Cry For Me, Argentina: Crises of Poverty, Prices and Public Finance

September 7, 2019
Editor(s): Matthew Trachevski
Writer(s): Lachlan Woods, Michelle Koo, Preethika Padmanabhan, Nicholas Bea

On Sunday the 11thof August, conservative Argentinian President Mauricio Macri suffered a resounding defeat in the primary elections to his left-wing rival, Alberto Fernández and his running mate Cristina Fernández de Kirchner. Macri is hoping to win a second term at the presidential poll come October 27; however, due to his austere economic policies, his chances of being re-elected look dire. Macri has failed to save Argentina from its current economic crisis, despite promising he would be able to attract foreign investment. Macri also underestimated the effects on inflation that cutting government expenditure would cause.

When Macri took office in December 2015, his plans were to return Argentina to zero inflation and zero poverty while reducing Argentina’s level of foreign debt. However, this has failed to eventuate, with inflation hitting 54% over the last 12 months – twice the rate when he entered. Foreign debt has also doubled after Macri had to use a rescue debt package from the IMF of $57.1bn in September 2017.

Source: Financial Times

In addition to worrying levels of inflation and debt, Argentina’s poverty figures have increased from 29% to 35% of the population. This rise in poverty has led many Argentinians to feel that Macri’s leadership has only sent the economy downward. In an attempt to boost the economy and prevent social unrest, President Macri has increased income tax cuts and welfare payments that were established by his predecessor, Christina Fernández de Kirchner.

Upon President Macri’s resounding loss in the primary election, the value of the peso shed 20%, resulting in it being down over 45% this year against the U.S. dollar. This was followed by Fitch and Standard & Poor’s downgrading of the country’s debt rating amid growing concerns that there is a high likelihood of Argentina defaulting on its foreign debt. Ultimately, the fall in the value of the currency and drop in Argentina’s credit quality has led many investors to question whether these income tax cuts and increases in welfare payments will only put Argentina in a worse state, or whether it has the ability to turn Argentina’s economy around before it is all too late.

In order to curb inflation, the Central Bank has been selling off its reserves at the rate of over $300 million on certain days, as well as lifting the interest rate to 45% in order to control the peso’s fall and attempt to stabilise inflation. This drain on the Central Bank’s reserves has led economists to question Argentina’s ability to stabilise its finances and spur growth in the economy with a dwindling monetary supply. Recently, the country’s benchmark foreign bonds have fallen further to a record low of 43 cents on the dollar, with traders seeing an 89% chance that the country will default on a payment within the next 5 years.

Source: BBC

In a last ditch-effort, the government is now trying to re-profile $101 billion of debt, of which $7 billion is short-term debt held by institutional investors, in order to prevent further financial pressures on its foreign currency reserves which have plunged $10 billion in the past month alone. In order to achieve this, the government has forced investors whose short-term notes have been issued in the local market to accept longer maturities, asked foreign bondholders to “voluntarily” push out their maturities, and pleaded to the IMF to give them more time.

However, the state of the economy isn’t solely a product of President Macri’s poor management. The government had been basing the economy’s turnaround on increasing its exports, and thus reducing its trade deficit. However, with Argentina being an economy heavily focussed on the agricultural sector, recent droughts throughout 2018 have hindered this opportunity, leading to greater social unrest and a larger trade deficit. Furthermore, when investors began pulling out of the emerging markets after US interest rates rose in 2018, Argentina was struck particularly hard as its financial system is based on raising capital from overseas investors. Therefore, if these two factors hadn’t occurred, the economy would likely be in a stronger current position.

Despite some economic achievements, such as putting the country’s fiscal and current accounts in order (the government’s budget deficit is expected to be eliminated by the end of the year), Argentina’s debt burden has still ballooned from 53% of GDP in 2015 to over 89% today. Furthermore, with the $56-billion-dollar debt package that Argentina took from the IMF last year, the country is now locked into a debt package that is going to result in further austerity and unpopular reforms.

Ultimately, it is likely that Argentina will struggle for decades to come. The reasons being that investors are no longer wishing to invest in emerging markets due to the markets already being in a period of high risk. Argentina is also facing large structural issues with respect to its government implementing tax and economic reforms. Furthermore, the country has low levels of productivity due to its workforce being relatively uneducated and lacking modern technology. I believe that due to its high levels of inflation, dwindling monetary supply, and one third of the population already being below the poverty line, Argentina is only delaying its defaults that are expected to occur. The question now is when, not if, Argentina will default.

References
  1. Walker, A. & Palumbo, D. (2018). Argentina – the crisis in six charts. Retrieved from https://www.bbc.com/news/business-45451208
  2. Oxford Analytica, Daily Brief. (2019). Argentina: Debt-to-GDP ratio. Retrieved from https://dailybrief.oxan.com/Analysis/GI244951/Argentina-Debt-to-GDP-ratio
  3. Smith, C. (2019). Argentina is on the brink. Retrieved from https://ftalphaville.ft.com/2019/04/25/1556180002000/Argentina-is-on-the-brink/

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, its Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Matthew Trachevski
Editor
Lachlan Woods
Writer
Michelle Koo
Writer
Preethika Padmanabhan
Writer
Nicholas Bea
Writer