Macri’s Unorthodox Turn to Prop up Consumption

11th April 2019

By Scott Squires

Macri’s Unorthodox Turn to Prop up Consumption

Observers of local economic dynamics have a saying about Argentine policymakers: they can be the most unorthodox Keynesians or the most orthodox budget-cutters, depending on if it’s an election year or not. When an election is up for grabs, no experiment to boost consumption is off the table. When the election cycle is over, worried finance ministers will say it’s time to foot the bill again, even if that means big cuts to consumers’ purchasing power.

With the International Monetary Fund (IMF) watching over the shoulder of President Mauricio Macri’s administration, the government might find it harder to spend an extra dollar or two in this election year to keep Argentines content amid a recession that continues to gnaw at pocketbooks. But over the last few days, a political decision seems to have emerged: simply sticking to the scheduled cuts won’t do. Thus, policy measures to stimulate demand ahead of the elections will be crucial, even if they come straight from the Kirchnerite playbook.

The Casa Rosada will do this in a number of ways. In an effort to help with the grocery bill while also boosting consumption, which is expected to decline in 2019 for the fourth consecutive year, Macri’s administration advanced negotiations for a 6-month price freeze on 40 basic pantry items — including staples like beef, rice, pasta, and milk, as well as cookies, mineral water, cleaning supplies and toiletries.

In addition to working with food suppliers to contain prices, the government is also expected to announce discounts of 15 to 40 percent for Argentines on the ANSES registry — the social security agency that handles pension and disability payments and recipients of the Universal Child Allowance (AUH).

The government also plans to overhaul and re-launch a number of loan and financing programs, including the Argenta, Procrear, and Mejor Hogar loans, as well as the Ahora 12 financing pro-gram for appliances and electronics. Among these, the overhaul of Créditos Argenta, which gave fixed-term, low-interest loans to retirees, pensioners, AUH beneficiaries, and the disabled, will also throw a lifeline to Argentines struggling to keep their heads above water. The other three programs aim to jumpstart the struggling construction sector as well as sales of household appliances. If demand in those sectors is boosted, positive feedback loops could help spread the benefits to other sectors of the economy in the short term.

The initiatives came after pressure from Macri’s political allies, who argued that a response was needed as a signal to potential voters as they struggle with the country’s financial crisis. Macri’s main economic advisors have always been deeply skeptical of moves such as price controls —which became common during the final years of the Kirchnerite administration — but now these policymakers seem to have ceded ground to Cambiemos’ political wing.

Increasing social spending, too

Macri’s government has already promised to maintain social spending throughout the IMF-backed austerity plan. During his State of the Nation Address last month, Macri announced the government would increase the country’s Universal Child Allowance (AUH), granted to poor families with children, by 46 percent — above official inflation forecasts for the year. As The Essential wrote in March, the AUH increase would do well to contain Argentina’s rising poverty rate, which rose to a striking 32 percent last month, and could help in the effort to secure at least part of the traditionally Peronist working-class votes.

It’s not the only Cambiemos spending initiative to make headlines. Buenos Aires Provincial Governor Maria Eugenia Vidal — whose approval ratings slumped along with Macri’s earlier this year — recently moved forward with a wage increase for teachers in the province to keep up with inflation. Vidal approved the wage hike despite the state’s financially difficult position, drawing ire from some in Macri’s cabinet.

Macri’s lieutenant in the city of Buenos Aires, Mayor Horacio Rodríguez Larreta, also looked more willing to grant public sector employees raises to keep up with inflation. Some reports have said his deal with the state workers’ union UPCN could be 10 percentage points above what their national counterparts will get from Macri.

Overall, both Larreta and Vidal seem to be siding closer to the “political” wing of Cambiemos, which fears the consequences of a spending freeze, although Macri has ceded ground in this regard too.

Is it a wise strategy?

The national government has said its electoral stimulus package will have zero cost to taxpayers, aided by IMF dollars allocated for social spending programs, although the portfolio of the ANSES social security bureau will likely feel the hit of expanding its subsidized credit lines. Moreover, the private sector has already voiced its unhappiness over the price freezes.

Until this policy shift, Macri’s government had been described as playing a “dangerous game,” by betting on an economic plan that could freeze the economy through spending cuts and high interest rates in order to keep the peso-to-the-dollar exchange rate down. The decision to increase spending and prop up consumption somewhat seems a more political turn aimed at boosting his flagging popularity.

But while Macri’s additional spending could buy points at the polls in October, it could also be economically counterproductive. Increased government spending could clash with the government’s number one election-year economic priority: keeping the peso-dollar rate under control, by either driving up inflation or forcing the Central Bank to raise its Leliq interest rates even further.

As things stand, Macri is already walking a tightrope. As the Central Bank controls the exchange rate through massive dollar-denominated auctions of Leliq notes that sop up peso liquidity, the currency has still slipped against the stronger dollar; the currency hit all-time lows this month. As always, any external shock — a US interest rate hike, or other emerging market turbulence — could throw the peso off-kilter, and with it, Macri’s political strategy.

Scott Squires

Scott Squires a journalist for Reuters in Buenos Aires. He holds a dual-Master's Degree in Global Policy Studies and Journalism from the University of Texas at Austin.