Argentina’s president-elect, Alberto Fernández, has been holding his cards close to his chest, leaving many scratching their heads as to the type of policies he plans to implement to tackle the country’s many interconnected problems.
Unless Fernández and his team have cooked up a brilliant plan, simultaneously dealing with high inflation, maintaining fiscal prudence, restructuring an onerous debt repayment schedule with the International Monetary Fund (IMF), and tampering incipient tensions with the country’s neighbors—all whilst addressing worsening poverty and unemployment—is an almost impossible task.
Indeed, Argentina’s next government faces a set of challenges that seem almost insurmountable. To overcome these challenges, the government will have to seek a serious debt rescheduling to give itself the room it needs to address a very real social crisis without risking even higher inflation. But as Eduardo Levy Yeyati, Dean of the School of Government of Universidad Torcuato Di Tella, warns: “even if the debt is fully rolled over, if it grows with its average interest rate (above five percent), and the GDP falls, the country needs an unrealistically high primary fiscal surplus to make the debt ratio sustainable.”
It is unlikely this scenario will come to pass in Argentina under Fernández. So what are the policies that the next government holds in store and what are the costs the government is willing to bear?
Building a mystery
Fernández has revealed the names of most of his cabinet, but who will head the Ministry of Economy remains a mystery. Rumors about who the potential future Minister of Economy will be range from the orthodox Guillermo Nielsen, heterodox Matías Kulfas, to the academic Martín Guzmán. Some suggest that Kulfas will become the Minister of Production—in charge of the ‘real’ economy—while either Nielsen or Guzmán will be appointed as the Minister of Finance, responsible for restructuring debt. Fernández says he will announce his full cabinet on December 6.
So far, Fernández’s statements suggest he prefers a heterodox approach, a position that raises concerns among creditors, the IMF and Argentina’s newly minted pro-market neighbors. But why exactly does Fernández hold these heterodox views? There are a few compelling explanations.
Firstly, Fernández is a Peronist who believes in the virtues of a big state to promote industrial development. He is also skeptical of market forces and favors redistribution over growth to address poverty and inequality. His market skeptic views fit the Peronist lore of political solutions to economic problems, exemplified with his proposal of a tripartite (union, business and the state) Economic and Social Council to fix wages and prices and pass reforms. Fernández also makes a typically Peronist distinction between productive and financial capital, with the latter seen as damaging to the former. As a result, he is willing to reduce interest rates, because he believes this will have a salutary effect on the real economy.
The second reason has to do with the exhausted narrative promoted by the outgoing government of President Mauricio Macri, whose orthodox approach—intended to fix the economic and fiscal mismanagement left over by the Kirchner presidencies—will be remembered as one of overconfidence and meekness.
Macri’s attempt to patiently reduce the fiscal deficit through gradualism, failed by mid-2018 with investors panicking over Argentina’s inability to repay its debt with rising U.S. interest rates. Gradualism left the country with a serious debt overhang—the national government’s foreign debt increased by $59 billion between 2015-2018, reaching a total of $131 billion. Unable to pay its mounting debt obligations, in September, 2018, Macri received the largest IMF bailout in the organization’s history, which unceremoniously ended his experiment with gradualism.
A heavier inheritance
As the currency devalued, inflation almost doubled—Argentina has a high rate of pass-through, increasing peso prices to match dollar prices. Argentines fled the peso for the dollar to protect their savings and, in response, the central bank increased interest rates to punitive levels to avoid worsening capital flight and inflation. But the strategy failed to stem the currency crisis and rising inflation. As a response, in April 2019 Macri adopted heterodox economic policies, such as freezing utility prices to increasing price controls on basic goods to try and curb the country’s economic crisis.
By mid-2019, inflation began to slow, but another blow to the economy came with the unexpected scale of Macri’s loss in the August primaries (PASO). Country risk rose to levels suggesting an almost certain default, fueling capital flight and a mini-bank run of over $24 billion from August. As of writing this article, the country’s reserves have fallen to $44 billion. Macri’s loss created a power vacuum and left him unable to re-establish confidence and authority. As a result, he imposed very strict capital controls (CEPO).
In the short-run, capital controls helped stabilize Argentina’s currency and stop the bleeding of the country’s reserves, but this is a stop-gap measure. As with most controlled prices, a parallel black market emerged, which can gradually undermine efforts to control monetary aggregates and that, in turn, could further weaken monetary policy. Coupled with high inflation and the depreciation of Brazil’s currency, Argentina’s peso continues to lose its competitiveness.
Although macroeconomic variables have stabilized, the next government will face a nearly impossible task of paying back a whopping $64 billion in debt repayment next year. One reason for the onerous repayment schedule was Macri’s decision to push forward domestic debt repayment to the first half of 2020—70 percent of the $64 billion debt must be paid in the first half of 2020. The only positive way Fernández can deal with this debt crisis is to restructure the debt, but this is where things get complicated.
Deal or No Deal
Fernández has floated around the idea of copying Uruguay’s or Portugal’s approach to addressing a debt crisis. But unlike Portugal, Argentina lacks the backing of a credible central bank and transfers from rich countries to soften the blow. Unlike Uruguay, Argentina does not have a sizeable primary budget surplus and lacks a stable political system that can credibly signal to creditors that loans will be repaid.
Instead, Fernández inherits a country deeply divided and with a primary deficit of 0.5 percent of GDP and net reserves of $12 billion—although this is a far better situation than what Macri was given. Nevertheless, achieving primary balance in 2020 will not happen if Fernández continues to fervently oppose austerity. Speaking to the country’s largest industrial lobby group, Fernández asked “how much longer will they think that austerity is the solution, that a society can be fixed by throwing 10 million or 12 million people out the window?” Given the incoming government’s hostility to balancing the budget, the only way to avoid default would be to seek a generous rescheduling of the debt.
Although there is no official plan, a rumored debt restructuring plan promoted by potential Minister of Finance, Martín Guzmán could be set in place. His proposal includes stopping repayment for two years, denying additional IMF loans and would pace fiscal adjustment in a way that does not “create destabilizing macroeconomic effects.” His idea is to create fiscal space for Argentina and use the temporary relief to engender economic growth.
But this is a risky bet as Argentina’s prospects for growth are low and two years will almost certainly not be enough to recover what has been lost in the recession. The motors of growth must be investment and exports, to avoid or counteract import pressures that an increase in aggregate demand will cause. The incoming government has placed many of its cards on the Vaca Muerta non-conventional oil and gas field to prop up exports and reduce energy imports, but without sound policies, this is wishful thinking.
Argentina has the room to make serious cuts to expenditure with relatively little cost. An example is the exorbitant subsidies the government pays to keep the perpetual loss making national airline afloat. There is also room to improve the efficiency of state spending; according to the Inter-American Development Bank, Argentina spends 7.2 percent of GDP inefficiently, the worst in the region.
Regardless, Argentina will not be able to access credit, at least on favorable terms. Without a commitment to reduce spending, and the ability to raise taxes, the next government may have to resort to money printing. This will likely lead, sooner or later, to higher inflation that will erode whatever short-term gains were made in the initial period of the next government’s term.
A fine line
This complex economic setting places the next government in a serious bind as the social situation in the country is reaching emergency levels not seen since the 2001 crisis.
Poverty has increased from 26 percent in the second half of 2017 to 35 percent in the first half of 2019. Estimates place poverty at 38 percent by the end of the year. Food insecurity also increased from 6.2 percent in 2017 to 9.3 percent in 2019, affecting a staggering 30 percent of those under 17. No doubt this is why Fernández is making tackling food insecurity a key priority for his government.
The increase in poverty is explained primarily by the serious deterioration in the labor market. Although open unemployment has remained relatively stable, this hides that almost 35 percent of Argentines are employed in precarious and informal jobs. Indeed, between 2016 and 2019, the number of formal jobs increased by a mere 21 thousand, while informal jobs and self-employment increased by 815 thousand. These jobs pay less and have little to no labor protections, such as unemployment insurance. Real income, in turn, has fallen by 12-15 percent and pensions by 18 percent. The most vivid demonstration of the sharp decline in worker’s incomes is the labor share of income declining from 54 percent of GDP in 2016 to 43 percent in 2019, a reduction not seen since 2002.
Given this context, the next government has already said it intends to increase the wages and benefits for the poorest. The government promises to de-link utility prices from international prices (pesification), which means increasing costly and inefficient subsidies. It will also be tempting for the government to expand public employment to compensate for the weak private sector performance. The problem is that all this will significantly worsen fiscal accounts and will turn off creditors to any restructuring plan.
In the end, none of the choices are appealing and something will have to give.
Nicolás Saldías, Senior Researcher at the Wilson Center’s Latin America Program and Argentina Project and is a Ph.D candidate at the University of Toronto