Argentina is once again on the brink of economic collapse

Of Agustino Fontevecchia

Some 30 months after the new government took office, Argentina found itself in dire economic straits, with an alarming drop in the peso and an economy faltering due to a lack of reserves in the Central Bank’s coffers. The underlying problem, as usual, was a complete lack of confidence in the government’s ability to formulate and execute a credible economic plan, especially at a time of global tension that inevitably affected Argentina.

Once the point of no return was passed, then-President Mauricio Macri announced in televised remarks that he had instructed Economy Minister Nicolas Duhovene to seek an emergency bailout from the International Monetary Fund, then headed by Christine Lagarde. What remained of Macri’s presidency was a nation on high alert as the value of the peso continued to sink and a series of rotating officials running key economic institutions implemented emergency measures that allowed the government to complete its constitutional term amid protests, the first non-Peronist to do so since the return of democracy in 1983.

That was then. Coincidentally, (current) President Alberto Fernandez has been hit by a debilitating peso slump that lasted several weeks into his 30th month in office, as Argentina’s exhausted economic model failed to build confidence and reserves in the Central Bank. And it comes at a time when a global reassessment of risk threatens to push advanced economies — and thus the rest of the world — into recessionary territory that includes high inflation and heightened geopolitical risk, including an ongoing war sparked by Russia’s invasion of Ukraine.

Argentina has an incredible opportunity to exploit its natural resources, yet record exports in the agricultural sector have not translated into explosive growth in the overall economy, as the recovery in industrial sectors is stifled by a lack of dollars for investment and imports, while the galloping inflation destroys the purchasing power of workers. The question everyone is asking these days – including Vice President and head of the opposing camp Cristina Fernandez de Kirchner – is whether President Alberto Fernandez will make it or will some kind of institutional crisis occur that will force him to call early elections or resign.

At the Central Bank, Governor Miguel Angel Pesque appears to have an initial response. Shortly after imposing new and tighter currency restrictions, Peske said the current market pressure should be resolved by October. Just three months from now!

Peske’s explanation is that energy imports rose by $200 million to $900 million to $1.6 billion in May and more than $2 billion in June, largely because of the war in Ukraine. “If we exclude energy imports,” he said, it is in the order of $6 billion [ανά μήνα]which means $72 billion on an annual basis, compared to exports that are over $80 billion and could reach $90 billion, a level that would support stability in foreign exchange markets.”

He acknowledged that the Central Bank needed to bail out domestic bond markets and said a recent bond auction where former Finance Minister Martin Guzmán (before he resigned) rolled over debt and even achieved net peso financing was a “positive result.” Since implementing that round of monetary tightening, the Central Bank had accumulated about US$1 billion in reserves, much of which it has since “burned” amid a severe decline in the peso.

Pesque’s unbridled pragmatism rests on his ability to hold down the dollar-peso exchange rate with increasingly restrictive measures, which by definition will hamper economic growth. As economist Julieta Collela details, Guzmán has indeed been successful in his latest bond auctions, but at an increasingly higher price. He had been forced to raise the interest rate paid to investors while reducing the duration of the securities offered and at the same time begging and somehow forcing both private banks and public institutions to absorb more and more pesos. This was happening alongside the increase in money printing that has begun to worry the IMF.

In its latest quarterly review it said “more disciplined spending management is needed for the second half of 2022”, including “streamlining spending on goods and services, transport subsidies and transfers to provinces and public enterprises”, while calling for “prudent wage management ” for federal employees and lower spending on pensions, which should happen automatically under the current formula unless the current administration intervenes discreetly, as expected.

The questions are all interrelated. While Pesque was right to say that higher energy demand would subside, he did not take responsibility for politicians’ inability to build a key infrastructure project that would aggressively reduce external energy demand and thus the need for hard currency: the natural gas pipeline stretching from Vaca Muerta to Buenos Aires. This failure covers all the de Kirchner-Macri-Fernandez governments.

There is also a weak energy policy that Guzmán has failed to unravel, largely due to resistance from the political organization La Cámpora, which supports de Kirchner. Will Batakis or her successor be given the political leeway to succeed? Essential imports to sustain the economy, private sector debt and increased tourism spending are all contributing to the pressure on the Central Bank’s limited reserves. And one should not ignore the international context, where apart from the war there is a massive disruption in global supply chains combined with the until recently expansionary monetary policy that is undoubtedly increasing inflationary pressures. Some, such as economist Nouriel Roubini, are already predicting a massive stagflation crisis that could rival the global financial crisis of 2007-2008.

All this, however, pales in comparison to Argentina’s decades-long political decline, which makes it even more fragile in the face of a critical situation. One of the main exponents of this decline is Cristina Fernandez de Kirchner, who, together with Macri, built a political career based on opposing each other and fueling the country’s polarization.

After blasting the president of her choice, de Kirchner sat down at the same table with opposition economist Carlos Melkonian, who presented a macroeconomic plan she believes is structured for the next president, regardless of his political orientation. Both have been criticized for holding this meeting, but it’s a good message in these days of total rejection for anyone on the other side of the aisle.

Beyond the election calendar, a confidence boost is badly needed, even if de Kirchner and Melkonian are playing for themselves. On the economy, Guzmán may have been right about the macroeconomics, but it’s hard to see how they’ll manage, even with difficulty, like Macri, without regaining some credibility.