Latin America Advisor

A Daily Publication of The Dialogue

Can Argentina’s Macri Prevent an Economic Crisis?

Argentine President Mauricio Macri met with his cabinet this week at the Casa Rosada.

Argentine President Mauricio Macri announced on May 8 that his government was seeking assistance from the International Monetary Fund in an effort to avoid a currency and financial crisis like ones the country has suffered in the past. The request followed decisions by Argentina’s central bank, which is grappling with an inflation rate of more than 25 percent, to sharply hike interest rates and spend billions of dollars in reserves to shore up the peso, whose value has plummeted against the U.S. dollar. What is behind the slide in the Argentine peso, and what more can the central bank do to address the problem? Is Macri making the right move by seeking help from the IMF, or will he pay a political price at home for embracing the Washington-based lender? Is Argentina at risk of falling into a full-blown financial and economic crisis this year?

Thomas Morante, partner at Holland and Knight in Miami, and Barbara Efraim, associate at Holland & Knight in Los Angeles: "To stem the continuing depreciation of the peso and halt runaway inflation, Argentina’s Central Bank raised interest rates, increasing borrowing costs while pesos are simultaneously being exchanged for dollars at an alarming rate. The interest rate increases are exacerbating fears among foreign investors that the government may delay much needed, though politically unpopular, fiscal reforms. Against this backdrop, President Macri began talks with the International Monetary Fund to borrow $30 billion or more to hopefully prevent a financial crisis. If granted, the credit lines could help strengthen the peso and provide additional reserves. But if the IMF demands that Argentina reduce its deficit in exchange, government spending would likely be reduced, and Argentines would be affected. IMF involvement is also reminiscent of the crises Argentina experienced in the early 2000s, when the peso lost 70 percent of its value, and the government imposed the corralito, forbidding withdrawals from U.S.-denominated bank accounts. The current situation, with soaring inflation, a weakening peso, and a request to the IMF, looks like the beginning of a crisis with political overtones. While the pro-market reforms of the Macri Administration continue, the benefits have been slow to materialize. Meanwhile, the government’s promises to cut inflation to 15 percent in 2018, from its current level of 25.4 percent, seem overly ambitious—and IMF demands will likely be unpopular. While foreign investors appear optimistic about the IMF involvement, memories of the past linger. There is growing fear that President Macri could be voted out in 2019, and his incremental pro-market reforms could then give way to economic policies of the past."

Horacio Verbitsky, president of the Center for Legal and Social Studies in Buenos Aires: "This crisis was generated by the incompetence of the government, which boasted at the beginning of its term that controlling inflation would be very simple. In a complicated international situation (with falling exports and a rising prime rate), Macri renounced legitimate inflows through the suppression and elimination of retentions on primary export taxes, from which the presidential family benefited. To compensate, he scrapped subsidies and implemented enormous increases in energy tariffs. The central bank dismantled monetary regulations, making the inflow and outflow of currencies unrestricted and leaving exporters with no obligation to pay taxes on the dollars that they receive for their sales, as well as relieving them of obligations to bring dollars to Argentina, with which they then speculate on prices and spread uncertainty. The financing of operating costs in pesos with dollars created unmanageable debt in dollars and treasury bills, which were emitted to rid the market of the pesos that were released in the Treasury’s purchase of those dollars. No country in the world has indebted itself as much as Macri’s Argentina. The stock of treasury bills is already greater than reserves, an important portion of which are the deposits of personal accounts in the banking system. In theory, this would be compensated for with what Macri called a ‘flood of investment.’ But that never materialized, which seems understandable in a country whose cabinet members have their assets abroad due to a lack of confidence, as the energy minister proclaimed. The financing of an unsustainable proportion of the dollars that enter the country leaves immediately through tourism, forming of foreign assets, imports, and transfer of profits abroad. The IMF will impose more severe austerity measures, with zero net effect on the balance, since any deficit reduction achieved by adjusting spending and public investment will be offset by new interest payments. Growth this year will be nonexistent and inflation will be between 25 and 30 percent. Resistance against Macri’s unsustainable politics, both socially and financially, will increase."

Marcelo O. de Jesús, independent consultant from Argentina: "Last Friday, Argentina raised the interest rate to 40 percent, and this Tuesday the government announced it is turning to the IMF to get a loan of around $30 billion. Is Argentina facing a new crisis? The answer is ‘No, but…’ Investors in Latin America recently shifted from local currencies back to the U.S. dollar (once the Federal Reserve Bank raised U.S. Treasury bond rates), increasing the value of the dollar. Yet Argentines see the dollar as the ‘cure’ for inflation—it is a fixation. The government knows this, and, after failing to control the rate by selling $5 billion in reserves in one week, it increased rates to 40 percent. Macri’s government says that they are caught between two contradictory goals: controlling public expenditure while keeping subsidies to the poor, and reducing subsidies to public services, thereby making them more expensive and increasing inflation. As Carlos Pagni wrote, Argentines have the right to feel confused, since just a few days ago the government announced good economic news (more jobs, economic growth) and now it is resorting to the IMF. At this time, Macri’s administration continues to enjoy good political capital: it won parliamentary elections against former President Kirchner and is politically welcomed around the world. But if inflation remains high (approximately 9 percent for the first quarter), it will have a negative impact and Argentines, not just big investors, will begin thinking of buying dollars."

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