Money-changers come in Argentina

12 Sep 2019 10:54|Marcin Lipka

“Argentina is plunging into a deeper and deeper crisis. Raging inflation, a drastic peso depreciation, recession and a return of capital flows’ control. How is it possible that President Macri's reformatory team has led to such a disastrous economic situation which enjoys only a small group of people who illegally trade in foreign currency?” writes Marcin Lipka, Conotoxia Senior Analyst.

When the centre-right and market-oriented Mauricio Macri was elected President of Argentina in 2015, after 12 years of populist reign by the Kirchner family, it seemed that the country was finally getting back on the right track.

Citizens have had enough of the two-digit price growth, increasing poverty, difficulties in running a business, corruption, manipulation of official statistics, or lack of access to foreign currencies. Macri and his coalition "Let's Change" announced the end of all these malpractices.

Change, but not for long

Four years ago, the Argentines were prepared for sacrifice. They were aware that the country was poorly governed, and the left-wing populism, for the eighth time in history, led the country into bankruptcy.

Surprisingly, contrary to fears, the transition to a more open and more market economy was not so terrible. The adaptation of the economic reality (currency realignment, abandonment of export tariffs on agricultural products and subsidising electricity) was carried out relatively smoothly and did not cause a dramatic increase in unemployment and deeper recession. Why?

Gentle therapy instead of shock one is a wrong decision

Macri applied a lower level of shock therapy. There was no extensive privatisation and employment in the public sector remained high. In fact, excessively generous salary indexation has led to a gentle transition to a new reality for the citizens. Salaries increased significantly, as the principle of their dependence on inflation was maintained, and it was historically revised upward after the realignment of statistical data.

The sense of wealth and access to foreign goods and services also enabled a huge inflow of capital to Argentina (mainly from the USA). Investors "bought" Macri's assurances that Argentina has already had its populism behind it. Unfortunately, this capital was primarily speculative, and the main reason was to use relatively high interest rates.

Although Argentina went bankrupt in 2014 and over the previous years had practically no access to foreign capital, in August 2016 it was able to sell the bonds worth more than 16 billion USD in one single day, with a total declared demand for these instruments from investors of 68 billion USD. According to Bloomberg’s estimates, no other nation from the emerging countries has ever obtained as much capital in one day.

Time for a brutal awakening

In addition to overly slow reforms and the absorption of foreign capital, Argentina faces another major problem - strong dependence on agriculture.

The agricultural exports of Argentina constitute 62%, while the OECD average is 10%. Employment in this sector is only 2%, while in the OECD - 5%. Soybeans, corn, wheat, sunflower oil, pork, or poultry were and still are the main sources of foreign currency inflow.

However, the prices of such goods are constantly fluctuating and depend on the unpredictable phenomenon of weather. In addition, for years they have been used as, in fact, cash cows by governments, which imposed export tariffs on producers to raise budget revenues (up to 20 billion USD annually) and to maintain low food prices in the country.

This "clever" strategy resulted in a situation where, with few exceptions, agricultural productivity (especially animal husbandry) grew very slowly in Argentina due to underinvestment (OECD "Agricultural Policies in Argentina" data). Difficulties in accessing foreign currencies also decreased investment opportunities of agricultural holdings. The participation of large farms is also excessively high, which, due to the instability of law, increase only the area of crops instead of improving their efficiency.

The pride of the Argentines and the source of their wealth from the late nineteenth and early twentieth centuries (the prosperity level was comparable to that of the USA) is now turning into a curse. The good economic situation on the agricultural commodities market brings Argentina into consumer well-being, and the cyclical price drops brutally awaken them from this state. And it has lasted for over 100 years.

Good intentions are not enough

The insufficient scale of early reforms is Macri's major mistake. Additionally, in the 2017/2018, Argentina was affected by the worst drought in 50 years, which caused a decrease in soya production by more than 30%.

In 2018, the generosity of foreign investors also ended. They realised that Macri was unable to keep the election promises (low inflation, economic growth) and Argentina had to appeal to the IMF for financial aid (eventually 57 billion USD).

The IMF in Argentina has a disastrous reputation for blaming the fund for the massive crisis of the turn of the century. Besides the economic punch for Macri's team, it was also an image failure and an excellent argument for left-wing populists to attack the centre-right.

Then, it got only worse. The Argentine peso lost half of its value between March 2018 and March 2019. Debt, denominated mainly in the dollar, became almost unpayable, and inflation exceeded 50%, although Macri promised it to be 5% 4 years earlier.

Severe economic and political crisis

The second dramatic moment for Argentina turned out to be the result of the primary elections on August 11th, this year. The mandatory voting revealed a disastrous result for Macri, which was significantly underestimated by the polls. Left-wing Alberto Fernandez (his candidate for vice-president is Cristina Kirchner, who ruled in 2007-2015) won over 47 percent of total votes, while Macri gained 15 percentage points less. If the result was repeated in a month and a half in regular elections, then Fernandez would win in the first round.

This news resulted in a further, depreciation of the peso of about 30%. Moreover, the authorities decided to arbitrarily postpone the repayment of some of the bonds, which in fact can be considered insolvency. The final touch and symbolic failure for Macri was the necessity to introduce control over the capital flow (limits on the purchase of foreign currencies, order to sell them to exporters).

Restrictions on access to dollars cause a return to the symbol of the Kirchners reign, namely street exchange of hard currency. A few days ago, in the article "Argentina's black market money changers expect a resurgence in business", the Financial Times wrote how you could hear on the street "Cambio, cambio!", a slogan associated with currency exchange, very typical for the Kirchners’ reign period.


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