Argentina: Market Meltdown Can Be Halted

By Arturo Porzecanski*

From right to left, then-president Cristina Ferdandez de Kirchner, then-minister Alberto Fernandez, and other then-ministers

Ministers of Cristina de Kirchner / Wikipedia / Creative Commons / https://es.wikipedia.org/wiki/Archivo:Ministros_de_Cristina.jpg

The unexpectedly strong performance of the Alberto Fernández-Cristina Fernández de Kirchner (FF) ticket in Argentina’s August 11 presidential primaries has triggered a stampede out of the country’s currency, stocks, and bonds, but FF hold the key to staving off a full-fledged crisis. If the confidence of local and foreign investors is not recovered soon, the market rout has the potential to induce runaway inflation, plunge the economy into a deep recession, and cut off domestic and international financing for both the outgoing and incoming governments, potentially leading to a default.

  • The FF Peronist ticket’s 15.6 percentage-point margin of victory over President Mauricio Macri and his companion was foreseen by none of the pre-election polls. The wide gap shocked investors because it indicates the Fernández duo could win in the first round in the October 27 general election, avoiding a second-round ballot on November 24 in which the pro-market Macri was thought to have a better chance. The coattail effect of FF helped allies in provincial and local primaries around the country. With likely majorities in one or possibly both houses of congress, FF would have a powerful government that could implement much of its agenda, for better and for worse.

Now the challenge is to stop the vicious cycle of capital flight, currency depreciation, accelerating inflation, and plunging economic activity sparked by the electoral results. Failure to do so sooner rather than later will make it very difficult for the government to refinance its maturing short-term debts, and the Central Bank will likely experience a steady drain of its international reserves. In that scenario, the IMF, which has been sending big checks to Argentina every three months, would probably not send the next one in late September.

  • The Macri administration has announced some palliative measures (e.g., a 90-day freeze in gasoline prices and a tax exemption for food purchases), and the Central Bank has tightened marginally monetary conditions. But the government leadership team is powerless to restore the investor confidence that has evaporated.

Given his clear frontrunner status, Alberto Fernández could play a crucial role in reversing the trend. During eerily reminiscent circumstances in Brazil in mid-2002, local and foreign investors were increasingly worried that Luiz Inácio “Lula” da Silva, who was running strong in the polls in his fourth presidential campaign, would end the market-friendly policies of the outgoing Fernando Henrique Cardoso – including a break with the IMF, from which Brazil had been borrowing.

  • Worried about potentially inheriting an economic and financial mess, Lula made a public statement – he called it a “Letter to the People” – making clear his commitment to sound fiscal and monetary policies and the rule of law. He wrote about a “new social contract capable of assuring economic growth with stability,” one of whose premises was “naturally, a respect for the country’s contracts and obligations.” He followed those words with concrete actions. Two months before the elections, he gave his blessing to a new IMF program committing the next government to maintain, with minor modifications, Cardoso’s austere fiscal and monetary policies.

Lula’s actions after his election, including putting a market-friendly and popular mayor in charge of his transition team and choosing a career private-sector banker to run the Central Bank, provide a path that Alberto Fernández could follow as well. Under Lula, the Brazilian Central Bank felt supported in its all-out effort to extinguish the flames of inflation and to buttress the currency. Interest rates were thus hiked as needed before and after the October 2002 elections. He initiated confidence-building meetings with investors before taking office and reassured lenders and investors, both in Brazil and abroad.

  • So far, Alberto Fernández is denying any responsibility for the developing financial and economic crisis, blaming Macri for all that’s gone wrong. But unless he makes announcements that give confidence to local and foreign investors, he will inherit a mess.

August, 22, 2019

*Dr. Arturo C. Porzecanski is the Distinguished Economist in Residence at American University and a member of the faculty of the International Economic Relations Program at its School of International Service. This article is adapted from an essay he wrote in Americas Quarterly.

Argentina: From Gradualism to Shock Therapy

By Arturo C. Porzecanski*

Argentine President Mauricio Macri

Argentine President Mauricio Macri. / Wikimedia / Creative Commons

The austerity measures that President Mauricio Macri announced yesterday to deal with the sharp depreciation of the Argentine peso and acceleration of inflation in the past couple of months are a belated but entirely appropriate effort to stem the country’s massive capital flight.  His administration intends to lower government spending and reimpose taxes on exports to reduce the fiscal deficit faster than envisioned in May, when a three-year economic program was agreed with the International Monetary Fund (IMF).  This is in addition to a previously announced government hiring freeze and cuts to subsidies for electricity and other services.

  • Specifically, the goal now is to minimize the public sector’s financing requirement for 2019, limiting it to rolling over debt maturities coming due plus borrowing $15 billion mostly from the IMF, World Bank, and Latin America’s development banks (CAF and IADB), to cover the interest payments coming due next year. All told, the fiscal deficit contraction that would be achieved between 2017 and 2019 is equivalent to about four percentage points of GDP, compared to the previously pledged 2¾ percent of GDP in savings embodied in the IMF program.
  • In return, Macri’s government has requested the IMF to speed up disbursements under the $50 billion loan facility, which had envisioned a $15 billion up-front payment in June, made on schedule, plus installments of about $3 billion per quarter through June 2021, depending on performance and need. The Fund’s Managing Director, Christine Lagarde, has instructed IMF staff to work with the Argentines to reach a rapid conclusion of discussions to present to the Executive Board for approval.

Macri’s announcement was an admission that what had been advertised in May as a strictly “precautionary” loan must now be amended to provide emergency financing full-throttle.  While a number of emerging-market currencies have come under downward pressure in recent months, the sell-off in Argentina is only comparable to that in Turkey: both the Argentine peso and the Turkish lira currently buy about half as many U.S. dollars as they did at the start of the year (now 100 pesos = $2.60 vs. $5.40 then).  The currency downdraft has dragged Argentine stocks and bonds down when measured in dollar terms; the probability of a debt default in Argentina, as deduced from bond yields, currently ranks highest of all in the emerging markets but for Venezuela, in default since late 2017.

  • Last December, the central bank of Argentina (BCRA) committed itself to achieving an inflation rate of 15 percent during 2018, but prices rose more than that just in the first six months of the year. Given the cost-push pressures unleashed by the peso’s sharp depreciation since May, Argentina would be lucky to end the year with inflation cumulating less than 40 percent.  The patent failure of monetary policy to stabilize the currency and curb inflation thus far will probably be hotly discussed during the government’s negotiations with the IMF.  Last week the BCRA hiked its target interest rate to 60 percent from 40 percent in early August, which is more than double the level that prevailed through May.  Chances are that the IMF will pressure the central bank to keep interest rates significantly above expected inflation until the fever breaks.

We wrote in mid-May that we were witnessing in Argentina the demise of President Macri’s cherished – and popular – gradualism in tackling the poisoned inheritance left after 12 years of populism under presidents Néstor and Cristina Kirchner.  Now we are beholding the embrace of “shock therapy” in fiscal and monetary policies by the Macri administration.

  • Macri and his economic team keep blaming adverse circumstances, such as the worst drought in 30 years, which has delivered the poorest harvest since 2009; risk aversion among investors because of the tightening of U.S. monetary policy; and uncertainty generated by the “corruption copybooks” scandal involving Kirchner government officials and construction industry businesspersons. Their diagnosis is patently wrong.  Despite the poor harvest, Argentine export earnings through July have increased in the best performance in several years.  The tightening of U.S. monetary policy has been very gradual and well telegraphed in advance; it has not caused problems in prudently managed countries.  And the recent scandal is tarnishing Macri’s opposition in the legislature and has not reached the scope of the “carwash” scandal in Brazil.
  • Macri and his team are reaping what they sowed. In 2016-17 they claimed that they could do little to address the inherited fiscal and monetary problems because otherwise they would lose precious seats in midterm congressional elections and end up as lame ducks.  And then, after Macri’s party Cambiemos did well in the October 2017 contest, they claimed that in 2018-19 they could do little to address the inherited fiscal and monetary problems because otherwise they would lose the presidential elections in October of next year.  Up until February, local and foreign investors were willing to give the Macri administration the benefit of the doubt, but then they got impatient, started to pare their positions especially in short-term government bonds, and subsequently decided to exit on a large scale when the central bank failed to tighten monetary conditions sufficiently to keep the peso from depreciating rapidly.

September 4, 2018

*Dr. Arturo C. Porzecanski is Distinguished Economist in Residence at American University and a member of the faculty of the International Economic Relations Program at its School of International Service.

Intense Electoral Year in Latin America

By Carlos Malamud*

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Chilean President Michelle Bachelet with the leaders of her coalition, Nueva Mayoría. The Chilean presidential election of 2017 will determine the legacy of the Nueva Mayoría. / Gobierno de Chile / Flickr / Creative Commons

The new year will be an intense one for Latin American elections.  Although perhaps not as important as those taking place in 2018, this year’s elections will have a significant impact on the countries holding them and, in some cases, the region as a whole.

  • In Ecuador’s presidential and legislative elections on February 19, the PAIS Alliance will run a slate of nominees for the first time without Rafael Correa heading its slate. The President said he’s stepping down for family reasons, but Ecuador’s economic problems, aggravated by the decline in oil prices, apparently convinced him to seal his legacy on a high note now rather than end his time in office in defeat.  The party’s presidential candidate, former Vice President Lenin Moreno, has a 10-point lead in polls over his closest competitor and has the advantage of facing an opposition divided among seven candidates, but his leadership remains uncertain.
  • In Mexico, the state governors of México, Nayarit, and Coahuila and mayor of Veracruz are up for election on June 4. The race in México state will measure the popular backing of the four parties in contention – PRI, PAN, PRD, and López Obrador’s new Movimiento Regeneración Nacional (Morena) – in the 2018 presidential election.  The older parties will begin to weed out the weaker pre-candidates.
  • Elections for half of the Argentine Congress and a third of its Senate in October will define the second half of President Mauricio Macri’s presidency. The government is confident that economic recovery will strengthen its election prospects.  A weak showing will strengthen the Peronista opposition and complicate Macri’s agenda.  The Peronistas are currently divided into three big factions – that of Sergio Massa; the “orthodox” wing headed by some provincial governors, and corruption-plagued Kircherismo grouping headed by former President Cristina Fernández.  Open, simultaneous, and obligatory primaries (known by the Spanish acronym PASO) in August will be an important test for all.
  • Chile will elect a successor to President Michelle Bachelet on November 19. Primaries in July will reveal whether the country’s two big coalitions – the center-left (including the President’s Nueva Mayoría) and the center-right – are holding, as well as the presidential candidates’ identity.  The names of former Presidents Sebastián Piñera and Ricardo Lagos are in the air, but it’s too early to know how things will play out in the environment of growing popular disaffection with politics and politicians.
  • Honduras will hold elections on November 26. Due to a Supreme Court decision permitting reelection, incumbent President Juan Orlando Hernández could face a challenge from ex-President Manuel “Mel” Zelaya, who was removed from office by the Army in June 2009, running as head of the Libertad y Refundación (Libre) Party.
  • Also in November, Bolivia will elect members of various high courts, including the Constitutional, Supreme, and Agro-Environmental Tribunals and the Magistracy Council. These elections will reveal the support President Evo Morales will have as he tries to reform the Constitution to allow himself to run for yet another term in office.

These elections in 2017 have a heavy national component but will shed light on the region’s future direction.  The success or failure of the populist projects in Ecuador and Honduras, or of President Bachelet’s Nueva Mayoría in Chile, will tell us where we are and, above all, help us discern where we’re headed.

January 17, 2017

*Carlos Malamud is Senior Analyst for Latin America at the Elcano Royal Institute, and Professor of Latin American History at the Universidad Nacional de Educación a Distancia (UNED), Madrid.  This article was originally published in Infolatam.