Why is Argentina trapped in endless economic crisis
Argentina is going through an economic crisis marked by an inflation rate that is among the highest in the world and that the swings in the policies of the central bank can not contain. Above 50% per year and fueled by a strong depreciation of the domestic peso in the last year, inflation hit economic activity and boosted poverty.
The popularity of center-right president Mauricio Macri has collapsed, raising doubts about his chances of being re-elected in the presidential elections next October. As Macri is the favorite of the markets, those doubts cause more financial uncertainty.
How did it arrive at this situation
Argentina has a long history of inflation. According to an estimate by economist Fausto Spotorno of the consultancy Orlando Ferreres y Asociados, in the last 75 years, the cumulative inflation was 119,000 billion.
Repeated financial and exchange rate crises and ceased payments over decades made Argentines lose confidence in their currency and seek refuge for their savings in the dollar. That is why Argentina is a "bi-monetary" economy, and what happens with the dollar is felt in domestic prices in pesos.
After taking office in 2015, Macri promoted a cut in public spending in an attempt to reverse the country's strong fiscal deficit, which many consider the other side of inflationary processes in the third largest economy in Latin America. But the reduction of subsidies to public services, part of the cut-off plan, triggered the tariffs for these services and fueled inflation even more while affecting consumption by reducing the purchasing power of Argentines.
Economic activity, which was already suffering from the fall in consumption, received the coup de grace when the central bank raised interest rates further in order to contain prices, making more expensive the financing for businesses and people. That cocktail aroused a growing distrust of the markets in the government's financial program and triggered an outflow of capital: the peso collapsed 50.5% in 2018 and 15% so far this year.
Given the lack of willingness of private entities to lend money to the country and the volatility suffered by the peso, Macri sought to give certainty to the markets by going last year to the International Monetary Fund (IMF), which granted him a record US line of credit. $ 56,300 million.
But the distrust was not diluted. In the latest of its attempts to contain the dollar and inflation -vailed by the IMF-, the central bank announced changes on Monday that will allow it to intervene more in the exchange market, leaving behind its policy of free-floating between price bands. Analysts believe that central bank interventions could work in the short term, but doubts persist about the future.
What prevents Argentina from overcoming the crisis
To generate more confidence from investors, Macri has sought to clean up the accounts, but his adjustment of the economy extended the recession, which in turn hit the tax collection. With the economic parade and poverty climbing 32% of the population, the popularity of Macri collapsed and the former center-left Cristina Fernández de Kirchner, who scares the financial markets, today appears as the main candidate for the presidency in recent polls.
Fears of Fernandez's possible return to the presidency, many investors are leaving Argentina, which hinders the recovery of the country and, paradoxically, Macri has fewer chances of winning the October elections. In turn, Macri's lukewarm attempts to regulate some basic prices generated more distrust in the markets, which drove away more capital.
Although the central bank met the monetary targets and extended the commitment to zero growth in the amount of money in circulation until the end of 2019, the improvement in the economy did not come. Only this year, the inflation rate reached 11.8%, accumulating 54.7% in the last 12 months.
What could happen after the presidential elections
Experts expect financial volatility to be maintained at least until the October elections, although doubts about the future of the economy do not extend to the next few years.
The scenarios vary according to who is elected president.
Under the two populist mandates of Fernández, between 2007 and 2015, the government applied price controls, at the exchange rate, to foreign trade and expropriated Repsol's YPF oil company, among other measures. That's why the financial markets want the re-election of Macri. Other Peronist candidates such as the moderates Roberto Lavagna and Sergio Massa are better seen by the financial world than Fernandez, but their chances are lower.
Analysts agree that the next government will have to renegotiate the terms of the agreement with the IMF to stagger the millionaire payments that the country must make in the coming years. Argentina faces debt maturities with private creditors for around US $ 20 billion over the next two years and, given the closing of the financial markets, the outlook is worrisome.
Although referents of the main presidential candidates argued that the country will not have a default, the increase in insurance against a default reflects doubts about Argentina's ability to meet the maturity of private debt. The country was already the protagonist of the biggest default in history in 2002.
According to projections by economist Guido Lorenzo, of consultancy LCG, the peso could fall to 52 units per dollar from the current 45 by the end of the year, and annual inflation would be around 40.5% in December.