Argentina: Economy in Crisis

Argentina is in desperate economic straits with President Macri being forced to ask for accelerated disbursement of the IMF standby loan and to announce emergency measures as the peso goes into free fall. Recession looms and Macri’s hopes of a second Presidential term in late 2019 seem likely to be dashed. But Brazil is managing to lift itself out of its worst recession for some time; so perhaps Argentina can too?

April 2018 saw the beginning of the massive loss in investor confidence in Argentina’s future, causing President Macri to approach the IMF for a $50 billion standby arrangement (approved on 20 June). This allowed him to draw down an immediate $15 billion but instead of calming fears, the peso continued to slide to the point where, in early September, Economics Minister, Nicolas Dujovne, was despatched to Washington to ask for an accelerated disbursement plan for the remainder of the funds. IMF Director, Christine Lagarde, is likely to be sympathetic (though at the time of writing no agreement has been announced).

The statistics speak for themselves. The Argentine peso has fallen in value from 16 pesos to the US dollar in 2017 to a record low of 39 pesos to the US$ at the end of August, including drops of 7% on 29 August and 13% on 30 August. This makes the Argentine peso the worst performing currency of the world’s emerging markets in 2018 against the US$, ahead of the Turkish lira, Brazil’s real and the South African rand. Inflation in Argentina has soared from 24% in December 2017 to nearly 32% at the end of August. Foreign currency reserves, which had been rising under Macri, have dropped from $55 billion in February 2018 to $36 billion by end-June. The Central Bank raised interest rates three times in April and May to reach 40% and has since raised the rate to 45% and at the end of August to 60%, squeezing domestic businesses wanting to borrow. Foreign debt, once under 40% of GDP, now stands at 75% of GDP (with some pundits suggesting that this could reach 90% of GDP by the end of the year). The budget shortfall stood at 5.1% of GDP at the end of July. Economic activity, which had increased to nearly 5% in November 2017, has slumped to a negative rate of -2.7%.  Unemployment has risen to 9% of the working population and more than 28% of Argentina’s 44.5 million inhabitants are assessed by the IMF to live below the poverty line. The situation is serious. Standard & Poor’s lowered its credit rating for Argentina from ‘stable’ to ‘negative’.

The IMF had set fairly strict targets for its $50 billion standby loan, primarily to control GoA’s fiscal deficit and to curb inflation. Macri promised to balance the federal budget by 2020 and to continue his austerity measures, including further cuts to energy subsidies, lowering the public sector wage bill and suspending promised tax cuts. In July, he announced a freeze to public sector recruitment until the end of 2019 and delayed key infrastructure projects, particularly a German $2.2bn hydro-electric dam project and two nuclear powered reactors to be built by China.

On 3 September, Macri announced a temporary restoration of taxation on agricultural grain exports (corn, wheat, soy beans) at 4 pesos per US$ in value and 3 pesos per US$ in value for processed products. This is a major u-turn: he had abolished export taxes as one of his first acts on his election as a mark of his business-oriented economic policies. Macri acknowledged that this was a ‘a bad tax’ but said that he needed the help of the farmers. He also announced his intention to abolish 12 of Argentina’s 22 Government departments as well as reducing the number of Government Ministers in an attempt to reduce spending on the government payroll. He stressed that the ‘gradualist approach’ that he had adopted at the start of his administration was not working; it needed to be ‘faster’.

The social implications of Macri’s austerity measures, no matter how ‘gradualist’ he might term them, have been pretty severe. Argentinians have been faced with major increases in utility bills, up by over 1,000% in electricity and water costs. They have seen the closure of many shops including the flagship chain stores of Walmart (US) and Falabella (Chile). The construction sector has been hit with the prospect of significant job losses with the abolition of major infrastructure projects. Official GoA figures record the loss of 76,359 jobs in the public and private sectors between November 2016 and June 2018. It is becoming increasingly hard for some Argentine families to afford their usual living essentials. Not surprisingly, there have been mass demonstrations and union agitation. The IMF remains deeply unpopular with memories of the 2001/2 crisis still high in people’s memories. Yet Macri has so far rejected the idea of increasing direct taxation – most OECD countries collect an average of 8.7% of GDP in direct taxation; Argentina only 3.2% - if only to shore up his declining popularity base.

Argentina holds Presidential elections on 27 October 2019. Macri was hoping to achieve a second term of office; if successful, he would be the first non-Peronist President to do so. But his prospects are declining, as his popularity rating slips below 40%. Even so, his ratings are still higher than those of Cristina de Kirchner, who remains mired in corruption scandals. So far, there is no obvious candidate to take up the leadership of the Peronist movement to mount an effective challenge against him; Peronism remains divided. Macri has the support of the international community and may still achieve success – but it looks increasingly unlikely.