Argentine President Mauricio Macri has appointed Hernán Lacunza to replace Nicolás Dujovne as finance minister following Dujovne’s resignation on Aug. 17, nearly a week after Peronist opposition candidate Alberto Fernández trounced Macri in the country’s primary elections. Days earlier, Macri had announced a series of economic measures designed to help Argentines through the recession, including hiking the minimum wage, temporarily freezing fuel prices and increasing help to small businesses. To what extent will Macri’s economic package alleviate citizens’ economic woes in the short and long terms, and will they win him support ahead of the October presidential election? What can Argentines and international markets expect from Lacunza and Macri’s government before his first term ends in December? What economic panorama will Argentina’s next president inherit, and is the country’s standby deal with the International Monetary Fund at risk?
Megan Cook, lead specialist in the political and regulatory risk/strategic affairs practice at Cefeidas Group in Buenos Aires: “The package was a clear signal that the government recognizes that its economic management was a leading cause of its primary defeat. The measures alone—while certainly welcomed by struggling Argentines—are unlikely to meaningfully increase support for Macri. They may provide some short-term relief, but the anticipated pass-through effect of the peso’s sharp post-election devaluation to inflation may dull their impact. Moreover, most of the measures (including tax breaks and reductions) are temporary and do not address the structural causes of the country’s current economic challenges. Indeed, the measures may prove to be more of a headache for the government than a boon. Governors concerned about their impact on provincial coffers have launched judicial challenges, investors have decried the gasoline price freeze as undermining legal certainty, and the cost of financing the package clashes with the aim of reaching fiscal neutrality this year. In this post-primaries context, Hernán Lacunza’s nomination indicated not only that the government understands the electorate’s frustration but also suggested a desire to ensure stability ahead of a probable presidential transition. Lacunza, who is widely respected, has made stabilizing the exchange rate, showing commitment to the IMF deal and promoting constructive dialogue with the opposition his priorities. However, recent days have shown that electoral incentives often trump concerns about guaranteeing stability. Regardless of who is Argentina’s next president, he will be tasked with quickly addressing a thorny set of challenges, including rising unemployment, high inflation and the country’s increasingly unsustainable debt load. Lacunza’s Aug. 28 announcement that the government would seek to extend debt repayment periods (including with the IMF) is the first step toward a likely revision of the IMF deal, which does not yet appear to be at serious risk of collapsing.”
Claudio Loser, former head of the Western Hemisphere Department at the IMF and founder and CEO of Centennial Latin America: “Argentina’s economic situation today is complicated, and it can change, mainly for the worse, at any time during the next several months. The primary elections were not binding but gave a strong and surprising signal about the likely winner in October, the Peronist Alberto Fernández. However, Argentina has two electoral bodies: the national voters and the financial markets. The market reaction was strong, if not violent, initially, but with increasing tensions, and the very recent announcement of a forced debt restructuring on a large portion of the domestic debt, conditions have deteriorated. This clearly shows the constraints that any elected candidate will face, unless they want to become isolated and inward-looking again. Unfortunately, it is likely to happen as Alberto Fernández in recent days accused the IMF and Macri of wasting the country’s scarce resources, financing massive capital flight and creating problems for the economy. Fernández at times sounds conciliatory, but now he has taken a more confrontational approach. President Macri had announced some popular-sounding measures that have low cost but moderate impact. The new minister of finance can steer the economy up to the October election, even with the new measures, if the IMF assures its continued support and disburses some additional $5.4 billion in September. A few days ago, that seemed likely. The new measures and continued market uncertainty make that outcome much iffier, even though the IMF has been conciliatory and has indicated that it supports t supports Argentina.”
Horacio Verbitsky, president of the Center for Legal and Social Studies in Buenos Aires: “The relief measures are insufficient, come too late and won’t repair in two months the damage done in three and a half years. The hypothesis of an electoral recovery for the incompetent Macri is fantasy literature. The IMF’s recessive program is untenable. Its loans were not applied to productive investment, but rather to the formation of assets abroad, a phenomenon politically called capital flight. The parallelism between both lines is impacting. For this reason, Macri’s government only subsisted on the artificial respirator that the IMF placed for him at Trump’s request. If the IMF provides the quota of $5.421 million forecasted for mid-September—something that has not yet been decided—Macri could stay on until the October election and, maybe, until his term ends in December. Otherwise, he will follow the fate of former Presidents Alfonsín and De la Rua, who left the presidency before their terms ended when the IMF and the World Bank cut their financing. Macri said it would be easy to contain inflation, and he ‘brought it down’ by tripling it. He promised a flood of investment, and it ‘increased’ by falling to a third of its previous level. This left 40 percent of the population in poverty and desperation. Argentina’s society is different from the Spanish or Greek ones, and it has a capacity of resistance that Macri and his allies did not count on. Debt must be reprofiled sooner rather than later, and the priority is the reactivation of the economy, which has succumbed to a deep stagflation.”
Andrés Asiain, director of the Scalabrini Ortiz Center for Economic and Social Studies in Buenos Aires: “The ruling party’s resounding electoral defeat accelerated the crisis phase of Argentina’s cycle of indebtedness and speculation under Mauricio Macri’s administration. In a desperate attempt to save the election, the government announced a package of populist measures. Even so, the announced transfers will not compensate for the foreseeable deterioration of income caused by the peso’s devaluation and inflationary impact, so we do not expect it to lift consumption and, much less, to shift the political course. With no chance of re-election, Macri’s goal is to finish his term—a task that is not simple amid the serious economic situation and the fact that no non-Peronist president has finished his term since the return to democracy. To do this, he instructed Lacunza to try to contain the peso’s value since a new run could unleash an uncontrollable economic and social situation. The task is not simple, and it has already required a partial debt default and the introduction of measures that limit the purchase of dollars for companies and large savers. It remains to be seen how the massive outflow of deposits from banks can be contained. The agreement with the IMF seems to have fallen, and the next disbursement is on pause, a fact that was hidden under the euphemism of ‘reprofiling’ of the debt with the lender. Moreover, the economy left for Alberto Fernández to inherit could not be more ruinous, a hyper-indebted economy with a central bank empty of reserves.”
Jorge Castro, president of Instituto de Planeamiento Estrátegico: “Argentina is experiencing a deep political, financial and monetary crisis following Macri’s 15-point defeat in the primary vote. The reason for the crisis is the Wall Street-based international financial system’s belief that Macri’s political power disappeared after Aug. 11 and that a victory for ‘kirchnerismo’ in October would be absolutely negative. Thus, there was a devaluation of 33 percent in three days, with the value of Argentine companies in New York plummeting 30-60 percent, and a country risk that reached nearly 2,000 basis points—in line with default levels. Consequently, the price of insurance against default of Argentine debt rose from 57 percent to 75 percent during the weekend of the vote. The international financial system presumes Argentina will default, or that it has already. The underlying problem is that Argentina lacks national currency, and therefore domestic and capital market savings, and all savings and investment operations are carried out in U.S. dollars. The historical novelty this year is that there are two powerful machines to create value, bring genuine dollars and attract investments: the agricultural sector and Vaca Muerta. This is the key difference between Argentina’s 2019 crisis and the 2001 collapse.”
Editor’s note: The commentaries above, except for Andrés Asiain’s, were submitted to the Advisor before Argentina’s government announced new capital controls on Sunday.