Argentina – no room for wrongfooting in an economic tango

By: Lars Piil Damm, Senior Analyst, EKF

Argentina's newly-elected president faces a tall task in getting a grip on the economy.

There'll be no room for wrong-footing once Alberto Fernández, Argentina's president-elect, has been sworn into office on 10 December. Inheriting a country in deep crisis, he faces the towering task of doing away with massive debts and poverty.

With sovereign debt verging on 100 per cent of GDP, Fernández is presumably going to have to tackle debt restructuring to avert impending national bankruptcy. Meanwhile, the state coffers are near-empty. Central bank foreign exchange reserves are critically low as Argentineans have withdrawn in excess of USD 20 billion from the banks in recent months for fear of currency restrictions and other unfavourable interventions.

The Argentine central bank has now introduced tough currency restrictions to halt the freefall in currency reserves, meaning that individual bank-account holders are limited to USD 200 purchases per month, while exporters are forced to transfer export earnings home within the space of a few days in order to secure currency transfers to the country.

As if the national debt and constrained currency reserves weren't enough, Fernández also has to contend with a desperate population hoping for miracles. The Argentine economy has been ailing for the last 18 months since the country was afflicted by a severe currency crisis, which defied all remedies despite substantial IMF loans.

The crisis sent inflation rocketing above 50 per cent within the past year. With wages failing to keep pace, and the economy in recession, poverty has escalated, with an estimated 35 per cent of the population falling below the poverty line.

The presidential elections

In the elections on 27 October, left-wing populist from the Peronist Party, Alberto Fernández, ran against market-friendly incumbent president Mauricio Macri, who had been hailed as the nation's economic saviour on taking up office in 2015. Although, initially, he pulled Argentina out of default and restored confidence, enabling the country to start borrowing again, when doubts suddenly arose about Argentina's ability to service its obligations, things went downhill for Macri.

 It will be interesting to see if it will be Alberto Fernández or the immensely popular but more radical Kirchner who actually gets to call the policy shots

Massive capital outflows broke out, and when it became apparent after the primary vote in August that Alberto Fernández was favoured for the presidency, the outflows accelerated to the point where the central bank had no option but to apply foreign exchange controls.

Fernández' running mate in the elections was Macri's predecessor, ex-president Cristina Kirchner. The fact that Kirchner as president and leader of the Peronist Party had run the sovereign economy aground was due to excessive fiscal spending and an unfavourable commercial climate of nationalisations and export taxes. Fernández had served a term as chief-of-staff to Cristina Kirchner during her presidency, and it will be interesting to see if it will be Alberto Fernández or the immensely popular but more radical Kirchner who actually gets to call the policy shots.

Hard times ahead

By voting for Fernández, the Argentines have given the Peronists a new chance, and while foreign investors and industry leaders fear further deterioration in the commercial climate and increased governmental control, all eyes are on the president-elect's next moves. All the more because the future president's policies remain under wraps until he takes office.

However, his approach is expected to be fairly pragmatic. He is likely to seek an extension on repayment of the IMF loans, in return for which the IMF will make requirements which will restrict his room for manoeuvre. Moreover, he only holds a majority in one chamber of parliament.

In sum, Argentina and Fernández will be facing hard times ahead given the forecast for negative economic growth next year.

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