Argentina must fix economy after debt deal

BUENOS AIRES: It took months of tough talks for Argentina to reach agreement on restructuring $65 billion in debt. Now, economists and policymakers say, the real work begins: reviving Latin America’s No 3 economy from its currency and fiscal crises.

Though both government and creditors celebrated Tuesday’s deal that should help Argentina avert a messy default, it still faces a 10 percentplus contraction this year, an over-valued peso, spiking poverty and a deep fiscal hole.

“This was the easy step,” Stephen Liston, senior director at the Council of the Americas, said of the debt deal. How the once-wealthy grains producer does from now is the acid test for Peronist P r e s i d e n t A l b e r t o Fe r n a n d e z a n d h i s s t a r Economy Minister Martin Guzman, fresh from taming Wall Street.

“This is an important step,” Guzman said of the agreement. “But this does not solve all the problems of the Argentine economy.”

Argentina’s peso has been propped up by tight capital controls, which has seen the value of the currency in black market trades veer dangerously away from the official rate, with the gap currently around 76 percent.

The government says it plans to ease controls, but only when the economy has been righted, leaving an artificially strong peso that businesses say hinders trade.

Precarious situation

“It’s a very precarious situation there where you’ve got an over-valued currency, but weakening it will only worsen the debt situation,” said Nikhil Sanghani of Capital Economics in London. Inflation, the thorn in the side of Argentine policymakers for years, shows little sign of abating. Consumer prices have slowed during the pandemic, but remain at an annualized level above 40 percent and will likely revive as the economy recovers.

The central bank, looking to mop up liquidity, is facing a “snowball” of short-term debt, temporarily reining in prices but increasingly straining the institution, said economist Eduardo Levy Yeyati of Buenos Aires’ Universidad Torcuato Di Tella. Getting out from under this would likely mean the bank has to raise interest rates to encourage savings in pesos, he added, otherwise it would risk unleashing a new wave of inflation.

Under the weight of public spending to combat the impact of the pandemic, the primary fiscal deficit soared to $3.53 billion in June and the government is expected to end the year with a large fiscal hole.

Guzman has pledged to return to fiscal balance and keep the deficit under control, but faces a politically tricky balancing act between that and growth-boosting policies.

“The fiscal deficit has blown out again and we think that the primary deficit will be something like 8 percent of GDP this year,” said Sanghani, adding it could force the government to adopt politically unpalatable measures even as millions face increased poverty. “If they have to impose some sort of austerity going forward, it will only keep the economy quite weak and that will hinder its ability to pay off even these restructured debts.” —Reuters