Argentina should be booming. The South American nation sits atop some of the world’s biggest shale oil and gas reserves. It has a vibrant tech sector and spawned the region’s most successful ecommerce giant. It is one of the top international grain exporters and possesses abundant stocks of lithium at a time when demand for both has soared because of the Ukraine war and the global drive for electrification.
Yet Argentina is instead lurching towards one of its periodic collapses. Inflation reached 64 per cent in June; it may reach 90 per cent by the year end. On the black market, the dollar is fetching more than twice the official rate as Argentines rush to dump pesos. Sovereign debt, restructured less than two years ago, is again trading at distressed levels as investors take cover.
Cut off from international markets after its 2020 default, Argentina’s government is struggling to fund itself. It is issuing copious amounts of domestic debt at ever-higher interest rates — most of it inflation-linked — and encouraging the central bank to print more and more pesos to fill the gap.
With financial ruin beckoning, government paper is less attractive. So the central bank offered investors a novel put option on Treasury notes, as well as buying the paper itself to put a floor under prices. Tight exchange controls, grain export curbs, energy subsidies and state-imposed price freezes complete a dismal picture.
If the economics are bad, the politics are arguably worse. Infighting within the Peronist government between President Alberto Fernández and his powerful vice-president, Cristina Fernández de Kirchner, forced the departure this month of the economy minister, Martin Guzmán. Guzmán had masterminded successful debt restructurings with private creditors and the IMF but was hated by Fernández de Kirchner and her allies for refusing to spend more. His exit robbed the government of its only credible figure. Silvina Batakis, his little-known replacement, was quick to pledge her commitment to meeting IMF targets. The odds, both political and financial, are heavily stacked against her.
This raises the question of what the IMF should do. It is on the hook for $44bn lent to a previous government, a programme which veered off track after barely a year. An internal report later found that the 2018 programme was “too fragile” to succeed and based on over-optimistic assumptions.
History may be about to repeat itself. Although the fund and Batakis believe that Argentina can still meet its targets this year, including a fiscal deficit of 2.5 per cent of GDP before interest payments, few others agree.
Economists at Citi are among those who think it very likely that Buenos Aires will fail to rein in central bank money-printing, increase foreign exchange reserves and trim the deficit enough to succeed. It looks ever more as though the fund failed to set tough enough conditions when it renegotiated the latest bailout in March.
The perennial villain in Argentine politics, the IMF has been at pains to present itself as a helpful partner to the perennial defaulter this time, rather than a high priest of austerity. The result, however, is that the fund’s 22nd programme with Argentina, described as “pragmatic and realistic” only in March, is already in trouble.
Faced with a weak government in hock to Peronist populism and failed economic policies, the fund would have done better to insist on tougher targets to inspire business confidence and investment. Tough love, rather than sticking plaster, is what Argentina needs.
Source: Economy - ft.com
