BUENOS AIRES (Reuters) - Days into his presidency, Mauricio Macri faces his first big threats as he seeks to fix Argentina’s ailing economy: inflation and recession.
In his first policy moves since taking office on Dec. 10, the free markets advocate made good on his promises to eliminate capital controls and cut hefty export taxes.
But floating the peso triggered an immediate 26.5 percent devaluation and by making imported goods more expensive it will put further pressure on inflation, which already stands at well above 20 percent.
Economists expect inflation to accelerate to 35 percent in 2016, eating into Argentines´ purchasing power and dampening spending. They predict the economy will contract in the first months of the year, although it could then pick up again if new investment kicks in and a cheaper peso helps exporters.
Argentines knew the peso was being held artificially strong and many believe the measures are needed, but even Macri’s own supporters are worried.
“It is going to hurt us all,” said Cristina Lopez, 70, who works as a secretary to supplement a pension that she says is not enough to get by on. “I went to get medicine yesterday and it had gone up 30-40 percent already.”
Lopez voted for Macri’s center-right “Let’s Change” alliance and blames the poor economy on 12 years of populist policies.
“They left us in a bad situation,” she said of the previous government of leftist Cristina Fernandez, who imposed currency and trade controls in Latin America’s No 3 economy in a bid to boost domestic consumption and foster national industries.
As Macri dismantles those policies, he risks tipping the economy into recession and stirring unrest from labor unions linked to the Peronist party he has just turfed out of power.
“The contractive exchange, fiscal and monetary policies at the same time will generate a decline in economic activity in the first half of the year,” said a research note from Buenos Aires brokerage Allaria Ledesma and Co.
Macri believes a mix of pro-business policies and government austerity will bring inflation under control and encourage the investment that Argentina needs to grow rapidly and create jobs.
But in the short-term he has a problem, and little space to maneuver.
Interest rates are already high, discouraging investment. And austerity means reducing utility subsidies and restraining public sector wage hikes, both of which are unpopular.
Macri will be helped if exports start to grow quickly, and some businesses are already hopeful.
“The devaluation is an opportunity rather than a problem,” said Pedro Cascales, whose company Tradefin makes machinery such as units for backup supply of gas. He mainly sells products in Argentina but with a cheaper peso and no more industry export taxes, he is on the hunt for foreign markets.
“In the last years it was tough because the peso was strong,” he said, adding that he expects his revenue will jump from 30 million pesos this year to 50 million in 2016.
Yet he is still wary that rampant inflation could kill those ambitions.
“The big challenge will be the rate of inflation because if inflation goes up at the same rate or even more than the devaluation this advantage might only last a few months.”
The devaluation pushed up the price of imported wares, including consumer goods like televisions and refrigerators but also those used lower down the production chain like auto parts.
Businesses have been quick to hike prices in anticipation of increased costs and some are accused of moving too quickly, using the devaluation as an excuse to increase profits.
“The government has to control the decisions by those who determine prices, the big monopolies and oligopolies as well as the supermarket chains,” said the Confederation of Medium-Sized Enterprises (CAME), which represents more than 450,000 companies. “In the last few weeks, these actors increased prices in anticipation in an abusive way.”
Argentina is scarred by episodes of hyperinflation that have periodically destroyed the value of the peso, resulting in an obsession with saving in U.S. dollars.
Seeking to end that and lock in currency stability, Fernandez propped up the peso with central bank reserves while restricting access to dollars.
But her controls spawned multiple exchange rates that distorted the economy and made business tricky. The strong peso made Argentine exports expensive and discouraged investment.
Argentina’s business leaders have broadly welcomed Macri’s early measures but noted that his overall plan hinges on whether he can contain inflation and keep the exchange rate from falling much further.
To mitigate the impact, particularly on the poor, and also stave off possible unrest, Macri’s government will keep the Fernandez government’s “agreed prices” program which ensures certain basic goods are available for reasonable prices.
Still, his government will struggle to keep Congress and Argentine society at large on board with its plans if the economy does not pick up next year. Macri’s already fractious alliance does not have a majority in Congress and Fernandez’s party, the Front for Victory, remains a powerful force.
Macri’s opponents claim his measures favor big business and will hit the poor. A speech held by former economy minister Axel Kicillof in a Buenos Aires park last weekend drew around 10,000 people.
“These are unpopular measures that have always served miniscule interests but are against the interests of the greater majority,” Kicillof told the crowd. “Together and organized, they will not be able to silence us.”
Reporting by Sarah Marsh; Editing by Christian Plumb and Kieran Murray