What many K supporters don't understand is that when Nestor took over in 2003, Argentina was already out of the crisis and the currency was extremely devalued. This attracted lots of investment because assets and labor were cheap. He had inherited a fiscal surplus of 2.5%!
Then comes 2006 - 2011 and the boom of commodity prices...soy reached $650, oil $150 (prices are about half that now). Argentina was flush with dollars as a result. Enough money to subsidize electricity, gas, transportation. Generous welfare programs. Stuff the public sector with more and more jobs. This of course juices the economy, puts money in the hands of the people. However very little of this windfall was invested into long term productive projects like education and infrastructure. What you had was the commodity windfall used on short term items. So when people say their lives were better under the Ks, it's true!
Also during the time you had the tax burden on business go up. Inflation start to rise. This makes more business unviable and less of an incentive to invest. There comes an inflection point that when you raise taxes over a certain point, tax revenue actually goes down. In 2008, during the best economic climate in modern Argentine history, they entered into a fiscal deficit that continued to deepen until they left office.
Around the end of 2012 commodity prices begin to fall. The Ks economy and politics is revolved around generous subsidies, state employment, welfare payments - so when the money dries up from export taxes continue their policies and in 2015 they leave office with a 7.5% fiscal deficit!
Another important point - From 2011 and on, the reserves have been going down. Capital controls don't stop capital flight!! It only makes it more costly to move capital offshore.
Here enters Macri. The only gift he had when he entered office was that there was very little debt outstanding, besides the vulture debt which was $4.5 billion. The problem was he inherited a fiscal deficit of 7.5%. The only government that can constantly run fiscal deficits is US government. In order to cut that deficit he needs to lower public spending. Afraid of the social and political consequences he doesn't cut spending enough. Macri's policies are Kirchner-lite, but he opens up the economy believing that more money will come in due to his business friendly speak. Rather what happened was when investors saw the same tax burden, the same labor laws, high government spending, they moved their money out of Argentina. With no capital controls the process happened quickly, put even more pressure on the peso and made the dollar denominated debt impossible to pay back.
Now AF will be confronted with the sins of both administrations - Inflation, high public spending, high taxes and a large dollar denominated debt. It will be very interesting to see AF's approach. We know the cepo will strengthen, as it has already today, but as I stated above that doesn't necessarily stop capital flight. The only viable tax base is raw materials which are not at high historical prices. He can't borrow from the markets, maybe the IMF or China, but both the IMF and China will want their pound of flesh.
There just isn't the money to engage in the same policies of the Ks from 2003-15. The only source of money to try to fund it is by expanding money supply aka print more pesos. In this current economic context that means only one thing - serious hyper inflation.
