Macri, the economy and Dutch disease: Argentinian angst

Ever since I first met with members of Cristina Kirchner’s administration – the henchmen that populated the state banks and ministries – I’ve been privately supporting the forces of their opposition.

That the ultimately successful opposition transpired to be a real breath of fresh air – Mauricio Macri’s Cambiemos – took me further out of my usually neutral position of observer.

Their victory – and the Macri administration’s attempts to dismantle the economic and financial mess they inherited – has verged on the heroic.

That’s not to say the finance ministers – and they’re getting through those by the way; Prat-Guy to Caputo to Dujovne – haven’t made some unforced errors and tightened the margin for error when there was barely any to begin with.

But the country – and it is potentially a great one – seemed to finally have a government it deserved.

Those mistakes, though, began to pile up and I began to worry.

Prescient call

In April, I wrote that – and it has been one of the few times in my career that I have made a prescient call – the tortuously slow fiscal adjustment would soon test the market’s patience.

Turkey then sparked off an emerging market (EM) FX panic that engulfed the Argentine peso and led to the IMF coming in, and a new severe – and necessary – monetary policy caused a recession and has left Macri’s presidential re-election in October in the balance.

If Macri – or another candidate for Cambiemos – doesn’t succeed, then there’s a real possibility that the once-in-a-generation chance to transform the economy will be lost.

But on my last trip, concerns beyond the potential for a Cambiemos victory began to take amorphous shape.

It wasn’t until that round of meetings with bankers that I truly began to grasp the scale of the energy opportunity that Argentina has with Vaca Muerta.

It is one of the largest untapped shale oil and natural gas reserves in the world. So much so that the conversations with economists quickly spun on to the potential for the exploitation of these reserves to expose the country to Dutch disease – with the opening up of the country’s industries hit by appreciation to a now-petro-defined Argentine peso.

I began to worry that a rapidly appreciating peso could, in a small number of years, hurt exports – even the efficient agriculture sector – and undermine the government’s attempt to re-integrate the economy into the world’s trading systems.

The clear and present danger comes from Macri’s ability to win this year’s presidential elections 

Those fears were compounded by contacts in the Argentinian agriculture industry: they have long been crying wolf about government policies damaging their competitiveness – new taxes raised and promises to improve infrastructure to get produce to domestic and international reneged upon.

Were there really some wolves gathering around the country’s one truly world-class sector?

Sadly, that source of concern didn’t last too long. In London meetings at the beginning of this year, I met some leading global investors in EM energy projects. I brought up the potential for the exploitation of Vaca Muerta – expecting the eyes of those in the meetings to light up with excitement and, frankly, greed.

So, it was with surprise and a little deflation that I noted the muted interest. I was told that those remote fields probably wouldn’t be commercially viable, what with the structural decline in energy consumption – thanks, slowing China – and the lower production costs of competing energy sources: US shale, traditional Middle Eastern sources and, yes, renewable technologies.

Without powerful project economics, I was told, there wasn’t going to be the excitement that would lead international investors to overlook the large regulatory and political risks that are inherent – still – when investing in Argentina.

The YPF expropriation is fresh in this industry, and it will take more than four – or even five – years of orthodox Argentine government to get oil and gas investors to commit long-term capital.

First things first

Anyway, perhaps I was getting carried away with my fears for Argentina.

First things first. Macri has to win this year’s presidential election and, according to recent polling data from Buenos Aires-based consultancy Isonomía, the poll – first reported by Bloomberg – shows Macri’s approval rating has rebounded from June’s lows of 37% to end last year at 51%, which would be good enough to claim a second term.

However, the same survey revealed that unless the government continues to make progress in its fight against inflation, without tipping the economy into a recession that leads to higher unemployment, that support could quickly erode again.

That’s the real reason I shouldn’t be worried about the potential for Dutch disease – or the lack of appetite for developing the country’s energy reserves. The clear and present danger comes from Macri’s ability to win this year’s presidential elections.

And at this point, that’s pretty much a toss-up.

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