From impending catastrophe to moderately optimistic?

For quite a while now we’ve been hearing negative sentiment regarding the near future. At least since the pandemic delivered an unexpectedly hard blow to the whole world, which had wide-ranging repercussions, there’s a general feeling that things are about to get even worse. The end of the global Covid-19 pandemic came with the outburst of a new war which threatened to expand from the regional to the global stage as Russian strongman Vladimir Putin invaded Ukraine in an apparent offensive/defensive move aimed at deterring NATO. Battered global economies trying to get back on their feet after the powerful shock of lockdowns across the globe and supply chain restrictions were hit once again with massive uncertainty, rising energy prices and continued global bottlenecks sparking a bout of inflation the likes the world economy hasn’t seen in half a century. While Argentina is special in that it (forcibly) operates outside the global financial system, it is undoubtedly impacted both positively through an increase in global commodity prices and negatively given reduced demand from its major trading partners and tighter global financial conditions making it even harder to attract much-needed dollars.

And just as the global economy was heading into an unavoidable recession, sentiment seems to have been reversed as optimism appears to take over. It’s a cautious positivity that can be seen in global equity markets which have rallied on the back of an expectation of an imminent reduction in monetary tightening by the world’s major central banks, starting with the US Federal Reserve. “Has the time come to slow the monetary tightening or even reverse it?,” asks the Financial Times’ chief economics commentator Martin Wolf. “That the answer to this question is ‘yes’ is becoming an increasingly common view. Markets are certainly behaving as if the days of tightening were numbered,” he answers. Citing the International Monetary Fund’s latest World Economic Outlook, he notes growth expectations have risen throughout, with emerging markets and developing economies performing extremely well, in part as a consequence of the reopening of China and falling energy prices. Rich countries are looking better even if they are set to grow below average figures, inflation will come down, and a global recession is no longer the expected scenario. The IMF highlights several downside risks including a slowdown in China, an escalation of the war in Ukraine, debt distress, persistently high inflation, sudden financial re-pricing and geopolitical fragmentation. For Wolf, the dilemma is now in the hands of major central banks which will have to time precisely the reduction of monetary stimulus in order to bring inflation back down to the two percent range while keeping output and consumption growing.

The tables seem to have turned in the United States as well, even if the population there doesn’t seem to be realising it. According to Nobel laureate and New York Times op-ed columnist Paul Krugman the US economy is firing on all cylinders. “Real gross domestic product has risen 6.7 percent under President Biden [and the United States] has gained 4.5 million jobs in 2022 [while] inflation over the past six months, which was indeed very high last winter, was less than two percent at an annual rate,” he noted in a recent column. While some prices remain extremely high, energy prices have fallen aggressively, the unemployment rate is at its lowest point in 50 years and inflation-adjusted wages are rising, Krugman notes. Counter-intuitively, “recent economic data has been positive all around, yet a plurality of adults believes that we’re in a recession,” Krugman adds. He blames that misperception on partisanship and a negativity bias stemming from media coverage and an uninformed public.

Latin America has been fairly resilient despite global shocks in 2022, growing nearly four percent on average according to the Imf—argentina clocked in a 4.6 GDP increase, which undershoots Economy Minister Sergio Massa’s expectations of above five percent. Lower food and energy prices coupled with decisive action by central banks to target inflation have allowed countries to lower price increases, yet core inflation remains high. Growth is expected to slow in the region to 1.5 percent as the impact of high interest rates and lower commodity prices hit, which will increase the risk of social discontent and unrest. Poverty has increased aggressively over the past few years, as has food insecurity. This occurs in tandem with increased distrust in institutions which could lead to political paralysis, as we’ve seen in several countries throughout the region. Growth will increase to 1.9 percent in 2024 according to IMF projections while inflation will continue to come down from an estimated 18.3 percent last year to 12.7 percent in 2023 and 8.9 percent the following year.

What does all of this mean for Argentina going into an electoral 2023? As mentioned above, Argentina has been operating on a relatively isolated cycle of economic contraction and rising inflation at least since Cristina Fernández de Kirchner’s second term, when twin surpluses became deficits, pushing her and then Economy Minister Axel Kicillof to go to war with vulture funds while erecting capital controls to avoid running out of foreign exchange reserves. The first few years of the Mauricio Macri presidency saw the country jump right back into global debt markets in a completely irresponsible manner, imploding at the first second of financial jitters in early 2018 and going into full crisis in 2019 after Macri lost the primaries when capital controls were restored in a situation which persists to this day.

Alberto Fernández’s economic tenure has been mixed, with inflation exploding nearly into triple digits while economic growth has strongly rebounded. The global opportunity of high food and energy prices remains, despite prices easing a bit, giving the country’s export sector another important opportunity. A drought has affected the agro-exporting sector while delays in building a pipeline connecting the Vaca Muerta shale field to crucial infrastructure has limited upside gains. Furthermore, the capacity to develop lithium mining in one of the most productive regions of the world, together with a competitive knowledge economy sector mean a more robust global economy could demand more of what Argentina has to offer,. even investing in developing critical infrastructure and promising companies. The value of Argentine assets have rallied substantially recently but remain dirt-cheap. The expectation of a change in government swapping the Peronists for the supposedly market-friendly Juntos por el Cambio coalition should lead to further appreciation in Argentine assets.

The risks of further self-inflicted damage remain as elections and a deeply divided political system foster gridlock and procrastination. With both major coalitions fragmented and aiming their guns internally, the rise of fringe right-wingers like libertarian economist Javier Milei represents the disillusionment of a large portion of society with the political class and democracy more broadly. Capital controls, corruption, and antiquated regulations weigh down on the private sector, while a vicious circle of high taxes and high tax evasion continue to de-capitalize the economy.

The opportunity is there for the taking. For some, Argentina will grow regardless of the incompetence of its leaders. Another theory is that the country is uncontrollable, regardless of who is in charge. Yet, a move toward moderation among the leading candidates of both coalitions and a consensus regarding certain key issues appear in the horizon, as long as the hardliners are effectively pushed to the outer bounds of the ruling coalitions.

Just as the global economy was heading into an unavoidable recession, sentiment seems to have been reversed as optimism appears to take over.