Cry For Me, Argentina: Why A Great Nation Keeps Jumping From One Economic Crisis to Another

terça-feira, junho 04, 2019

Argentina's Treasury Minister Nicolas Dujovne, right, and International Monetary Fund (IMF) Managing Director, Christine Lagarde, left. (AP Photo/Andres Kudacki)
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Legendary steaks, world-class wine, championship polo and tango, scenic Patagonia and, of course, Lionel Messi: Argentina is blessed with the best of the best. Why does a country like Argentina continually experience one economic crisis after another?

The problem is not from a lack of natural resources. Argentina has an abundant supply of commodities and is the world’s third largest producer of soybean meal. It’s not from excessive levels of debt. Argentina’s gross debt as a percent of GDP is 76% compared to 238% for Japan. What seems to be holding Argentina back is a disbelief held by international investors and Argentinians alike that the future can be different from the past. Argentina’s history of staggering rises in consumer price inflation, sharp currency devaluations and forced debt restructurings, exacerbated by excessive government spending and widespread corruption, erodes domestic and international confidence. These features have prevailed for so long that they have become ingrained in the psyche of the nation, which presents a serious obstacle to change.

According to the Fraser Institute, Argentina ranked 160 out of 162 countries in its 2018 Economic Freedom Index, just ahead of Libya and Venezuela. The index measures several factors, including the size of the government, property rights, freedom to trade internationally and regulation. When pervasive corruption and the lack of an independent judiciary are added into the mix, the bar for structural change is set very high.

Argentina finds itself in the news once again, this time related to an economic slowdown resulting from reforms enacted by the Macri government in an attempt to address some of these structural issues. Known as a champion of free markets, his mandate after winning the 2015 presidency was to reduce inflation and improve business conditions. His intentions were good: eliminate excessive government spending, reduce export taxes and regain access to international financial markets. But he was a victim of ambition and bad luck.

A year after he came into office, the country experienced a massive drought that hurt exports of soybeans and dented the economy and, consequently, government revenues. Around the same time, the US Federal Reserve started to raise interest rates, sending shock waves through emerging markets, including Argentina. The value of the peso, which had been hovering around 20 per one US dollar, depreciated rapidly, falling by more than 50% versus the US dollar in the first half of 2018. Given the prior history of currency devaluation and subsequent inflation, Argentinians were quick to convert their pesos into dollars. The government needed help, so it turned to the IMF… for the 22nd time in the last 60 years. In June of 2018, it secured a $50 billion loan, the largest loan ever granted by the IMF. Of course, the loan came with restrictions on how the funds were to be used and was conditional on advancing fiscal reform. In other words, Argentina had to balance its budget.

The peso has fallen vs the US dollar III CAPITAL MANAGEMENT

Macri slashed government spending and reduced subsidies for water, electricity and heating gas to meet the primary deficit target dictated by the IMF. The fiscal contraction had an immediate negative effect on the economy and the higher utility costs filtered into higher prices and lower consumer spending. The loss of spending power did not sit well with the working population. Policies framed as “pro-business” were characterized as “anti-labor” by union advocates. Roughly 40% of workers are unionized in Argentina and are used to extracting concessions and protections from previous free-spending populist governments.

The markets and the people of Argentina are running out of patience. The markets fear that the elections scheduled later this year will result in a change in political parties and a return to populism. A return to populism will violate the IMF agreement and could ultimately lead to yet another debt restructuring. Adding to investor concern is the seniority enjoyed by the IMF with its preferred creditor status, lowering the recovery rate for existing bondholders. Investors are justifiably nervous: Argentina keeps piling on debt denominated in US dollars. Total debt as a percent of GDP is manageable; however, the majority of that debt, over 77%, is in foreign currency. The government can run deficits in pesos to pay back the debt; it can't run deficits in US dollars.

Annual inflation in Argentina is now over 55% III CAPITAL MANAGEMENT

The loss of domestic and international confidence has resulted in a rapidly slowing economy, an annualized inflation rate of over 50%, and short-term interest rates that exceed 70%. It will be very hard for the Macri government to get reelected with such a dire economic backdrop.

If Macri fails in securing another term, progress toward completing his ambitious structural reforms would likely come to an end. Argentina would likely fall back into a cycle of excessive spending, followed by another currency devaluation and ultimately another debt restructuring.

Structural and economic reforms are needed to break the boom-bust cycles of the past. Argentina must make significant changes to move off of the bottom of world economic freedom rankings. Macri is trying, but it seems like the short-term pain borne by the people of Argentina may be too much to bear. Long-term prosperity may have to wait.

Page: Forbes