Argentina and the point of no return
The uncertainty that has characterised Argentina’s economic policy has suffered another severe shock, with President Mauricio Macri reaching an extended agreement with the International Monetary Fund while Central Bank President Luis “Toto” Caputo resigned only three months after accepting the position. In between, the peso has remained under pressure as a severe devaluation has substantially worsened the economic outlook. In a country as volatile as Argentina, there is no point of no return, but even acknowledging that the economy is nowhere near as vulnerable to suffering a true implosion as in the past — like the traumatic 2001-2002 crisis — it is imperative that the Macri administration figures out its path, both in terms of monetary policy and its communications strategy, in order to avert an even deeper crisis. Argentina will not blow up, as the many prognosticators of doom suggest. Yet it needs, more than ever, a clear plan that is both technical and political in order to avert further damage.
Causation could be defined as the occurrence of Event A necessarily generating Event B. Several philosophers – from Immanuel Kant to David Hume – have questioned whether causation truly exists, suggesting it is rather a consequence of our understanding of reality. We attribute the power of causation to certain events, which in turn allow us to interpret things as they happen to us. Caputo’s exit from the Central Bank during Macri’s visit to New York last week — where the president received an award as an outstanding “global citizen” from the Atlantic Council, spoke before the General Assembly of the United Nations, and secured additional financing from IMF Managing Director Christine Lagarde — is difficult to interpret. The cause, for some, was the peso’s continued plunge, which he wasn’t able to contain. To others, the IMF asked for his head, given the former Deutsche Bank and JP Morgan trader’s insistence on direct intervention in currency markets, which directly contradicts the Fund’s liberal worldview, under which currencies should float freely. A third group indicates Caputo couldn’t stand the heat given the level of public scrutiny over his personal life, including 14 counts of financial crimes that are currently under investigation by the courts.
Causality is also what economists try to hint at when they present their correlations. Indeed, explaining the run on Argentina’s peso is more an act of faith than science. At its most basic, it reflects a lack of dollars, as Argentina is running dual deficits – both fiscal and trade – and its financing necessities are far from being covered by what the economy manages to export. It’s also the consequence of a deep lack of confidence in the Macri administration’s capacity to correct huge macroeconomic imbalances, to the point where stagflation could lead to the return of a populist government, the worst of which could be led by former president Cristina Fernández de Kirchner. Buying time by securing financing, which should allow the government to eradicate the primary deficit by the end of 2019, should – at least hypothetically – solve that issue.
Macri has placed his hopes on the IMF, reaching an agreement with its technocrats to further reduce public expenditures, and the export of raw materials, primarily agricultural and energy in the form of the Vaca Muerta shale formation. Indeed, the worse drought in half a century has generated an unexpected shortfall in foreign currency, which, according to current projections, should be reversed in the coming harvest. The development of Vaca Muerta would revert an energy deficit that is one of Argentina’s principal causes of dollar dependence.
With the devaluation and IMF-imposed imposed austerity, Macri has already embarked on what several of his critics claim is one of the biggest shortfalls of his administration: taking decisive action against excess public spending. Dollar-denominated debt is an issue, as a weaker peso means interest financing has become all the more expensive.
Argentina’s position remains critically fragile. It is still the most vulnerable of the so-called ‘emerging markets’ to foreign shocks, including US President Donald Trump’s trade war with China, and the Federal Reserve’s rising interest rates which result in a stronger dollar. This won’t change, and Macri has progressively lost most of his top lieutenants to the crisis which began in December, when Cabinet Chief Marcos Peña, Economy Minister Nicolás Dujovne and then-finance minister Caputo essentially forced then-Central Bank governor Federico Sturzenegger to accept higher inflation as a conduit to higher output. This didn’t happen, as the peso’s value fell sharply and rather than recovering, the economy fell into recession.
Now, the ruling Cambiemos (Let’s Change) coalition has to step up. Facing increased electoral challengers in the form of the so-called ‘rational Peronists,’ Macri and his team need to reach difficult political agreements with society’s primary actors: the political opposition, businessmen, and the electorate. This requires political manoeuvring which we haven’t yet seen from this government. Buenos Aires Province Governor María Eugenia Vidal and City Mayor Horacio Rodriguez Larreta have been working on this from the shadows, with Interior Minister Rogelio Frigerio and Social Minister Carolina Stanley’s recent prominence indicating they are winning the silent battle. While Macri represents the pragmatists, the belief in causality über alles, the political wing of the government seems to be keen on the fact that social sciences aren’t scientific, but social.
The government also needs to tackle the causes of Argentina’s profound unproductiveness. One of the world’s highest tax burdens and rigid labour laws need to be reformed, while an industry-by-industry plan to revitalise particularly important sectors is key. So is communication. We need Macri and his top ministers to engage society directly, explaining their plans and negotiating with different actors so as to regain the trust of the country’s decision makers and society.
It’s game time, let’s hope they are up to the task.
Macri and his team need to reach difficult political agreements with society’s primary actors: the political opposition, businessmen, and the electorate. This requires political manoeuvring which we haven’t yet seen from this government.