Macri reform push descends into court fight

Posted on September 14, 2016

Argentine President Mauricio Macri has appealed to sports fans from both his own nation and neighbouring Brazil to stop insulting each other at the Rio Olympics. He is also having to play the peacemaker at home, where his latest reform — an attempt to reduce subsidies on utility bills — has led to strikes and protests, run foul of the courts and been seized upon by his political opponents.

To give him credit, Mr Macri has not shied away from implementing unpopular measures since he came to power in December, fully aware that Argentina’s economy needs a radical overhaul after 12 years of socialist rule. He immediately abolished capital controls, quickly let the currency devalue to encourage exports and has started to cut back both regulation and the civil service.

    So far, however, the new government’s pro-business reforms have had little tangible effect, not helped by the severe recession next door in Brazil. The economy is expected to shrink another 1.5 per cent this year and private analysts expect inflation of 40 per cent. Mr Macri said last week that the situation will stabilise in the fourth quarter and that next year will be much better, promising gross domestic product growth of 3.5 per cent in 2017, with inflation down to 17 per cent.

    But to achieve that, the government is opening the spending taps: a $7bn infrastructure programme is supposed to spur private investment, create jobs and tackle poverty; there is also a plan to boost pensions and cut income taxes, as well as a tax amnesty to encourage Argentines with money overseas to repatriate their funds.

    While this all makes sense in terms of boosting growth, it risks wreaking havoc with government finances. The president’s comment in this regard last week was that he “would like” to meet the target of a fiscal deficit of 3.3 per cent of GDP next year. Independent economists already think the gap will be larger.

    That makes the current battle over utility tariffs — a major drain on the public purse — critical if the administration is to have any hope of remaining fiscally responsible. Both the increase in gas prices decreed on April 1 and February’s rise in electricity prices have been challenged and, in effect suspended, by federal judges in the country’s lower courts — most of whom are appointees of the previous regime of Cristina Fernández de Kirchner.

    This is not only a big headache for the government but also for consumers, who are not sure what they need to be paying, and for the gas and electricity distributors, who have stopped invoicing customers because of the legal imbroglio.

    The gas case has now advanced to the Supreme Court, which is expected to rule this week. Medley Global Advisors, a macro research service owned by the FT, says the Macri administration expects the Supreme Court to issue a middle of the road ruling that will probably request that the government completes the public hearings demanded by the constitution and takes into consideration the social consequences of raising gas tariffs, but will not block the price increases from going ahead.

    If that happens, it would set a useful precedent for the electricity case. The government would then accelerate the public hearings, originally scheduled for October and hold them before the end of this month. Longer term, it would start to neutralise the Kirchnerist elements in the judicial system to prevent similar challenges in the future, says Medley.

    Administration officials argue that Mr Macri faced similar problems when he was mayor of Buenos Aires, with local judges attempting to block many of his decisions. But, they point out, ultimately he overcame their resistance and it will be the same this time.

    Meanwhile, it is certainly true that the president remains broadly popular in the country and is managing to pass legislation through Congress, where he has no formal majority, by co-opting mainstream Peronists and isolating the hardliners under former president Ms Fernández.

    If, contrary to government expectations, the Supreme Court upholds the lower court ruling nullifying the tariff rise, it would cost the government 80bn pesos ($5.5bn) in revenues and undo the only significant fiscal austerity measure it has so far adopted. This would also signal that national energy policy is in the hands of the courts, which could undermine the government’s whole investment programme. But the odds are that Mr Macri will get his way and continue to fix Argentina’s problems.

    Dan Bogler is a commissioning editor at Medley Global Advisors

    You must be logged in to post a comment Login