Friday, August 30, 2019

Argentina’s infernal cycle

It is by pure coincidence that I spent the last ten days in Argentina while the country sped to one of its periodic disastrous economic crises. The purpose of this post  is simply to share some of my impressions. I do not claim that they are necessarily right because some of them are clearly out of my area of expertise.

I knew that the economic situation had deteriorated, and I read with some surprise that Alberto Fernandez won hands down against Mauricio Macri in a mock elections but, like many foreigners, I did not even understand what that mock election was. In the English-language press it was dubbed a “primary” and while, in some formal ways, it was indeed a primary, fundamentally it was something else, as I will explain below  

The first thing to realize is that everything that in the last month or so could go wrong did. So let’s start with the mock election, PASO by the Spanish language acronym. It was supposed to be a primary where, on the same day, voters would choose a candidate, among several from their own party, who  should run in the presidential election. More or less like Democrats in the US choosing among various Democratic candidates, and Republicans likewise among various Republicans. But in this year’s PASO each party had only one candidate. There was thus no inter-party choice at all. The vote became a giant election  poll. The fact that almost 50% of voters, under the conditions of obligatory vote valid for both the PASO and the general election, decided to vote in the Fernandez  “primary”  (16% more than the number voting in the Macri “primary”) thus indicated a clear intent of vote in the real election. 16 percentage points seems like an unbridgeable gap for Macri.  

Thus the result of this weird mock election transformed the sitting president into a lame duck president with four months yet to go  before the presumed new president takes over (two months until the election, and then two months before the formal transfer of power). The all but certainty of Fernandez’ win spooked foreign investors (Alberto is running on a ticket with Cristina Fernandez de Kirchner, the former president and widow of Nestor Kirchner) and Argentina’s debt, in the midst of an IMF negotiation,  was downgraded. It also produced the first signs of a run on the peso.

The political situation could not have been worse for economic stability. Macri maintains the hope of a remontada, or winning from behind, and his economic policy is, I suppose, now predicated on that political calculation. Fernandez is seen as a future president, but at this time, he has no economic power whatsoever. Clearly, the situation would have been better if Fernandez could become immediately the new president, or if PASO had not taken place. As it is, the most destabilizing political situation is afoot.

One adds to that economics. With the devaluation of the peso (during the ten days that I was there, the peso went from 56  to a dollar to 62, that is devalued by some 10% in ten days), a dollarized economy like Argentina is immediately exposed to increased inflation. It is now running at 50% annually, but is likely to accelerate. In a country where all economic decisions are dollarized, every increase in the value of the dollar implies higher peso prices. The loss in peso’s value makes the dollar ever more attractive as the store of value, and the expectation of further inflation and peso devaluation exacerbates the demand for the dollar and the flight of capital abroad.

Time becomes, like in all high inflations, crucially valuable. A peso received tomorrow is not of the same value as the peso received today. Some stores are thus accepting only cash payments or debit cards; not credit cards. In my experience, this is still an exception, but it could soon become more widespread.   

At the same time, the economy is contracting at an annual rate of about 2% which obviously means lower incomes and higher unemployment. Poverty is estimated at almost 40% of the population. Real earnings of people paid in pesos will decline (as nominal peso incomes fail to catch up with inflation) and their incomes in dollars will decrease even further. In such conditions, the Church has just asked the president to declare a food emergency and to presumably freeze prices of food. Rationing cannot then be far behind.  

We thus get to a situation of an infernal cycle where everybody tries to save themselves by converting all pesos into dollars which only gives an additional incentive to those who have not yet converted all their pesos to do it as promptly as possible.

I was in Greece where the euro withdrawals were limited. I saw some signs of panic but I think that the Argentine short-term situation is worse. The euro continued to be the store of value and the unit of transaction; the problem was the shortage of the euros like the shortage of the dollars in Argentina, but there was (obviously) no danger of hyperinflation.

To stop this infernal cycle which is essentially driven by politics and lack of confidence one needs massive inflows of foreign exchange. The fear is voiced at times in Buenos Aires that even that might not help if most of that inflow is immediately sent abroad. But clearly there must be such a substantial inflow that would be sufficient to stop speculation and capital flight and reintroduce some stability. Argentina seems to me to be in a situation where the short-term dominates all other concerns. It is like a patient that is bleeding, and the role of the doctors is not to ask whether the patient has health insurance or not but to rush him to the emergency room. All other considerations about the rescheduling of the debt and the rest can, I think, take place only when a modicum of stability is reintroduced. 

The role of the IMF is crucial. It lent enormous amounts of money to Greece. There is no reason why Latin America should be treated differently than Europe.

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