por Federico Poore
Buenos Aires Times, 23-06-2018
When Mauricio Macri entered the Casa Rosada in late 2015, Argentina was seen as an increasingly attractive market. His progrowth, pro-business presidency was turning the country into the next big thing.
Two-and-a-half years later, with the peso plunging and soaring twin deficits, Macri has moved to seek assistance from the International Monetary Fund (IMF). And while just this week the country won promotion to emerging-market status for the first time in a decade, investors are well aware that the peso has devalued by more than 32 percent so far in 2018. As the government receives the first disbursement of a US$50-billion credit line from the IMF, has Argentina lost its economic mojo?
“The Macri administration inherited major macroeconomic imbalances that were not going to be corrected in a single presidency,” Ramiro Castiñeira, an economist with the Econometrica consultancy firm, told the Times in an interview. “The issue is that he was taking on too much debt: in two years and a month he took on US$70-billion of debt. That choked off the debt market.”
The president argues the massive issuance of debt was necessary for the success of his “gradualist” timetable of fiscal deficit reduction — a way of moving forward with pro-market reforms without hurting those less well off. But this year, as the United States raised its short-term interest rates, the Argentine peso started to weaken.
Meanwhile, a new income tax on foreign investors came into effect and the government increased its inflation target amid market uncertainty. Investors moved to the exits and suddenly the country was facing a run against the peso. Along came the shock announcement that the government was requesting a stand-by agreement with the IMF.
“I believe the IMF deal can also be read as political support for the Macri administration, especially taking into account the situation in Venezuela and in Brazil, which is facing uncertain elections in October,” Castiñeira said. “Macri keeps alive the hope for a promarket government in the region.”
RECESSION ON THE HORIZON?
Other economists are not that optimistic.
Emmanuel Álvarez Agis, a former deputy Minister of Economy under the administration of Cristina Fernández de Kirchner (2008-2015), believes the agreement with the IMF will solve one problem by bringing back another.
“The deal will bring the necessary dollars but will surely cause a recession,” Álvarez Agis told the Times. “It’s positive news for creditors but negative for the people of Argentina.”
While Álvarez Agis may be expected to cast the move in a negative light, he’s not the only one that’s pessimistic. The odds of a recession skyrocketed in May to 68 percent from 24 percent, according a poll from Torcuato Di Tella University (UTDT). Goldman Sachs, Morgan Stanley and other banks have also cut their 2018 growth forecasts for the country to 1.5 percent or lower.
The former Kirchnerite official said the lifting of capital controls by the Macri government had helped bring financial dollars into the country, but warned it would also provoke an outflow of capital as soon as the economic scenario changes.
“Financial markets are anything but rational. They respond to ‘signals’ and waves of rumours — that’s why the government should not celebrate when it receives support from people from the financial world, nor be worried when they stop getting support from them,” he said.
In order to keep investors interested in the country the Central Bank, headed until last week by Federico Sturzenegger, refinanced billions worth of short-term Lebac notes with very attractive yields. Sturzenegger, a former PRO lawmaker, had tried to arrest a decline in the currency by raising interest rates to 40 percent, the highest in the world, which in turn created a timebomb which the government is still trying to address. Last week, the much-criticised Sturzenegger was replaced by Finance Minister Luis Caputo at the helm of the institution, with the government announcing that Nicolás Dujovne will lead a united Ministry of Finance and Treasury.
“I don’t think the government has a clear exchange rate policy, its measures are erratic at best,” said Arnaldo Bocco, a former Central Bank governor. “Until now, Macri’s economic programme was only working thanks to the issuance of foreign debt. The government needed loans cover the trade balance deficit. But now that’s over,” he added.
According to Bocco, whenever there is a crisis “the financial market makes a lot of money” because volatility favours speculators. Argentine authorities should act more decisively, he argues. “The Central Bank needs to regulate greed,” he said.
AUSTERITY AND GRADUALISM
Last weekend, Macri conceded the ruling coalition’s attempts to tackle inflation have so far failed, blaming the unexpected impact of increased utility prices, rising international petrol prices and changes in the international economy.
“We needed a path toward lower inflation, but nobody understands what it means to restructure public service costs nor the impact these changes have on inflation,” the president said in an interview with Channel 13. Private analysts expect the inflation rate this year to come in at around 27 percent, higher than last year’s figure of 24.5 percent.
While the president insisted that “gradualism is the way forward in caring for the most vulnerable sector of the population,” he added that the country will face “less gradualism [from now] so that we do not deteriorate the world’s confidence.”
Argentines don’t need a dictionary to know that less gradualism means more austerity, with many opposed to the strict conditions imposed by the IMF in exchange for the loan. According to the CEOP consultancy firm, Macri has only 37 percent support among voters in Argentina — the lowest rating of his presidency to date.
The presidential message can be read as ‘we all need to tighten our belts,’ but some are awaiting news about where and upon whom that burden will fall.
Last month, Cabinet Chief Marcos Peña ruled out suspending the country’s soy export tax cut after officials and economists close to the government revealed the proposal was part of the menu of options being studied to reduce the nation’s fiscal deficit at a faster pace. The measure “is not on the agenda,” Peña confirmed, despite calls to continue taxing the farming sector, which has benefitted from the spike in the dollar.
The government has also failed to tax workers and executives who are better off: last October, the Organisation for Economic Cooperation and Development (OECD) called on the country to lower the floor for personal income tax, which is currently set at 35,970 pesos (some US$1,260). The OECD said the country needed “a more progressive” taxation system — but ever since taking office the Macri administration has actually moved in the opposite direction. While OECD countries collect, in average, 8.7 percent of GDP in income tax revenue, Argentina gets only 3.2 percent of its GDP through the same levies.
To date, the government has ignored those calls. Instead, the president’s roadmap to austerity seems to be a more “traditional” one, with critics arguing it will spell difficult times for Argentine workers, who are already being hurt by the rise in inflation and subsequent fall in purchasing power. The proposed reduction in the deficit outlined by Dujovne will force the government to phase out gas and transportation subsidies and, most importantly, to cut back on infrastructure and public works projects in order to achieve a fiscal deficit of 1.3 percent of GDP in 2019. The Finance and Treasury minister has also committed to reducing the salaries of state workers by 13 percent over the next few years. (Protests have increased in the last few weeks and the country will face strike action led by the powerful CGT umbrella union group this Monday.)
IMF Director Christine Lagarde said the plan was drafted by Macri’s economic team, not imposed by the fund, and that it would ensure that social assistance spending does not fall. “This is a plan that was designed and is owned by Argentine authorities,” she said earlier this month during a press conference in Washington, D.C. The government has pledged to maintain, at least on paper, minimum social assistance spending of 1.3 percent of GDP in order to avoid other fiscal reforms where “society’s most vulnerable” were not protected. But critics of the deal are suspicious on how the government will meet these goals without making cuts to social assistance and employment.
“There’s no way for us to feel that the path chosen by the president will take us to a better place than the one we were,” said Agustín Rossi, the head of the Victory Front (FpV) caucus at the Lower House of Congress. On Thursday afternoon, Rossi commented on figures disclosed by the INDEC statistics bureau showing that unemployment stood at 9.1 percent, more than private analysts have estimated. “Austerity is starting to show its worst face,” he said. “We’re entering a time tunnel that takes us 20 years back,” he added, in a veiled reference to the 2001-02 economic crisis where the IMF played a leading role.
The national government, on its part, stopped repeating that “the worst is over”, like the president did in May after the first run against the peso. Dujovne knows that, despite his efforts, the country has passed from market darling to dud and now it’s going through a classic “confidence crisis.”
“We’ll be facing some difficult two or three months,” Dujovne said on Friday.