENOS AIRES — Diana Sacayán was found tied up in a 13th-floor apartment in Buenos Aires in October, stabbed to death. A month earlier, Marcela Estefanía Chocobar, 26, was decapitated and her body dumped on a vacant lot in Río Gallegos, in Patagonia. Also in September, in Santa Fe, a city on Argentina’s Pampas lowlands, the corpse of Fernanda Olmos, 59, was discovered on her bedroom floor, a plastic bag pulled over her head. She had also been stabbed.

The unsolved killings of transgender women in recent weeks have jolted Argentina, prompting soul-searching in a country that has introduced some of the most liberal civil rights legislation in Latin America, but that critics say remains mired in conservative and macho attitudes toward gender identity.

”Society hasn’t changed in the slightest,” said Andrea Cantero, 29, a hairdresser who until last year was called Andrés. ”We’re people like anybody else,” she added, ”but I feel it was a message to say, ‘You’re worthless.’ ”

Ms. Cantero, who says she is regularly insulted and threatened over her gender identity, spoke at a recent march of gay and transgender Argentines. She had tied her hands and ankles with rope, painted blood stains on her skin and written on her chest, ”Liberate us from violence.”

At the march, protesters held handmade signs denouncing the murder of Ms. Sacayán, 40, one of the most prominent transgender activists in Argentina. She led a group that fights discrimination against transgender people and was a regional representative of the International Lesbian, Gay, Bisexual, Trans and Intersex Association. On the street, someone had stenciled graffiti that read, ”Basta de travesticidios,” or ”Enough transgendercide.”

In recent years, legislators have passed a series of laws to protect the rights of transgender and gay people in Argentina. Although conservative attitudes on social issues persist and the Roman Catholic Church remains influential, the government of President Cristina Fernández de Kirchner has pushed for greater equality, seeing the issue as a crucial human rights concern. In 2010, Argentina became the first country in Latin America to allow same-sex marriage.

Three years ago, legislators passed a groundbreaking gender identity law that allows people to change their gender without a psychiatric diagnosis or surgery. It also requires state health care and private insurers to provide hormone therapy and gender reassignment surgery.

In Buenos Aires Province, Argentina’s most populous, lawmakers passed a bill in September that requires public sector employers to allocate 1 percent of jobs to transgender workers.

About 6,000 people, including a 6-year-old boy, have changed their gender on official documents in the last three years, compared with a handful before the 2012 law, said Esteban Paulón, president of the Argentine Federation for Lesbian, Gay, Bisexual and Transgender People.

Government ministries have in some cases supported transgender people searching for jobs by subsidizing wages and helping arrange medical attention.

But despite these advances, many challenges remain.

The gender identity law has been carried out slowly, critics say, noting that the provision for hormone therapy and surgery was only enforced this year. And few cities have doctors trained to perform reassignment operations. Similarly, as activists like Ms. Sacayán hailed the provincial labor law, doubts were being voiced in some quarters, like trade unions, about whether it would ever be respected.

In addition, hostile and uninformed attitudes on gender equality remain commonplace, according to many transgender people. In 2011, Susana Giménez, a popular television host, offered a glimpse of these attitudes when she said on air that she would rather die than be lesbian.

Silvia Augsburger, a former congresswoman who drafted the gender identity law, said, ”We have passed hugely important laws so that the community can express itself.” But, she added, ”as a state, we still don’t have the resources to guarantee them lives free of discrimination.”

A 2014 report by the National Institute Against Discrimination, Xenophobia and Racism estimated that 40 percent of Argentines held discriminatory attitudes toward transgender people.

A survey of nearly 500 transgender Argentines by the Huésped Foundation, published last year, said that discrimination had diminished in some contexts, like in schools and medical clinics, since the 2012 gender identity law was passed. But it also highlighted the challenges that transgender people face.

More than 60 percent of the people interviewed were prostitutes, pointing to the difficulties transgender people have finding other employment. A majority had not finished high school. Transgender life expectancy is 35, according to the foundation. In the general population in 2013, according to the World Health Organization, it was 73 for men and 80 for women.

”We are still victims,” said Daniela Ruiz, the founder of Artetrans, a transgender art cooperative.

Gay and transgender Argentines are now pushing for modifications to an existing law that targets traditional forms of discrimination, like those based on religious or political beliefs. They want provisions that would explicitly criminalize discrimination against transgender people.

Some are also urging transgender people to break out from the safety of their own community, which might speed up societal acceptance. ”Because they don’t integrate much, prejudices persist,” said Cristian Reches, 39, a gay university student who was at the march. ”There’s responsibility on both sides.”

Gender equality issues were also a factor in the campaign leading up to the presidential election on Nov. 22, won by Mauricio Macri, an opposition leader.

In the final weeks of the race, Daniel Scioli — the governing party’s candidate — and his supporters, including Mrs. Kirchner, sought to scare voters away from Mr. Macri, seen as socially conservative. Mr. Macri once called homosexuality a ”disease” and, last year, defended the harassment of women. ”Deep down, all women like being catcalled,” he told a radio station. ”There can’t be anything nicer.”

But Mr. Macri, currently the mayor of Buenos Aires, said this month that he would not thwart the gender rights movement. ”We have respected minority rights,” he said of his municipal government, which has supported same-sex marriage.

Despite the murders and the complaints about enduring discrimination, there are also signs that attitudes are changing.

In Chivilcoy, a city of 64,000 that has drawn attention for efforts against gender discrimination, a municipally funded medical center for transgender people opened last year, one of several similar facilities nationwide.

The center provides services like hormone and psychological therapy, vaccinations and speech coaching for transgender people to alter the pitch of their voice.

”When we would face up to our families, we were thrown out of our homes,” said Victoria Ocampo, 40, a transgender nurse at the center. ”But that’s changing now.” She recalled two teenagers grappling with gender dysphoria who recently turned up at the center with their parents.

”I focus on the progress,” Lizy Tagliani, a transgender woman in her 40s who is a hair stylist and a local TV celebrity, said as fans huddled around her. ”I don’t worry about what’s yet to be achieved. I always try to see the glass half full.”

By Benedict Mander in Buenos Aires
November 29, 2015

When Alfonso Prat-Gay took charge of Argentina’s central bank in 2002 at the age of just 37, the economy was still reeling from a meltdown less than a year earlier that saw what was at the time the biggest sovereign debt default in history.

In almost two years at the helm of the central bank, the former JPMorgan currency strategist not only oversaw a huge drop in inflation, but he also successfully unified the peso that had splintered into an array of quasi-currencies after bankrupt regional governments had been forced to issue scrip to pay their bills.

More than a decade later, Mr Prat-Gay once again finds himself with the task of fixing an economy afflicted with soaring inflation and a chaotic currency regime — this time as finance minister, after being picked by Mauricio Macri, Argentina’s centre-right president-elect, to mastermind the economy’s revival when he takes power on December 10.

Mr Prat-Gay now faces an additional challenge: fathoming the depths of Argentina’s economic woes given that figures published by the state statistics agency have become widely discredited.
“Truth is a pillar of what we have to offer. The sooner we let the mask drop, the better off we will all be,” Mr Prat-Gay told the Financial Times, arguing that the problems must be tackled in the right order. “Sequencing is at the heart of the matter,” he says.

Describing himself as a Neo-Keynesian, Mr Prat-Gay’s first move will be to remove strict capital controls in place since 2011 and to unify the currency, which Mr Macri has promised to do on his first day in office.

That will lead to a de facto devaluation, since the official exchange rate of 9.6 pesos to the dollar will be discarded, with the new exchange rate likely to be closer to the rate of about 14.5 pesos used in certain stock market transactions.

Martín Redrado, who replaced Mr Prat-Gay as governor of the central bank, said his predecessor’s success in the early 2000s was a “great achievement”. But he pointed out that the difference now was that the central bank badly needed to rebuild its reserves which it has burnt through as it tries to prop up the peso.

Central bank reserves have fallen by half to less than $26bn since his resignation in 2010 after a spat with the government over the use of reserves for paying debt. But some economists argue that liquid reserves are close to zero.

Born into the Buenos Aires elite, Mr Prat-Gay was educated at the same secondary school as Mr Macri, who is from one of Argentina’s richest families. Speaking flawless English, he later studied at the University of Pennsylvania before spending eight years with JPMorgan in New York, London and Buenos Aires.

Although he was nominated as Euromoney magazine’s central banker of the year in 2004, Mr Prat-Gay’s term was not renewed owing to clashes with the then president, Néstor Kirchner, over the independence of the central bank. He went on to set up an asset management company in 2005, before being elected to congress in 2009.

Perhaps the greatest concern is that Mr Prat-Gay could trip up in the remorseless world of Argentine politics. He has had to fight allegations of tax evasion, which he has demonstrated to be false; and in the run-up to the elections a video of him criticising Argentines’ weakness for electing little-known “caudillos” from far-flung rural provinces was circulated on YouTube, prompting accusations of elitism.

“On a technical and intellectual level [Prat-Gay and his team] have certainly got what it takes — let’s just hope that they do from a political perspective too,” says Mr Redrado, highlighting Mr Macri’s lack of a majority in congress as a major challenge. “The honeymoon is going to be short.”

Despite concerns that a devaluation would lead to a spike in inflation, investors and analysts are optimistic that Mr Prat-Gay has the skills to manage the complex transition. After all, at the central bank he presided over a fall in inflation from 40 per cent to 5 per cent.

“Alfonso is a pragmatist, and one of the smartest people around,” says Daniel Melhem, managing partner of Knightsbridge Partners, an investment management firm in Buenos Aires. “His tenure at the central bank was at a time of great economic distress, however he immediately brought stability and grew its reserves,” he adds.

“He is one of the most brilliant economists of his generation,” says Andrés Borenstein, BTG Pactual’s chief economist in Argentina, naming a handful of other Argentine economists, including Federico Sturzenegger, who Mr Macri has earmarked to head the central bank.

By John Paul Rathbone and Benedict Mander
November 27, 2015

Mauricio Macri sounded peeved but unsurprised when he described his meeting this week with Cristina Fernández, Argentina’s outgoing president. “It wasn’t worth it,” was his curt summary of their 40-minute conversation at the presidential residence; a comment that left his interviewers from a local television news station flabbergasted.

Two days earlier, the country’s voters had chosen Mr Macri as their new president in a surprise election that promises to turn politics in Argentina, and maybe even across Latin America, on its head. The swing from left to right is striking.

Out goes Ms Fernández, a sharp-tongued populist who models herself on Eva Perón. In comes Mr Macri, a 56-year-old millionaire who says Ayn Rand’s The Fountainhead is the book he would take to a desert island, and whose campaign promise to change Argentina and reinsert it into the modern global economy contradicts almost everything Ms Fernández stands for.

She invited Mr Macri for a private discussion about the transition. There was much they could have talked about. The commodity price crash and the gloomy prospects of Argentina’s closest trade partners, Brazil and China. Or how to co-ordinate the handover on December 10. Instead, their conversation focused on the event’s ceremonial niceties .

“Was that it?” asked the dumbfounded journalist. “That was the conversation we had,” replied Mr Macri. “And that is how we left it.”

Such a lack of co-operation marks an inauspicious start for the transition, especially as Mr Macri needs all the help he can get. For starters, South America’s second-biggest economy is a shambles. Bereft of hard currency, it is isolated from international capital markets, ravaged by inflation of more than 20 per cent. It has an overvalued exchange rate, with the peso hovering on the brink of a devaluation. The promise of “change” that won Mr Macri the election will be hard to effect.

Mr Macri is the oldest child of one of Argentina’s most prominent industrial tycoons, Italian-born Franco Macri, now 85. The latter has long had a relationship with Boca Juniors, Argentina’s most popular football club; Macri junior became president of the team in 1995.

Mr Macri found a political calling at 32, after rogue police officers kidnapped him, stuffed him into a coffin and re­leased him a fortnight later after his father paid a ransom. “It’s not an experience I would recommend,” Mr Macri told the Financial Times last month.

Two decades later, investors are applauding his aim to resuscitate what a century ago was one of the world’s most prosperous economies by cutting trade tariffs and ending a decade of heavy-handed state intervention. In the past month alone, the local stock market has soared 41 per cent.

Mr Macri has made a good start, assembling a technocratic team that includes Alfonso Prat-Gay, a respected former central bank chief, as finance minister. He has made an about-face on foreign policy, saying he wants to repair relations with the US and eject socialist Venezuela from a regional trade group because of its rights abuses. Domestically, he has promised a more conciliatory approach than Ms Fernández’s confrontational style, handing out Nelson Mandela’s biography to his cabinet.

Even so, he faces formidable obstacles. As his coalition lacks a majority in Congress, Mr Macri will be as weak a leader as any president since the return of democracy more than 30 years ago. Moreover, the last time that Argentina embraced free-market economics was in the 1990s under the freewheeling presidency of Carlos Menem.

That experiment ended in 2001 with a $100bn debt default and disastrous devaluation that has scarred the Argentine psyche. Mr Macri’s aloof mien and playboy lifestyle — his second wife is a model, his third a fashion designer — will make the bitter economic medicine Argentina will probably have to swallow even more unpalatable. In a telling comment, the footballer Diego Maradona, who found early fame at Boca, described him witheringly as: a “guy [who] does everything wrong. He’s a rich kid who knows nothing . . . he never even polished his shoes.”

Still, Mr Macri is no neophyte. His 12-year leadership of Boca is now a Harvard Business School case study: under his leadership, the finances of the near-bankrupt team were revived and the club won a string of trophies.

While at Boca, Mr Macri launched his political career — first as the founder of a new political party in 2003; next, as mayor of Buenos Aires in 2007. He was re-elected as mayor in 2011.

Mr Macri has a penchant for flamboyant 1970s pop stars: Rod Stewart and Freddie Mercury are favourites. Yet his record as mayor, akin to London’s Boris Johnson but without the jokes, is res­pectable. Despite lacking a majority in the local legislature, he created a police force that enjoys public trust, invested in infrastructure and installed widely used bicycle lanes.

Yet it is Boca, Mr Macri says, that taught him most, and he compares the presidency to a groundsman: someone who ensures the grass is neatly clipped and the lines tidily painted so the teams can play by “clear rules of the game”.

There is little tidy or clear, though, about modern Argentina, and as the recession continues to bite Mr Macri’s honeymoon will be brief. As one aide commented to the FT this week: “To say we feel swamped may be the understatement of the year.”

By Benedict Mander, Elaine Moore and Miles Johnson
November 26, 2015

Market gains must be franked by new ‘pro-investment’ government

After massive gains in Argentine stocks and bonds over the past two years, investors are beginning to wonder just how much longer the rally can continue as a new government takes power.

Storied hedge fund investors from George Soros to Dan Loeb have been piling into Argentine assets, speculating that better times await Latin America’s third-largest economy once its fiery nationalist leader, Cristina Fernández, quits power.

At last that moment has arrived. Better still, the market’s preferred candidate, the centre-right Mauricio Macri, clinched victory in presidential elections on Sunday. He promises to put an end to more than a decade of protectionism and state intervention, ushering in a new era of pro-investment policies.

“Argentina has an unparalleled opportunity,” says Emily Fletcher, co-manager of BlackRock’s Frontiers Investment Trust, who argues that Mr Macri’s proposed reforms could finally allow Argentina to realise its true economic potential.

“While we wouldn’t be surprised to see some profit-taking in the short term, the long-term outlook for Argentina is brighter than it has been for some time,” she adds, pointing out that the MSCI Argentina Index rose by 45 per cent in October alone.

Indeed, the tiny and volatile Buenos Aires stock exchange — whose market capitalisation is similar to a large US company — has fallen since Mr Macri’s victory, although Argentina’s heavily-traded bonds have registered slight gains.

Prices for the bonds that were issued by Argentina following its 2001 default have nudged upwards this week, with the yield on debt due to be repaid in 2033 falling eight basis points to 6.96 per cent since the start of the week. That comes after prices for the bond have more than doubled in the last two years to 114.5 cents on the dollar, up from just 51.5 cents in mid 2013.

Alejo Costa, head strategist at Puente, an investment bank in Buenos Aires, thinks that bond yields could continue to fall over the next few weeks as investors react positively to initial announcements by Mr Macri.

“But eventually we will need to see concrete results for the rally to continue,” says Mr Costa. “Soon investors are going to have to start to face up to reality,” he added, pointing to serious challenges facing the next administration.

Argentine stocks and bonds

First, Mr Macri will inherit a toxic economic legacy from Ms Fernández that will require immediate action. Faced with an acute shortage of foreign exchange reserves, Mr Macri has promised to remove strict capital controls on his first day in office.

He has also pledged to move swiftly to unify Argentina’s overvalued official exchange rate, which will effectively mean devaluing the currency. That, in turn, could spur the inflation rate, which is already one of the highest in the world thanks to the wholesale monetisation of a widening fiscal deficit.

Nevertheless, Mr Costa argues that the next government’s biggest problems are in fact political. Lacking the majority in congress that is needed to pass legislation, he warns that Mr Macri could run into grave governability issues.

“The economic problems are extremely serious and urgent. But even if you have the skills to solve them, that’s no use without political willingness,” he said, arguing that most of the major reforms planned by Mr Macri require congressional approval.

One of the most important is the resolution of a long-running legal dispute with a group of so-called “holdout” US hedge funds that has blocked Argentina’s access to international capital markets since its 2001 sovereign debt default.

Although credit rating agency Moody’s raised Argentina’s credit outlook to positive on the back of expectations that the new administration would seek to put an end to the saga, uncertainty about the success of this plan prevented an outright credit upgrade.

Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, points to factors beyond Argentina’s control that are also playing against Mr Macri chances of success. He lists the rapid slowdown of China’s economy, the crash in commodity prices, and the imminent start of the US Federal Reserve’s monetary tightening cycle.

“Macri couldn’t be assuming the presidency at a worse time from an emerging market sentiment standpoint,” says Mr Spiro. “This makes the implementation of economic reform in Argentina all the more difficult — but also all the more urgent.”

Such concerns explain why Jan Dehn, head of research at Ashmore, worries that Mr Macri could end up like other well-intentioned reformist presidents in the region unable to overcome tough circumstances. “The risk is clearly that Macri becomes to Argentina what [Vicente] Fox was to Mexico: an ineffective breath of fresh air,” he says.

By Daniel Lansberg-Rodriguez
November 25, 2015

His victory shows change is possible through the ballot box, writes Daniel Lansberg-Rodriguez

This is how socialism ends, not with a bang but with a squeaker. Despite a commanding lead during the run-up to Sunday’s presidential run-off election, in the end conservative challenger Mauricio Macri’s victory came down to only 200,000 votes in a nation of more than 40m. The defeat of Cristina Fernández’s political machine has prompted euphoria in much of Buenos Aires. Once it dies down, the president-elect will have his work cut out.

In democratic Argentina, non-Peronist presidents are the rarest of birds; none has finished a term in office. Mr Macri does not command a majority of Senate seats (although he can block hostile legislation). He has relatively little support among Argentina’s powerful provincial governors.

Meanwhile, much like Juan Domingo Perón, whose style shifted from militant nationalism to populist socialism, Peronism is amorphous, more patronage than ideology. It will recover.

Mr Macri may need time to transform the economic wasteland he inherits from predecessors who were happy to default on their country’s debt and shield inefficient industries from competition. But the effects of his victory may be sooner felt outside Argentina.

As the socialist tide in Latin America has receded, dragged back by the death or retirement of its charismatic leaders and the turning of the commodity cycle, it has left many a bloated government high and dry — in Brazil, Venezuela and Chile as well as Argentina. Still, Kirchnerism is the first to expire.

200,000 Macri’s victory came down to this number of votes

As the largest Hispanic country in South America, Argentina casts a sizeable shadow, and Mr Macri has promised to re-engage with the US and strengthen ties with the EU. Just as the rise of Hugo Chávez in Venezuela helped bring populist movements to power across the continent, Argentina’s choice of a market-friendly pragmatism may galvanise opposition movements elsewhere.

In Venezuela’s legislative elections next month, Mr Macri’s victory has shown a nervous electorate that real change is possible through the ballot box. There is even a remote chance it might strengthen the resolve of Brazilians seeking to impeach Dilma Rousseff, or persuade Bolivians that there can be workable alternatives, ahead of February’s referendum on scrapping term limits for Evo Morales.

Beyond what he represents, the importance of Mr Macri lies in what he can do. The past two decades has seen the proliferation of supranational organisations in South America, which has weakened US influence over the sovereign affairs of their members. This, though, has led to an erosion of values. A code of silence has prevailed as like-minded nations refused to call out one another on the chipping away of democratic protections, free media and human rights.

Nowhere is this as visible as in Venezuela, now governed by Nicolás Maduro, a gaffe-prone Pierrot who succeeded Mr Chávez and displays a penchant for collecting political prisoners. Mr Maduro is the most visible symptom of the region’s troubling slide towards authoritarianism.

Mr Macri invited Lilian Tintori, the wife of jailed Venezuelan opposition leader Leopoldo López, as guest at his victory speech. He has promised to invoke a “democracy clause” and suspend Venezuela from the Mercosur trade bloc during a summit in Paraguay, days after he takes office.

There might be costs: all but one of Mercosur’s other voting members are allied with Mr Maduro, and Brazil has already made its opposition to the suspension clear. Standing up to Mr Maduro would be worth it. It is the one campaign promise that Mr Macri can deliver unilaterally. Moreover, it would signal to the US and the EU that Mr Macri is the future and that the future is bright.

The writer teaches Latin American business at the Kellogg School of Management

By Benedict Mander in Buenos Aires and John-Paul Rathbone in London
November 25, 2015

It is a measure of the challenges facing Mauricio Macri as Argentina’s president-elect that on the eve of his electoral victory, as champagne cooled in the fridge and most Argentine minds were elsewhere, the central bank issued a stealthy decree enabling it to raid bank deposits.

In a bid to bolster precariously low foreign reserves, the institution ordered Argentine banks to sell half their dollar assets at an unfavourable exchange rate. For Mr Macri’s camp it was jut another reason why central bank chief Alejandro Vanoli has to go.

“The central bank is our most urgent problem,” said Federico Pinedo, a leading congressman for Mr Macri’s Pro party, who has filed a legal complaint against Mr Vanoli that led to a police raid on the bank last week.

In addition, though, the move went to the heart of the most pressing problems Mr Macri faces when he assumes the presidency on December 10: what to do about Argentina’s overvalued exchange rate and how to best dismantle capital controls.

Few issues are more divisive in a country where people look to the dollar as a store of value and where the outgoing government of Cristina Fernández has used every trick in the book to prop up the Argentine peso in order to suggest all is well.

“If you look at the numbers, which do not lie, they clearly show that when it comes to the economy, the government of Cristina Fernández did little good,” said Luis Secco, an Argentine economist.

Leaving aside Mr Vanoli’s legal problems, the broader fix that Argentina’s central bank is in is plain to see — especially as Mr Macri has pledged to dismantle its system of currency controls on “day one” of his presidency in a bid to restore market confidence.

The official exchange rate is 9.6 pesos to the dollar, but in the black market it trades at about 15. To support the official rate, the central bank therefore needs to sell dollars for pesos. However, it lacks sufficient dollars to do so indefinitely.

“The appreciated peso and exchange rate controls are choking economic growth,” Pilar Tavella and Sebastian Vargas, analysts at Barclays, said in a note to clients.

CHART: Argentine peso against the dollar

The logical alternative is to devalue — especially as the currency of Brazil, Argentina’s biggest trade partner, has fallen 45 per cent against the dollar over the past year, while the peso has dropped just 14 per cent.

The peso’s devaluation “is one of the most anticipated in Argentina’s history”, said Mr Secco, who argued that current exchange rate policy is unsustainable given hard currency reserves at an almost 10-year low.

According to the central bank, reserves are less than $26bn. But Nicolás Dujovne, an economist, said liquid reserves are just $2.7bn. Moreover, these are falling “dangerously” fast, dropping more than $1bn in November.

CHART: Argentine currency reserves fall

This is the backdrop to two recent central bank moves.

One is the November 21 order that commercial banks must sell half their dollar holdings at the official rate. Mr Dujovne estimated the move, which recalls the government’s 2008 nationalisation of pension funds, could add $1.2bn to reserves.

The other has been the central bank’s attempt before the election to prop up the official exchange rate by selling about $17bn of future dollar contracts.

The scheme, under which investors can buy dollars six months ahead for about 11 pesos to the buck, essentially guarantees healthy profits if there is a devaluation before then. That has produced almost “unlimited demand” from investors, said Mr Pinedo.

As a way of propping up the peso, though, this also virtually guarantees large losses for the central bank. Hence the legal complaint lodged against Mr Vanoli, who has been charged with damaging the national patrimony by selling futures at an artificially low rate.

At his first press conference as president-elect, Mr Macri asked Mr Vanoli, who has headed the central bank since October 2014, to resign.

Mr Vanoli has refused to step down before his term officially ends in 2019, saying: “You don’t appoint someone because they want a central bank that’s at the service of a devaluation.”

The central bank’s complications go further still. Lacking reserves, economists say it will be difficult for the incoming government to remove capital controls and avoid the exchange rate “overshooting” to a much weaker level. That, in turn, would fuel inflation already running at more than 20 per cent.

In addition, Argentina’s racing inflation is due to a collapse in the independence of the central bank, which has been forced to print money to finance a fiscal deficit estimated at 7 per cent of gross domestic product.

Although Mr Macri insists he wants to remove capital controls and unify the exchange rate, there is disagreement within his camp as to how fast the economy should be opened after more than a decade of isolation from international markets.

That, plus the political fallout of a sudden move and the possibility of other financial time bombs lurking in the vaults, explains Mr Macri’s call for “patience” on Monday when asked about his precise economic plans. “We really don’t have good information. We still don’t know [the exact situation we are inheriting],” he said.

By Raymond Colitt, Anna Edgerton and Charlie Devereux
November 30, 2015

* Macri beat Argentina’s ruling party candidate in Nov. 22 Vote
* President-elect pledges market friendly policies, freer trade

President-elect Mauricio Macri is pledging to turn Argentina’s economic and foreign policy on its head, introducing market-friendly and free-trade measures — a nail in the coffin of the economic populism that has dominated much of South America for a decade.

Macri, a 56-year-old wealthy businessman, has said he will abandon currency controls, cut subsidies, embrace closer ties with open economies of the Pacific Alliance, and seek to oust socialist Venezuela from the regional trade block Mercosur, just about three years after it won entry.

Leftist leaders throughout the region are losing support as money for their generous social programs is running out with the end of the commodity boom, said Riordan Roett, director of Latin American Studies at Johns Hopkins University’s School of Advanced International Studies in Washington. Venezuela’s Hugo Chavez and Brazil’s Luiz Inacio Lula da Silva no longer bestride the continent, propounding a new form of socialism for the 21st century and baiting the U.S.

“The populist left is marching out the door,” said Roett by phone. “They all rode on this commodity boom beginning in the early 2000s, misspent it, didn’t invest it. Now there’s no money.”

Argentina will post its biggest fiscal deficit in about three decades this year, while Brazil’s widens to a record. Venezuela doesn’t even report its fiscal balance any longer as its economy slips into chaos.

Good News

The shift to more orthodox policies is good news for business, said Michael Shifter, head of the Inter-American Dialogue in Washington.

Macri spoke by phone with President Barack Obama Wednesday to discuss trade and the energy sector, while agreeing to strengthen investment links with the U.K. in a separate call with Prime Minister David Cameron. Current President Cristina Fernandez de Kirchner had poor relations with the U.S. and worse still with the U.K.

Macri has also said he will push the Mercosur to move along in trade talks with the European Union.
In Brazil, the shift in policy means the government is turning to private and foreign investors to help finance infrastructure projects. In an effort to help shore up public accounts the government last week sold the rights to operate 29 hydro-power plants, raising 17 billion reais ($4.4 billion) from bidders including China’s Three Gorges Corp.

Even Bolivia’s Evo Morales, who seized foreign-owned gas fields in 2006 and maintained his anti-capitalist rhetoric after winning a third term last year, has shown signs of embracing private capital. In October he was courting investors in New York to lure hydrocarbons and mining investment.

Tread Carefully

Still, don’t expect a return to the kind of economic liberalism the region adopted during the so-called Washington Consensus in the 1980s and 1990s, when import tariffs were slashed, state assets sold off and industries deregulated, said Shifter.

“The new leaders coming in, like Macri, politically can’t afford to go back to the pure market formulas of a couple of decades ago and reject the social policy advances that have been made,” said Shifter.

“They’re going to have to accept them because people expect them to continue — if not there could be a backlash.”

Faced with the fiscal shortfall, Brazil’s President Dilma Rousseff is unwinding tax breaks, cutting spending and lifting price caps on fuel and energy as the budget deficit balloons. In response, her disapproval rating has surged to the highest of any Brazilian head of state.

The only large economy in South America bucking the trend is Venezuela, where President Nicholas Maduro is clinging to a myriad of stop-gap economic policies including multiple exchange rates and price controls to buffer the impact of the plummeting price of oil, its main export item. Yet even here change may be on the horizon. Polls show the opposition is set to obtain a majority in December congressional elections for the first time in 16 years as shortages spread to everything from toilet paper to medicine.

Mercosur Debate

Macri’s first point of conflict may be his pledge to oust Venezuela from Mercosur. Diosdado Cabello, president of Venezuela’s National Assembly, has already referred to Macri’s election as an “historic mistake” and warned him against meddling in the South American nation.

Macri will also seek closer ties with the more open economies of the Pacific Alliance –Mexico, Chile, Colombia and Peru — which have avoided recession following the slump in commodity prices. That more open attitude will certainly include closer ties to the U.S.

“There is a sense that there are changes afoot in the region, that the old kind of ’blame the U.S., run into the arms of Beijing and hope for eternally high commodity markets’ doesn’t cut it anymore,” said Eric Farnsworth, Vice-President of the Council of the Americas.

By Charlie Devereux
November 28, 2015

* Soybean export tariff to be lowered from 35 percent on Dec. 10
* Tax on corn, wheat, beef and sunflowers completely eliminated

Argentina will reduce its tariff on soybean exports by five percentage points, to 30 percent, when President-elect Mauricio Macri takes office, Clarin reported, citing designated Agriculture Minister Ricardo Buryaile.

The new government also will fulfill electoral pledges to remove tariffs on wheat, corn, beef and sunflowers from Dec. 10, Buryaile said, according to Clarin. The soybean tariff will be cut by five percentage points a year until its elimination in seven years, Clarin said.

Argentina, the world’s third-largest soybean producer, is forecast to export 10.75 million tons of soybeans in its 2015-16 marketing year, according to the U.S. Department of Agriculture.

By Ye Xie and Katia Porzecanski
November 25, 2015

* Macri reiterates pledge to lift nation’s currency controls
* Official and black-market rates are currently 58% apart

If there’s one point Argentine President-Elect Mauricio Macri has been crystal clear about, it’s that he hates all the rules and restrictions throttling the country’s currency market. On Tuesday, two days after defeating the pro-government candidate, Macri reiterated his pledge to do away with the foreign-exchange controls immediately upon taking office next month.

It’s an audacious plan, one that has the potential to jump-start his efforts to lure much-needed investment to the country but also one that comes with great risk. With the official and black-market exchange rates currently 58 percent apart, lifting the controls will almost certainly trigger a plunge in the value of the peso. That could cause a surge in consumer prices in a country where inflation is already running above 20 percent, deepen the economic slowdown and spark a public and political backlash against the new government.

The plan is so fraught with risk and so logistically difficult that many outside observers insist that he won’t really try to pull it off so quickly. They chalk it up to campaign rhetoric. But Macri isn’t toning down his language as president-elect. When asked Tuesday how fast he’d move, he replied Dec. 11, one day after he’s sworn in.

“History is littered with the corpses of countries that have abandoned capital controls precipitously,” said Barry Eichengreen, an economics professor at the University of California at Berkeley and former senior policy adviser to the International Monetary Fund during the 1997-1998 Asian financial crisis.

Should Macri, two-term mayor of Buenos Aires and wealthy businessman, follow through on the rhetoric, the $540 billion economy could suffer a big blow. “There will be a single exchange rate,” Macri said Tuesday. “The controls don’t make sense any more since there aren’t even any dollars left to defend in the central bank.”

Assuming he devalues the peso by 39 percent to 15.8 percent in three months to align the exchange rate with black-market prices and removes utility subsidies, the central bank will have to raise interest rates to 40 percent by September to control inflation, according to Oxford Economics, a U.K. research firm. Under such a “shock therapy,” the economy will shrink by about 3 percent annually in the next two years before picking up in 2018, economist Luiz Kessler wrote.

Venezuela, a neighbor and long-time ally, has been there before. In 1989, newly-elected President Carlos Andres Perez abruptly lifted foreign-exchange controls and let the currency plunge after finding that the central bank was running out of foreign reserves. Consumer prices soared 21 percent in one month alone, leading to the “Caracazo” riots that killed hundreds and spurred Hugo Chavez, then an Army officer, to accelerate plans to stage a coup attempt that launched his political career.

Instead of shock and awe, Macri should adopt a gradual transition to a free-floating exchange rate, said Paulo Vieira da Cunha, a former Brazilian deputy central bank governor. That would give the government time to pass measures that will soak up extra pesos, implement a credible fiscal plan and draw in cash from abroad, he said.

“There is a difference between doing something gradual with credibility and doing something haphazardly into a void,” said Cunha, now chief economist at Los Angeles-based money manager Ice Canyon.

No one is saying Macri shouldn’t start implementing changes quickly. After 14 years of rule under the Kirchners, the economy is reeling from the lowest foreign reserves in nine years at $25.8 billion, the biggest budget deficit in three decades and a regulated currency that’s failed to depreciate in line with inflation. In the last four years, the peso has fallen just 55 percent, compared with annual price increases of more than 20 percent since 2011.

Excluding items such as dollars held for commercial lenders and a $10 billion currency swap with the People’s Bank of China, the country has just $2 billion in readily-available reserves, according to Barclays Plc. Rigid currency controls are one of few measures that keep the country afloat amid relentless capital flight.

But for Macri, the margin for error is thin. As 49 percent of voters went for his opponent the ruling party candidate Daniel Scioli, unpopular measures of large devaluation, coupled with spending cuts and tax increases, would only alienate Argentines and erode his political support.

Mario Blejer, the nation’s former central bank president who devalued the peso in 2002, said capital controls should only be phased out and lifted sector by sector, starting with importers. To mitigate the impact, Macri will have to increase interest rates on central bank notes and spur demand for pesos, said Blejer, who boosted those yields to 140 percent 14 years ago.

“We used to think about it as an equation in which the greed for higher interest rates will trump the panic of holding pesos,” Blejer, who was most recently advising Scioli, said from Buenos Aires. “They’ll see that it’s difficult. You can’t just change everything from one day to the next.”

Another doubt for investors is the ease with which Macri can implement these changes without the support of the central bank. Alejandro Vanoli, who was appointed by Cristina Fernandez de Kirchner to govern the bank and deemed unqualified for the job by Macri, has vowed to carry out the rest of his term through 2019. He’s being investigated for illegal operations in the dollar futures market. While Vanoli has said the fraud allegations are politically motivated, they may pressure him to step down, according to Barclays strategist Sebastian Vargas.

Ultimately, Macri’s narrow victory over Scioli may be the loudest call for a gradual approach, said Vargas.

“What I’m seeing is that they’re becoming aware of the magnitude of the adjustments, maybe because of how close this race was, and that’s going to impact how aggressive they are,” he said in an e-mail.

By Charlie Devereux
November 25, 2015

* New ruling party official cites Prat-Gay as finance minister
* Prat-Gay served as central bank president from 2002-2004

A former JPMorgan Chase & Co executive, Alfonso Prat-Gay, will become finance minister in Argentina’s new government, said the head of a think-tank linked to the party of the incoming president. Prat-Gay confirmed he would be a member of the cabinet, while declining to say which ministry he would take over.

“We already know who the minister is – it’s Alfonso Prat-Gay,” Francisco Cabrera said in an interview on Radio Latina Wednesday. Marcos Peña, Cabinet Chief for President-elect Mauricio Macri, said he will announce the full cabinet at 5 p.m.

Macri has pledged to open up the country’s economy following a dozen years of trade protectionism and state intervention. He has also said he plans to reduce the power of the current economy ministry to diversify decision-making, with the finance minister playing a key role in a newly-formed economic cabinet comprised of six ministries. Prat-Gay said Wednesday that Macri’s government plans to present a package of new laws to Congress in its first week.

Asked to define exactly when Argentines will be able to step into an exchange house and buy dollars following four years of currency controls, Prat-Gay said it would be a priority.

“The president-elect has said he wants them to be lifted as soon as possible and we’re working toward that,” he said.

Cabrera said Federico Sturzenegger, a lawmaker from Macri’s Pro party who was also president of Banco Ciudad, the bank owned by the Buenos Aires city government, would become president of the central bank. Cabrera told the radio that he would become production minister.

Tough Challenge

The new finance minister will inherit a challenging economic scenario: reserves are at a nine-year low, the budget has the widest deficit in 30 years and the peso is at its most overvalued against the Brazilian real since the establishment of the Mercosur trade bloc in 1991. One of his first tasks would be to find a resolution to a decade-long legal battle with disgruntled creditors from the 2001 default that’s blocking Argentina from international capital markets.

“They’re building a great team with solid technical grasp, it’s way superior to what we’ve had previously,” said Fernando Jasnis, a money manager at Explorador Capital Management. “It’s a good signal, this team is going to promote trust. They’re people with a great track record and reputation in the market.”

As central bank president from 2002 to 2004, Prat-Gay halted a surge in inflation following the debt default and currency devaluation and helped spark a recovery from Argentina’s worst recession on record. He cut the inflation rate to 5.3 percent in 2004 from 40 percent at the start of his term in December 2002.

Despite winning the Euromoney magazine central bank governor of the year award in 2004, former President Nestor Kirchner chose not to renew his mandate as Prat-Gay pushed for more autonomy for the central bank.

Prior to his appointment as president of the central bank, Prat-Gay was the head of emerging market research at JPMorgan Chase. After leaving the central bank, he founded Tilton Capital, an asset management company. He entered politics in 2009 when he was elected as a lawmaker for the opposition’s Civic Coalition led by Elisa Carrio.

By James Gibney
November 25, 2015

Sunday’s election of Mauricio Macri as president promises a fresh start not only for Argentina, but also for its ties with the U.S., which have been mostly chilly since Argentina’s massive default in 2001.

Yet that will only happen if the U.S. revisits and learns from its own role in precipitating this diplomatic deep freeze. When President George W. Bush came into office, he threw away a budding, multi-faceted relationship to make Argentina a misguided object lesson in fiscal probity. If the U.S. truly wants Latin America’s “pink tide” of populist socialism to recede, and to rejuvenate its own regional diplomatic mojo, it needs not only to engage more deeply with the continent but also to take a more strategic approach to advancing its interests.

For decades, U.S.-Argentine relations have been marked, as one historian put it, by “repeated misunderstandings, extended periods of tension, and missed opportunities for cooperation and friendship.” They took a turn for the better with the 1989 election of President Carlos Menem. Partly this was driven by Menem’s conclusion that the only way to end Argentina’s recurrent economic travails was to break with the statist policies of the past — a decision that cheered U.S. policy-makers.

But according to Domingo Cavallo, who served both as Menem’s foreign and economic minister, Argentina also saw the Cold War’s end and President George H.W. Bush’s effort to create a New World Order as a chance to lock in economic and political benefits by aligning Argentina more closely with the U.S.

Over the next decade, a series of remarkable policy shifts followed. Argentina set aside its nuclear rivalry with Brazil and ratified the Nuclear Non-Proliferation Treaty. It sent ships to participate in the Gulf War. It cancelled a controversial program, funded by Egypt and Iraq, to develop a medium-range missile. Menem became Latin America’s “most vociferous critic” of Cuba’s human rights record.

Argentina also dramatically stepped up its participation in United Nations peacekeeping, and in 1997 the administration of President Bill Clinton designated the country a major non-NATO ally. At least figuratively, Argentina had achieved the “carnal relations” that Menem’s Foreign Minister Guido di Tella famously declared he sought with the U.S.

Then came the break-up.

Despite achieving brisk economic growth in the 1990s, Argentina’s government also continued to borrow heavily, and the decision to peg its currency to the dollar made the country vulnerable to external shocks. When the 1997 Asian crisis hit, falling demand for Argentine exports shrank its foreign reserves, making debts harder to cover. Meanwhile, the dollar’s appreciation rendered Argentina’s exports less competitive.

The U.S. at first tried to help. After crashes in Asia and Russia, the Clinton administration worried about a knock-on crisis in its good friend and star neoliberal pupil. So in 2000 it backed a $20 billion support package from the International Monetary Fund. Even with that in place, however, Argentina’s economic troubles mounted.

Unfortunately for Argentina, the incoming administration of George W. Bush was less sympathetic — skeptical about the wisdom of “bailouts,” and suspicious of the growing influence of multilateral organizations.

Treasury Secretary Paul O’Neill told Congress that the IMF “had been too often associated with failure”; in his earlier years as an academic, Treasury Undersecretary for International Affairs John Taylor had called for its abolition. (I leave it to Sophocles and psychologists to explain the glee with which the younger Bush undermined every multilateral pillar of the New World Order laid out by his father.)

In the summer of 2001, the administration signaled it was reluctant to support more IMF help for Argentina. As O’Neill put it, “Argentines have been off and on in trouble for 70 years or more. They don’t have any export industry to speak of at all. And they like it that way. Nobody forced them to be what they are.” The U.S. punted, and the IMF decided in November 2001 to pull the plug on further financial support. In December, Argentina defaulted on $132 billion in debt.

In the year that followed, the economy shrank by 11 percent, savings evaporated and more than 50 percent of Argentines were plunged into poverty. A revolving door of caretaker regimes led to elections in 2003 that brought to power Nestor Kirchner, who regularly lambasted the U.S. and IMF for beggaring his country.

Of course, blame for the conditions that led Argentina to collapse rests primarily with the Argentines. But the U.S. decision to let Argentina fall was neither necessary nor consistent. Even as the U.S. railed against the IMF and bailouts, it backed assistance to Turkey, Brazil, and Uruguay. And consider some of the costs. In Argentina, public opinion toward the U.S. turned sharply negative; there, as in the rest of Latin America, the U.S. reinforced its reputation as a fickle ally by abandoning a more-than-willing partner.

Worse, that partner then became a pain in the pampas. Kirchner not only repudiated neoliberalism and the so-called Washington Consensus; he and then his wife Cristina Fernandez unhitched Argentina from U.S. goals.

Kirchner cozied up to Cuba, and he and his wife went on to sign more agreements with Hugo Chavez’s Venezuela than with any other country, including inviting it into the Mercosur trade bloc. Kirchner opposed the invasion of Iraq and bucked the U.S. at the UN and the Organization of American States. As the host of the 2005 Summit of the Americas, he helped organize a counter-summit to attack the U.S. and its plans for a Free Trade Area of the Americas.

After taking office, his wife continued the sniping and skirmishing — trumped-up incidents like withdrawing from U.S. police training programs that Argentina said promoted oppression, or confiscating equipment to be used for joint security exercises. More seriously, her administration reportedly conducted secret negotiations with Iranian officials offering, in return for Iranian oil, to deflect charges that they organized the 1994 bombing of a Jewish community center in Buenos Aires. And Fernandez has opened the door to growing Chinese influence with a string of financial deals, motivated both by the country’s post-default needs for cash and her belief in the advantages of a multi-polar world.

The election of Macri promises better diplomatic days ahead: He plans to shift Argentina’s foreign relations away from China, Iran, Russia and Venezuela toward the U.S. and Europe.

But given the sharpening global competition for influence (not least with China), the U.S. had better reciprocate. Macri will need American support to finally regain access to the international credit markets. That’s a subject of heated dispute, with lobbying groups (bankrolled by hedge funds who bought up Argentina’s defaulted bonds) pushing the U.S. to take a hard line. President Barack Obama shouldn’t put that narrow interest ahead of rebuilding its partnership with Argentina and its broader influence in the hemisphere.

28 November 2015

BUENOS AIRES, Nov 28 (Reuters) – Argentina’s incoming government will abolish export taxes on corn and wheat the day after it assumes office and reduce the export tax on soy by 5 percent, designated Agriculture Minister Ricardo Buryaile confirmed to the daily Clarin.

President-elect Mauricio Macri won the election last Sunday on a platform of wholesale change. He has vowed to end interventionist measures like these taxes that have hobbled growth in Latin America’s third largest economy.

“The wheat and corn taxes will be eliminated from the first day, in line with what we promised,” Buryaile was cited as saying by Clarin.

“The tax on soy will drop by 5 percent from the start of Mauricio Macri’s term,” he added. “What we are examining is which methodology we will use.”

For years growers in the world’s No. 3 soybean exporter have been stung by a 35 percent tax on all international shipments.

The country collects a 23 percent export tax on wheat and a 20 percent levy on corn shipments.

By some estimates, Argentina will have doubled wheat shipments and surpassed Russia and Brazil as a corn exporter by the end of Macri’s four-year term, as the abandonment of years-long trade restraints unleashes the full potential of the country’s vast Pampas farm belt.

By Charles Newbery
27 November 2015

Buenos Aires (Platts)–27Nov2015/1015 am EST/1515 GMT Juan Jose Aranguren, the next energy minister of Argentina, said Friday he will seek to rebuild investor confidence in the country by improving business conditions after taking office December 10.

“We need, as in other sectors of economic activity, to restore rationality,” he said on Radio Mitre a day after getting tapped for the post by the conservative President-elect Mauricio Macri. “We must emerge from the schizophrenia we have lived in the energy sector in recent years.”

Aranguren, who comes to the post after working for years as the chief executive of Shell Argentina, said he will cut energy subsidies and push for a rapid increase in energy production to reduce imports.

He called it “a crime” to subsidize energy “in a country that imports 15% of its energy” when it also has rich resources of oil, gas and renewable power.

“Only countries that are exporters subsidize energy,” he said in his first public comments since getting appointed. “Our country is the only case that is an importer and subsidizes energy.”

Argentina holds among the world’s greatest potential for shale oil and gas, of which only about 54,000 b/d of oil equivalent is now in production.

The outgoing populist-left government has paid subsidies on energy since coming to office in 2003, at first to keep down gas and power bills to help pull the economy out of a 2001-02 crisis by fueling consumer spending.

In recent years, the outgoing administration has been paying producers subsidies to prop up wellhead prices at up to $80/b for crude and $7.50/MMBtu for gas to encourage rebuilding production after dwindling by 20% over the past decade.

The effort has helped to stabilize oil production at 532,000 b/d and to increase gas production by 3.2% to 117.3 million cu m/d in the first three quarters of 2015 compared with the annual average of 113.7 million cu m/d in 2014, according to the Argentine Oil and Gas Institute, an industry group.

However, with energy consumption continuing to rise, imports of crude, diesel and gas have held steady.

Aranguren warned that if temperatures surge this summer, blackouts could return because of years of insufficient investment in improving distribution.

By Dimitra DeFotis
November 25, 2015

Markets have heralded new, more market-friendly leadership in Argentina, but now the hard part comes: and recession is possible.

This is showing up in the market: The Argentina Merval Index fell more than 55 points or 0.41% Tuesday; the Global X MSCI Argentina exchange-traded fund (ARGT) is down more than 3% this week, and has pared gains for the year. The ETF is now up 1.8% year to date. Argentina banks Banco Macro (BMA), BBVA Banco Frances (BFR) and Grupo Financiero Galicia (GGAL) are down 10% apiece this week. Tamping down inflation and cutting government spending — tighter macro policy in the short term – could lead to an economic recession, writes Fathom Consulting, which adds:

“While [Macri’s] presidency provides an opportunity for longer-term economic reform, there is a risk that it will be impaired by his party’s failure to hold a majority in either houses of Congress. Mr. Macri’s agenda also faces challenges from abroad, with China in the midst of a hard landing; deepening recession in Brazil; and the US on the brink of raising interest rates for the first time in nearly a decade.”

Barclays analysts Pilar Tavella and Sebastian Vargas are a little more optimistic:

“Mauricio Macri will face three economic battles and a political one as soon as he is sworn in as president of Argentina: re-capitalizing the central bank; devaluing the ARS and ending FX controls; reducing the primary fiscal deficit from 4.8% of GDP; and preserving governability. We expect Macri’s administration to win the first battle quite quickly, boosting net reserves from the current US$2 billion to US$7 billion in the first quarter … we expect a decline of 1.1% in 2016, as a result of falls in real income related to the potential pass-through effects of a devaluation and fiscal adjustment. We expect higher growth (3.5%) in 2017 and beyond on positive-supply side effects following from much-needed adjustments …”

An inflation-targeting program may hasten the exit of Argentina’s central bank President Alejandro Vanoli, Barclays adds.

By Silvio Canto, Jr.
November 30, 2015

We mentioned last week that Argentina has a new president. He is already sounding a lot different than the incumbent. President-elect Mauricio Macri of Argentina sent a message to Venezuela and Iran:

Only a day later, Mr. Macri moved quickly to strike a different tone from that of the departing president, Cristina Fernández de Kirchner, who — along with her late husband, Néstor Kirchner — had controlled the presidency for the last 12 years.

At a news conference on Monday, Mr. Macri emphasized how his administration would differ from that of Mrs. Kirchner on foreign policy. He announced an effort to get Venezuela — a close ally of Argentina under the Kirchners — suspended from the Mercosur regional trade bloc over claims of the infringement of civil liberties there.

And he made clear his desire to revoke an agreement struck under Mrs. Kirchner with Iran to jointly investigate the 1994 bombing here of a Jewish center, which killed 85 people. Some investigators have accused senior Iranian officials, including a former Iranian president, of planning and financing the attack, making the agreement to give Iran a direct role in the investigation a political lightning rod.

Mr. Macri has also announced plans to improve diplomatic ties with the United States, which became strained in recent years over Argentina’s international debts and Washington’s sway in the hemisphere.

“There is little doubt that Argentina’s relations with the U.S. under a Macri administration will become friendlier,” said Michael Shifter, president of the Inter-American Dialogue, a policy group in Washington.

Mr. Macri understands how the Kirchner regime has hurt Argentina, from a relationship with Iran to demonizing foreign investors to distract the people from the failures of crony capitalism.

Let’s hope that president-elect Macri will also restart the investigation into the death (or murder) of Mr. Nisman, the prosecutor who was killed in his apartment the day before he was to appear in Congress.

It will take time, and patience, but Argentina has a chance to turn it around and become a vibrant economy and U.S. trade partner.

Singing a different tune with Iran and Venezuela is the right “tango” for the moment!

By John Charlton
1 December 2015

Further evidence that copyright protection terms appear to be heading in only one direction comes from Argentina. The country’s ruling party, Front for Victory, recently proposed a draft bill extending the term of copyright protection on photographs from 20 years to life of the photographer plus 70 years. This would put the copyright term for photographs on the same footing as that for books and may, effectively, sextuple the period of protection from 20 years to 120.

If the proposal passes into law, it would apply retroactively and may prompt the removal of many images from the public domain. It’s very likely that photographic images owned by foreign individuals and entities will also get the lengthier protection term. Argentine pressure group Fundacion Via Libre, which campaigns for more open access to digital information, is against the proposal. According to its secretary, Beatriz Busaniche, it is “fighting in the congress and in the media” to open the debate on copyright. “We are trying to build public awareness,” says Busaniche. “We are also talking to congressmen and women to provide them input on the consequences of this kind of [bill]. … [W]e hope our representatives will hear our voice.”

Busaniche says that Fundacion Via Libre has been “working in the copyright field since 2000,” and its research shows that “copyright extensions [have] negative effects [on] human rights, [especially] cultural rights…. We also defend public domain and free culture projects like Wikimedia Commons, which will be directly affected by this proposal.”

Earlier this year, Jamaica increased copyright protection to life plus 95 years, while in 2011, the European Union (EU) raised the term for music recordings to 70 years. In 2009, Cambridge University academic Rufus Pollock authored a paper that used mathematical models to show the optimum term for copyright protection should be 15 years. The Association of Graphic Reporters of Argentina is pressing for the copyright extension.

Rob Ward
26 November 2015

As the ideology known as Kirchnerismo begins to fade in Argentina following the defeat of outgoing president Cristina Fernandez de Kirchner’s intended successor in elections Sunday, shippers and container terminal operators in Buenos Aires may benefit from an increase in trade.

Kirchner’s economic policies and penchant for picking fights with neighboring countries have caused the country’s container trade to decline and the election of Mauricio Macri, the current center-right mayor of Buenos Aires, holds the promise of better days ahead.

Macri has promised major change on all fronts, including better relations with neighbors in South America, the United States and the European Union.

“It is going to be very interesting to see how President Macri deals with the many problems that have been left behind by the Kirchner regime,” Antonio Zuidwijk, an experienced and well-respected port consultant based in Buenos Aires told

These issues include protectionist policies such as import and export restrictions in addition to runaway inflation of more than 20 percent and trade spats with neighbors Brazil and Uruguay. The government also put too much of a focus on the domestic market rather than nurturing international trade, Zuidwijk said.

Zuidwijk, who was operations manager for Argentina, Uruguay and Paraguay for the U.S.-based Moore McCormack Lines in the 1970s when containerization was first being established in South America, said that these issues have caused the container trade in Argentina to shrink to where it was in 1998.

The country’s largest port, Puerto Nuevo in Bueno Aires, which is responsible for 90 percent of the country’s container trade, handled 1.2 million 20-foot-equivalent units in that year. The port moved 997,000 TEUs in 2014.

That decline took place even as containerization continues to grow throughout South America. For example, the Port of Santos, Brazil, which has surpassed Puerto Nuevo to become the continent’s largest container gateway, may pass the 4 million TEU mark this year, after breaking 2.5 million TEUs in 2010.

Argentina’s port sector must also contend with the government’s narrowly-focused approach to transportation. “The problem here is that no one looks at the complete picture, a transport policy for the country as a whole, of which the ports should form part,” Zuidwijk said. “The complete relationship between ports and the hinterland, between trucks, rail and waterborne transport.”

The government must also come up with policies to better manage the River Plate, which is shared with Uruguay, and work with Uruguay to figure out the best way to manage the entire River Plate Basin, Zuidwijk said.

Another positive aspect of Macri’s accession to power for the wider community of shippers and transport specialists is that the new Argentina president wants to bolster the local South America trade bloc of Mercosur.

Mercosur, which includes Brazil, Uruguay, Paraguay, Argentina and Venezuela, has been an ineffective body over the past 10 years and that has largely been due to Argentina’s intransigence and opposition to free trade under Kirchner.

For more than 10 years the EU has been trying to forge a free trade pact with Mercosur, but Argentina has often proved the stumbling block.

By Frank Holmes
Nov 29, 2015

It might be hard to believe now, but Argentina once ranked among the top 10 wealthiest nations in the world, following the United Kingdom, United States and Australia.

Today, however, it’s one of the most corrupt, according to Transparency International, a group that annually measures public sector corruption around the world. In 2014, Argentina ranked 107, sandwiched between Niger and Djibouti.

That’s largely because for more than half a century, Argentina has been led almost exclusively by the far-left Justicialist Party, based on the political thought of Juan Perón—an admirer of Mussolini—and his wife Evita.

But this week, Argentina said “no, gracias” to further leftist rule when it elected conservative businessman and two-term Buenos Aires mayor Mauricio Macri to succeed Cristina Fernández de Kirchner as president. It was an upset victory for the people of Argentina, who have seen their once-prosperous nation deteriorate under decades of Marxist policies.

It was also a strong win for investors around the globe. Not since Narendra Modi’s election last year has a leader’s entry on the world stage inspired such bullishness.

In the three months leading up to the November 22 election, Argentina’s Merval Index rose 30 percent as optimistic investors anticipated a win by Macri.

This week I was in San Francisco attending the Silver Summit & Resource Expo, where many fund managers commented that their Argentine holdings had seen huge jumps recently. Many people I spoke with were bullish on the country.

Latin America Veering Right to Escape Corruption

I join many others in expressing my belief that this change in leadership points to an ideological shift in Latin America and a rejection of the Peronism that has threatened to turn the region into an also-ran economy. I’m confident that once Argentina demonstrates to its neighbors that market-friendly policies stir economic growth and help lead to widespread prosperity, the people of Colombia, Brazil, Venezuela and others will demand similar corruption-free leadership.

In Venezuela—which is slightly less corrupt than the likes of Yemen, Libya and Iraq, according to Transparency International—the people are still reeling from Hugo Chávez’s disastrous administration. With food shortages and hunger worsening, the government implemented fingerprint scanners in grocery stores last year to limit purchases of basic goods.

This, despite Chávez—a leader who was supposed to be “for the people”—being worth an estimated $2 billion at the time of his death two years ago. It’s believed that he stole much of his wealth from the country’s oil industry. Today, his daughter Maria Gabriela is the wealthiest woman in Venezuela, worth double that.

In August, global intelligence company Stratfor conducted an analysis of satellite imagery taken of Puerto Cabello, Venezuela’s main port of entry for imports, between February 2012 and June 2015. The visible reduction in food container traffic is alarming.

Meanwhile, in Peru, First Lady Nadine Heredia is being investigated for money laundering and the usurpation of public functions. When I was in country earlier this month speaking at the Mining & Investment Latin America Summit, there was a lot of discussion on rule of law and corruption in Peru and surrounding South American countries. It’s estimated that stolen public money in Peru adds up to about 2 percent of GDP annually.

Latin Americans are increasingly saying enough is enough.

“What happened in Argentina was the first change in Latin America,” said former Brazil finance minister Maílson da Nóbrega, speaking to the Wall Street Journal. “It may be the start of a downfall in populist governments. I think the next one should be Venezuela. And I think Brazil will follow suit in 2018.”

Brazil President Dilma Rousseff, who won reelection last year, currently has an approval rating in the single digits. As I shared with you last month, her Marxist policies have suffocated business development. The country tumbled 18 points this year in the annual Global Competitiveness Index (GCI) and is now considered to be one of the worst in terms of burdensome government regulations and unethical business practices. The people of Brazil deserve better.

his is part of the reason why I believe active management is so important. When I travel around the world and talk to different people, I obtain and return with tacit knowledge that can’t be found by simply reading Bloomberg.

Macri Bucks the Trend

In this troubling context, Mauricio Macri is a breath of fresh air. He’s not what most people envision when they’re asked to describe the stereotypical South American leader. Unlike Fidel Castro, Chávez, Rousseff and others, Macri never served as a Marxist guerilla in his youth. There are no pictures of him posing heroically in a steaming jungle, attired in military garb like fellow Argentine Che Guevara. Macri’s more likely to be found playing a friendly game of soccer than delivering a rousing hours-long speech from a balcony. By most accounts, he’s contemplative and soft-spoken.

But change is precisely what Argentina needs now. For the last 12 years, former President Néstor Kirchner and, following his death, wife Cristina managed only to cripple the country’s economy even further. The size of the state doubled in the last 10 years alone. Entire industries were nationalized, taxing and spending skyrocketed, foreign investment fled and inflation exploded at an average pace of 20 percent a year.

Under these conditions, holding gold in Argentina pesos has been a good bet for investors.

Realistic or not, Macri has vowed to roll back many policies from previous administrations. He also plans to cultivate a warmer business climate with Brazil, Argentina’s top trading partner, and staunch the outflow of foreign capital. Last year, $2 billion left the country, a 75 percent increase from 2013, according to the Organization for Economic Cooperation and Development (OECD).

Which is a shame. Argentina has a huge amount of untapped potential—a highly educated population, the fastest-growing middle class in Latin America and an abundance of natural resources.

Here’s hoping Macri’s administration can succeed at fostering a more welcome environment for business, one that might benefit the Argentine people and global investors alike.

As Argentina is facing steep inflation, American consumers today are spending a little less on essentials such as food—more specifically, Thanksgiving dinner.

According to the Texas Farm Bureau’s Thanksgiving Meal Report, a typical spread of turkey, stuffing, sweet potatoes, cranberry sauce and more cost $46.48 this year, down 31 cents from 2014.

(The one Thanksgiving staple we spent more on this year was pecans. They’re up 11 percent as China’s appetite for the nut has increased.)

The reason for the savings? Lower fuel and grain prices. As a whole, grains are down about 11.5 percent from a year ago, while crude oil is off more than 36 percent. According to AAA’s Fuel Gauge Report, gas averages $2.05 per gallon right now, a 27 percent decline from this time last year.

As I’ve been saying since last December, this “oil peace dividend” is helping us save not only

By Patrick Gillespie
November 25, 2015

American Airlines won’t accept Argentina’s money.

The airline announced that it will no longer allow customers to pay for flights with Argentine pesos.

“We currently do not have inventory available for purchase in Argentine pesos due to repatriation issues,” American Airlines said in a statement.

Translation: American Airlines faces problems converting its pesos to dollars.
American Airlines had already changed its policy once — in September — allowing Argentines who buy with pesos to fly within 90 days of the purchase.

Now, no flights can be purchased with pesos. American Airlines is still accepting purchases in Argentina with foreign credit cards.

“American Airlines’ action is very strong,” says Pablo Singerman, CEO of an economic think tank, Singerman y Makon, in Buenos Aires.

There’s two issues for American Airlines (AAL) in Argentina.

First, Argentina’s central bank recently reduced the amount of money foreign companies could bring back to the U.S. on a daily basis. The reduction comes amid growing concerns over the central bank’s declining foreign reserves — a warning sign of economic instability.

Second, major changes to Argentina’s currency are coming.

Just last Sunday, Argentines elected Mauricio Macri as its new President. Macri has promised major economic reforms to turn around the country’s stagnant economy.

One of those reforms will be ending the government’s currency controls set by the previous administration led by Cristina Fernandez de Kirchner. The controls put the peso on a mostly-fixed exchange rate.

Right now one dollar equals $9.67 Argentine pesos. But many people believe that the peso is overvalued, and most Argentines exchange money on a black market at an exchange rate of 15 pesos to the dollar.

Kirchner put the controls in place to fight Argentina’s rising inflation, which has risen over 20% annually in recent years.

Ending the currency controls might lead to some volatility in the short term, but experts applaud the move and will likely lure back foreign investors.

“Macri is going to devalue the peso,” says Singerman. Long-term for foreign companies: “It’s a great time to invest in Argentina.”

It won’t be a surprise if undoing the currency control will immediately cause Argentina’s currency to be significantly devalued.

With a devaluation likely coming, American Airlines may not want to accept a currency that many experts say is well overvalued.

The situation in Argentina is similar to what’s already happening in Venezuela, where airlines have $3.7 billion held in the country because of currency controls, according to the International Air Transport Association. Venezuela has four official exchange rates and it also limits how much American companies can send back to the United States.

American Airlines is one of the biggest international airlines to fly to the Argentina. It has 27 weekly flights from various cities around the U.S. to Buenos Aires, the capital.

-CNN’s Diego Laje contributed reporting from Buenos Aires

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