Argentina: Back to the Brink
In a largely unexpected move, Argentina has abruptly called on the International Monetary Fund (IMF) for financial help to shore up its reserves and stave off currency pressures. The action by the government of President Mauricio Macri is hard to square with the fact that a little over a year ago, the country was the darling of the financial markets, having pulled off the sale of a 100-year bond, the so-called “century bond,” taking advantage of the low interest rate environment and investors’ appetite for emerging-market assets. In hindsight, the then much criticized move by the Macri government now looks like a stroke of genius.
How did long-troubled Argentina go from its relatively secure status to a country yet again on the brink of a financial meltdown in such a short period of time? Part of the explanation certainly lies with the excessive optimism over the country’s ability to dig itself out of the very deep hole caused by a decade and a half of economic mismanagement. When Macri was elected in 2015, he promised to swiftly return Argentina to international capital markets by resolving the country’s outstanding debt problems and removing the capital controls imposed by his predecessor Cristina Kirchner’s administration in a last-ditch effort to avoid financial collapse.
That promise was kept, which paved the way for renewed confidence over Argentina’s future. That confidence was further bolstered by Macri’s electoral victories in the midterm elections at the end of 2017, when his Cambiemos coalition dealt a significant blow to the opposition backing Kirchner. His gradualist approach to resolving Argentina’s grave macroeconomic problems appeared set for success. Markets appeared content, despite a projected fiscal deficit of over 5 percent of GDP for 2018, recorded inflation north of 20 percent annually over the past few months, and a current account deficit above 5 percent of GDP. In spite of these figures, as recently as April, market consensus forecasts were projecting GDP growth of 2.6 and 3.3 percent for 2018 and 2019, respectively.
The tide turned some three weeks ago, when skittish investors, fearful of the global repercussions of a potential US-China trade war combined with expansionary fiscal policy in the United States likely raising US inflation and interest rates, started to pull their money out of emerging markets. Currencies tumbled, with the Argentine peso and the Turkish lira suffering the biggest losses given their sizable external deficits and other macroeconomic imbalances.
The slide in the peso forced the Central Bank of Argentina to hike interest rates three times in only a few weeks, raising rates from 27.25 percent at the end of April to 40 percent in the first week of May. To soothe markets further, the Macri government also slashed the fiscal deficit target for this year by half a percentage point of GDP, thereby committing itself to significant adjustment. The combination of much higher interest rates, more fiscal adjustment, lower market confidence, and high current account deficits expected into the medium term have raised the stakes for Argentina and for Macri’s ability to steer the reform effort. These factors helped produce the decision to request IMF assistance. Given Argentina’s dependence on foreign financing to meet its twin deficit needs—fiscal and external—Macri’s reported request of $30 billion from the IMF is intended to help the country toe the fine line between financing and adjustment without compromising the reform effort.
The move is a bold one. Argentina, no stranger to Fund programs, has a very complicated history with the international organization. Following the announcement, Argentine economists from all sides of the political spectrum were quick to criticize the decision, which will unequivocally hurt Macri’s popularity—he is one of the few leaders in the region who could boast relatively high approval ratings until now.
For the moment, Argentina’s problems and its decision to call on the Fund are unique to the country. Other large economies in the region facing significant economic challenges, such as Brazil, are not in danger of facing a currency crisis or a major financial meltdown. That said, the return of the IMF to a region plagued by a history of failed programs is less than auspicious. For those who believed the region had graduated from the Fund once and for all, Argentina is again a wake-up call.
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