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Can Fernández Fix Argentina?

By voting President Maurico Macri out of office, Argentinians have signaled that they will no longer tolerate continued economic crisis, much less policies that appear to make matters worse. But, because solutions to Argentina's problems are not mutually compatible, the new government will likely face similar challenges.

BUENOS AIRES – The acute economic crisis that has been afflicting Argentina since 2018 has just produced a change in government. The newly elected president, Alberto Fernández, inherits from his predecessor, Mauricio Macri, a severely battered economy. Argentina is now being squeezed by a high debt burden, impaired social conditions, and soaring inflation and unemployment all at the same time.

Since 2012, the country has struggled to generate a sufficient inflow of dollars through exports. Between 2011 and 2015, then-President Cristina Fernández de Kirchner (now the incoming vice president) imposed severe currency controls that resulted in macroeconomic rigidities. But since eliminating capital controls in 2015, Macri’s administration has since made the problem worse. Instead of simply rolling back the controls that had distorted the currency market, the government lifted all controls, including those preventing speculative investment, which were considered to be macroeconomic safeguards.

Macri also promoted unprecedented debt policies, resulting in additional borrowing of $193 billion. This included a $57 billion loan from the International Monetary Fund, which came on top of a previous $44 billion loan (63% of the institution’s credit lines are now extended to Argentina). By the end of this year, the country’s debt-to-GDP ratio will have risen from 52% to 93%, according to IMF forecasts. Moreover, short-term debt deadlines have exerted additional pressure on Argentina’s already-dire balance of payments.

Lastly, in order to curb inflation, Macri’s government encouraged the central bank to push interest rates ever higher, to a peak of 70% in October 2018 (rates are currently still above 60%). And yet, this has given a further boost to speculative investment.

Under these conditions, Argentina’s ship started sinking as soon as currents of the global economy shifted. When the US Federal Reserve raised its own benchmark rate in March 2018, the Argentinian economy’s fundamental weaknesses were laid bare. Owing to a run on the currency, the peso has now fallen 210% against the US dollar, and inflation has increased at double its normal pace, reaching 48% in 2018, with a projected peak of 60% this year.

As if this were not bad enough, Macri failed even to meet his main goal of adjusting the fiscal balance. In 2019, Argentina will record a primary deficit (excluding interest payments) of 0.8% of GDP, and is on track to double that in 2020 (assuming a baseline scenario), owing to planned tax cuts from 2017 and reduced revenues from the recession.

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But the crisis in Argentina’s real economy is even worse. GDP contracted in three of the four years that Macri was in office. By the time he leaves in December, the poverty rate is expected to have reached 40%; and, following the loss of 140,000 skilled industrial jobs in manufacturing and trade sectors, unemployment will be at 10%.

Argentina’s challenge now is to address each of these separate dimensions of the crisis. In addition to bolstering growth and promoting consumption and genuine investment, policymakers also need to stabilize the exchange rate to restore certainty for investors and ensure debt repayment.

These goals are not necessarily compatible. Argentina must renegotiate debt-repayment deadlines with its private creditors and revise the current standby agreement with the IMF, whose aid has proved to be more political than technical. But while restructuring the debt will require an improved fiscal balance, the current deep recession makes achieving a primary surplus in 2020 exceedingly difficult. The severe economic adjustment that it would require could be too much for Argentinians to bear, given the extent to which the real economy has already deteriorated. As popular uprisings in Chile and Ecuador have shown, Latin American societies are increasingly disinclined to tolerate further painful adjustments.

For its part, the incoming government has signaled that it will try to stimulate domestic consumption to ease poverty. With limited fiscal resources, it will have to focus on improving conditions for impoverished social groups through cash-transfer programs such as the Universal Child Allowance (Asignación Universal por Hijo). Another major goal is to forge a new social pact by encouraging unions and companies to propose salary agreements in keeping with broader fiscal- and monetary-policy goals.

Fernández must show that he has the political clout to align the expectations of different stakeholders and follow through with policies that will prop up consumption and send the right signals to the market. There is little room for maneuver in an economy that is so fragile. Yet Fernández’s victory shows that Argentinians are fed up with the current approach, and with Argentina’s economic woes more generally.

Argentina is rich in many resources, including natural endowments such as metals, hydrocarbons, wood, and livestock. It has a diversified manufacturing industry, whose products range from steel and automobiles to biochemicals; and it is home to an educated, highly qualified workforce that is capable of providing top-quality services. The hope is that, once the crisis is over, the enormous potential of Argentina’s 45 million people can be unleashed and directed toward renewed growth and development. That is the real challenge facing Argentina and its new government.;