Argentina in my opinion should be booming. The South American nation sits atop some of the world’s biggest shale oil and gas reserves. It has a vibrant tech sector and spawned the region’s most successful commerce giant. It is one of the top international grain exporters and possesses abundant stocks of lithium at a time when demand for both has soared because of the Ukraine war and the global drive for electrification. Yet Argentina is instead lurking towards one of its periodic collapses. Inflation reached 64% in June; it may reach 90% by the year end. On the black market, the dollar is fetching more than twice the official rate as Argentines rush to dump pesos. Sovereign debt, restructured less than two years ago, is again trading at distressed levels as investors take over.
Cut off from international markets after its 2020 default, Argentina’s government is struggling to fund itself. It is issuing copious amounts of domestic debt at ever-higher interest rates – most of it inflation linked – and encouraging the central bank to print more and more pesos to fill the gap. With financial ruin beckoning, government paper is less attractive. So the central bank offered investors a novel put option on Treasury notes, as well as buying the paper itself to put a floor under prices. Tight exchange controls, grain export curbs, energy subsidies and state-imposed price freezes complete in my opinion a dismal picture.
If the economics are bad, the politics are arguably worse. In fighting within the Peronist government between President Alberto Fernández and his powerful vice president, Cristina Fernández de Kirchner, forced the departure last month of the economy minister, Martin Guzmán. Guzmán had masterminded successful debt restructurings with private creditors and the International Monetary Fund (IMF) but was hated by Fernández de Kirchner and her allies for refusing to spend more. He’s exit in my opinion robbed the government of its only credible figure. Silvina Batakis, his little-known replacement, was quick to pledge her commitment to meeting IMF targets.
The odds, both political and financial, are heavily stacked against her.
This raises the question now of what the IMF should do. It is on the hook for 44 billion US dollar lent to a previous government, a program which veered off track after barely a year. An internal report later found that the 2018 program was “too fragile” to succeed and based on over – optimistic assumptions.
History may be about to repeat itself.
Although the IMF and Batakis believe that Argentina can still meet its targets this year, including a fiscal deficit of 2.5% of GDP before interest payments, few others agree. I would call it “wishful thinking”. I think that it is very likely that Buenos Aires as will fail to reign in central bank money – printing, increase foreign exchange reserves and trim the deficit enough to succeed. It in my opinion looks ever more as though the IMF failed to set tough enough conditions when it renegotiated the last bailout in March. The perennial villain in Argentine politics, the IMF has been at pains to present itself as a helpful partner to the perennial defaulter this time, rather than a high priest of austerity. The result, however, is that the fund’s 22nd program – yes, you read the number correctly – with Argentina, described as “pragmatic and realistic” only in March this year, is in my opinion already in deep trouble.
Faced with a weak government in hock to Peronist populism and failed economic policies, the fund in my opinion would have done better to insist on tougher targets to inspire business confidence and investment. Tough love – rather than sticking plaster – is what Argentina needs.