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Eyeing elections, Argentina's government turns to populism

Publication Date: 30 Apr 2019 - By Mike Gallagher By Mike Gallagher
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Macro Investment Strategies Environmental, Social & Governance Multi Asset Latin America

The large upside surprise of March inflation unleashed a coordinated electoral effort of the Argentine authorities.

Fully aware that persistent inflation reduces his re-election chances, and after the Central Bank of Argentina effectively established a ceiling for the exchange rate, President Mauricio Macri has announced a set of measures to boost consumption ahead of the elections, including price controls.

These are the kind of short-sighted, populist and long-term negative measures that the government has previously criticised.

The Measures:

  • A freeze to electricity, gas and transport prices for the rest of the year. The government clarified that the two electricity price increases that were scheduled for the rest of the year will be “absorbed by the state”. The increase in gas prices that took place in April and is to be phased out over three months (April, May and June) will be the last one this year.

The government is also pressuring the local governments to keep prices fixed by saying these announcements only apply to the share of the gas, electricity and transport price that depend on the national government. If the user sees price increases in its invoices, it would be “because of the local governments.”

  • Copying much of the previous government’s playbook, the Macri administration has reached an agreement with private companies to freeze the prices of 60 basic consumption goods for at least six months. According to the government, these companies are committed to ensuring the availability of these goods in 2,500 retail outlets starting 22 April. The government added that maximum prices are either at or below the current average. Additionally, mobile phone operators agreed to freeze the price of their services until 15 September.

Further benefits were established for retirees and pensioners, the unemployed and other vulnerable groups, including discounts on medicines and the availability of more accessible credit. 

  • The government also announced some measures in favor of small- and medium-sized enterprises, including more flexibility to pay tax liabilities, and lowered withholding tax on exports for companies that increase their exports above their average of last year, though this measure excluded large exporters.

Panic Could Easily Be Transmitted to Market

This package provides support to private consumption at the expense of public finances and private companies.

The measures are clearly electoral, as the price increases put on pause this year are only delayed until after the elections. These are the kind of short-sighted, populist measures that the government has previously criticised.

As we expected, these measures are providing support to the peso.

We reaffirm, however, that we see these interventionist measures as long-term negative because they reduce efficiency. We also believe these measures may backfire if markets see them as a sign that authorities are panicking.

 

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