The adrenaline and anxiety generated by walking too close to the edge has taken over Argentina’s economic actors once again. This has put the pressure on Economy Minister Sergio Massa, who appeared to have tamed the beast in the second half of 2022 but now finds himself under threat on multiple fronts. As is usual in Argentina the issue appears to be that there aren’t enough dollars to satisfy demand as people flee from the ever-weakening peso. And in great part that’s true, as the Central Bank led by Miguel Ángel Pesce (in close coordination with Massa) was forced to sell $3 billion just in the first quarter in order to keep the multiple peso-dollar exchange rates under relative control, which is a staggering amount. This is especially so in the context of depleted coffers, particularly after an incredibly tough drought has dried some $20 billion in agricultural exports from Argentina’s economy compared to last year, which translates to about $7.4 billion in lost government revenue according to the Rosario Board of Trade. Once again, Argentina’s deep fragilities have surfaced as much-needed reform was replaced with kicking the can down the road, meaning that what could have been a relatively stable mediocrity all the way to the elections could be replaced with frequent turbulence. If that were to happen and the opposition Juntos por el Cambio coalition take the reins, then it will mean even greater pain as they would quickly enact a shock plan aimed at stabilizing macroeconomic variables that, according to one economist who is very close to one of the leading candidates, only has a 50 percent chance of success.
The economy is on edge as fears of a potential default have grown in tandem with a depletion of the Central Bank’s reserves. As usual, sentiment changed very quickly and what seemed like a promising tenure at the Economy portfolio for Massa – who pinned his electoral hopes on being able to bring inflation down to a monthly rate of around three percent – is quickly becoming a runaway fire. Massa began to lose control of a series of variables that precipitated an acceleration of a flight to safety away from the peso and into the parallel dollar exchange rates. One of the major catalysts was the devastating effect of the drought in one of Argentina’s only internationally competitive economic sectors, the agro-exporting complex. “The worst drought in, at least, the past 60 years has come to an end,” read the report by the Rosario Board of Trade which noted that recent intense rainfall had stabilized the situation in several key provinces including Córdoba, Santa Fe, and Entre Ríos. Exports have therefore fallen 48 percent, erasing $20 billion as mentioned previously.
The fragility of Argentina’s economy has once again been laid bare by an exogenous shock. Just like when the Mauricio Macri administration lost control of the economy in 2018 as Turkey suffered a currency crisis and contagion quickly spread through emerging markets, Massa’s piecemeal plan to “hold on” through Peronist gradualism until the elections is beginning to unravel. While he has proven to have the political weight that neither Martín Guzmán nor Silvina Batakais ever had, his autonomy — demarcated, of course, by Vice-President Cristina Fernández de Kirchner and her associates — ended far from a position in which a “stability plan” could be implemented. His chief economist and deputy, Gabriel Rubinstein, had spoken about a series of agreements and commitments to “de-dollarize” the major economic variables, along with the engineering of a solid fiscal position and some level of devaluation to put a definite lid on inflation. He quickly backtracked and disowned that idea, noting that a shock-devaluation would create a cascading crisis if the conditions weren’t right. Since then, the plan has been to continue to devalue the official peso-dollar exchange rate while finding dollars to keep the parallel rates under relative control. Whatever was left would be rationed for industrial imports, which of course stifles production.
This is the plan that is becoming increasingly unsustainable. The government has been able to get IMF chief Kristalina Georgieva to loosen some of the key components of the program, including kicking back debt servicing payments until it receives IMF funds to reverse the depletion of reserves. It’s in the IMF’s interest to keep Argentina from imploding, but surely there must be some limits and Massa is quickly pushing the boundaries. Inflation remains stubbornly high, having fallen temporarily but quickly breaking into triple digits. At the same time, the government is running out of hard currency, forcing Massa to rely on unorthodox and costly variants, such as the controversial forced bond swap with government bodies including the ANSES social security agency and the preferential exchange rate for agricultural exporters or “dolar soja.” Peso-denominated debt has snowballed as a large fiscal deficit and a sceptical financial sector has required ever-higher rates to bankroll the state. Aforementioned preferential access to beneficial exchange rates for the agro-sector initially brought much needed export liquidation, but by bringing those dollars to the present have depleted potential liquidations in the future. That future is now –after gaining control of a rabid economy in the aftermath of Guzmán, Massa must now overpower a financial crisis of his own making if he is to make it to the elections.
The few months that separate us from the deadlines to present candidates and the first round of elections (PASO primaries) amount to an eternity in political terms. Things can change very quickly, but as they stand, the going hypothesis is that Juntos por el Cambio will take the presidential elections with either Horacio Rodríguez Larreta or Patricia Bullrich as their candidate. Either’s economic plan would start with shock treatment, as mentioned above, likely pushing inflation even higher, potentially to the 150-percent per annum rate, in the first quarter. That devaluation would be coupled with a series of reforms aimed at cutting the deficit and limiting peso printing that, in theory, should restore confidence and lead to a sharp drop in inflation in the second half of the year. Currency controls, known colloquially as the “cepo” would be eased at some point in 2024, probably toward the end of the year. Growth could return the following year if all goes according to plan. One of the leading economists within Juntos por el Cambio’s ranks estimates there’s only a 50/50 chance of success, but they believe it’s the only way out. They expect social unrest and constant protests, especially in the first quarter, and therefore require broad-based support for the reform program, including from members of the Peronist coalition.
Another alternative could be a surprise victory for libertarian economist Javier Milei, who some believe could make the run-off. This scenario is much more difficult to project but Milei, an anti-establishment candidate obsessed with closing the Central Bank and reducing the state to its minimum expression, will have limited congressional support. Social instability and political deadlock would lead to a dangerous situation with an economy in flames. Outside of Milei, the ruling Frente de Todos coalition – which still hasn’t figured out its candidacies and is internally tearing itself apart – could still prove competitive in a scenario where no one candidate appears popular enough to win in the first round. President Alberto Fernández bowed this one out, but reelection was already an impossibility. Massa is looking to take the lead, but he still hasn’t been able to get the public blessing of Cristina Fernández de Kirchner.
An acceleration of the current state of the crisis could prove fateful, so it is Massa’s main priority to regain control. President Alberto Fernández’s meeting with Joe Biden put US Treasury Secretary Janet Yellen face-to-face with Argentina’s economy minister and it could be read as an implicit show of support for Argentina in its attempt to avert default. The game is not yet over, but the cards have already been dealt. Let’s hope we got a good hand – and that they play it right.
This piece was originally published in the Buenos Aires Times, Argentina’s only English-language newspaper.
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