National Post (National Edition)
In Argentina, Macri’s revival is on the rocks
If you’re feeling the hurt from rising interest rates here in North America, spare a moment to consider the plight of Argentines — it might provide some context. Five years ago, the benchmark rate was in the low teens. A year ago, it was in the mid20s. In April, it was 40 per cent. Today, it stands at 60 percent — the highest interest rate in the world.
Granted, inflation running around 40 per cent cushions the blow for borrowers somewhat. But 60 per cent is still 60 per cent, and it’s a pretty clear sign of how desperate the currency and economic crisis in Argentina has become.
How did it get there? not so long ago, Argentina looked, at long last, like it was doing everything right. The December 2015 election of Mauricio Macri — the centre-right son of an Italian tycoon — was supposed to mark the beginning of the end of the country’s financial balkanization, which lasted more than a decade after its infamous 2002 debt default, as successive regimes mixed populism and bad policy to stay in power (and, often, enrich themselves).
The new president pledged to lift market-distorting capital and currency controls, revamp the oft-ignored tax system, resolve ongoing litigation with bondholders, reduce trade restrictions and remove the plethora of subsidies on public services. He largely followed through on those promises, and for a time it looked like it was working: Macri inherited a recession that lasted through the first half of 2016, but the economy turned around and grew by nearly three per cent last year.
Global investors started seeing Argentina in a new light. A Us$16.5-billion bond issuance in 2016, which marked the country’s return to global debt markets after 15 years in the doghouse, saw strong demand. So did its re- markable Us$2.75-billion float of 100-year bonds in 2017 — a clear vote of confidence in Macri’s way forward. Optimism prevailed: at the start of 2018, official forecasts called for 3.5-per-cent GDP growth.
Well, the world has changed since then, and a big part of Argentina’s troubles has to do with factors beyond the Macri’s control. Rising interest rates in the U.S. have conspired to boost the greenback against other currencies and raise debt-service costs for countries like Argentina (and Turkey) that borrowed in U.S. dollars. Rising global trade tensions, courtesy of U.S. President Donald Trump, have raised the risk profile for emerging markets generally. For Argentina, in particular, one can also blame the weather: a severe drought that began last November decimated the country’s agricultural production, which is a big driver of the economy. In April, thanks to the drought, GDP shrank for the first time in more than a year.
That’s when the crisis of confidence in the Argentine peso began in earnest. Granted, the currency had been falling for a while already, thanks in part to Macri’s freer-market policies — it declined by more than 40 per cent against the U.S. dollar from the time he took office to the end of 2017. But since late April, it has fallen by another 50 per cent.
Argentina’s central bank has been quick to respond — maybe too quick. Since April, it has hiked rates five times, and began dipping into its reserves to support the peso.
Meanwhile, the Macri administration in June tapped the International Monetary Fund for a Us$50-billion loan — the largest in IMF history — to help restore confidence. Macri also introduced austerity measures in September, drastically cutting spending and raising export taxes to combat a soaring current account deficit.
Those moves might have come straight out of the textbook of economic crisis management, but they might also have communicated that things were even worse than markets feared. In any event, they failed to stem the peso’s bleeding. And crushing interest rates, combined with reduced spending, are undoubtedly impacting the real economy. GDP shrank by more than four per cent in the second quarter, and forecasts are calling for it to fall by more than two per cent through 2018. Argentina is once again in recession.
Some are seeing light at the end of the tunnel. Macri is reportedly nearing a deal with the IMF for a further extension of credit — officials have hinted that it is days away, and may be provide tens of billions more — and he has pledged that there is no chance the country will default on its debts.
The resignation earlier this week of Luis Caputo, the head of the central bank, threw more uncertainty into the mix, but the damage on markets was limited, perhaps because investors took it as a sign that more funding from the IMF was imminent. For what it’s worth, the Argentine stock market has regained its buoyancy on hopes of more IMF money and better crops next year: the Merval index has risen by 35 per cent since the start of September.
So Argentina could regain its economic footing, at least in the short term. Beyond that, it’s more cloudy. There’s a presidential election next year, and Macri’s approval ratings have fallen to the mid-30s from above 50 per cent in December. There are already demonstrations and labour strikes on the streets of Buenos Aires, and cozying up to the IMF might prove deeply unpopular among Argentine voters.
In short, those betting on Macri had better hope his crisis plan works, and quick. Because even if 2018 doesn’t spell the end of Argentina’s long-term economic renaissance, 2019 very well could.
MACRI’S APPROVAL RATINGS HAVE FALLEN TO THE MID-30S.