By Patrick Gillespie
Argentina is facing some of the world’s highest inflation, with a rate that’s back over 100% for the first time in three decades. The government is on its third economic minister since July and President Alberto Fernandez’s leftist coalition looks permanently split. South America’s second-largest economy has almost no access to international capital and is struggling to comply with the conditions attached to a $44 billion aid program agreed to with the International Monetary Fund. Any bright spots? So far, a population hardened by decades of economic crisis has not turned to the kind of violent street protests that brought down the insolvent government of Sri Lanka in 2022. But the most likely paths forward all involve significant levels of pain.
1. How serious is Argentina’s crisis?
___STEADY_PAYWALL___Argentina nosedived into an economic crisis in 2018 and it’s never fully recovered. Annual inflation has been above 50% most of the time since then; it reached 103% in February. Inflation’s impact has been exacerbated by three years of recession — since the 1950s, Argentina has spent more time in recession than almost any other nation, according to the World Bank. Nearly 40% of Argentines live in poverty today, compared to about 25% at the start of the crisis. Still, today’s price gains remain far from the heights reached in the country’s last bout of hyperinflation from 1989 to 1991, when it surpassed 3,000% annually.
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2. How did things get so bad?
A currency crisis in 2018 led to the peso losing half of its value against the dollar. The IMF responded by loaning a record $57 billion to the business-friendly administration led by then-President Mauricio Macri, but the deal failed to stabilize the economy. Fernandez’s election in 2019 sparked a massive selloff in government bonds that his government later defaulted on. Without access to credit following the default, Fernandez printed money during the pandemic to finance cash handouts and salary programs, which set the stage for inflation to surge higher. Fernandez also implemented a labyrinth of currency controls and price freezes, creating an alphabet soup of different exchange rates. The measures proved ineffective at cooling inflation and currency losses, but made the business environment more complex for companies across the country.
3. Where do things stand?
Argentina is on the brink of another recession this year as a historic drought comes on top of inflation. Private economists see gross domestic product, or GDP, dropping 3% in 2023. Inflation in triple-digit territory is wiping out Argentines’ paychecks, shrinking their buying power and consumer spending. The drought is destroying Argentina’s key commodity exports — soy, corn and wheat — that are essential to growth, jobs and tax revenue. Argentina’s top grains exchange forecasts a soy harvest of only 25 million metric tons compared with the five-year average of 45 million tons. The prospect of a recession also complicates Argentina’s latest IMF deal, struck a year ago, by making it harder to meet the key targets.
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4. How does this affect the IMF deal?
The IMF and Fernandez’s administration in 2022 reached a new $44 billion deal, replacing the package negotiated with Macri’s government. The new deal effectively delays payments owed from the first program — so long as Argentina complies with a new set of conditions. Although the original repayment schedule to the IMF from the Macri deal remains in place, the new deal disburses IMF money to Argentina in a timetable that amounts to refinancing the original pact and extending repayments by at least four years. In short, the IMF is disbursing money to Argentina in its new program so Argentina can pay back the IMF for the original program.
5. What conditions did the IMF set?
Argentina has to pass quarterly reviews where the government must show progress on key yardsticks, such as lowering its fiscal deficit. With less tax revenue due to the crop drought, Argentina will have to cut more spending to meet the fiscal target, a politically unappetizing approach before elections this October. If Argentina doesn’t pass one of the so-called staff reviews, it risks defaulting on the IMF loan, which would remove almost all remaining sources of international financing for the country.
6. Is Argentina at risk of running out of money?
The central bank is running low on net cash reserves, down to an estimated $1.3 billion, according to consulting firm FMyA. Total reserves less than half the level they were in 2019. That’s raising the risk of a potential currency devaluation, which in the past has provoked social tension. The very expectation of a devaluation is causing more people to buy dollars, hold exports or speed up imports, exacerbating the government’s greenback drain. A gap between the official exchange rate and various parallel rates has held around 100% for several months, a level and stretch of time not seen since Argentina’s hyperinflation days.
7. What’s the government’s plan?
So far, there hasn’t really been one, besides trying to meet the goals set in the IMF deal. Fernandez said in a 2020 Financial Times interview: “Frankly, I don’t believe in economic plans.” The most consistent theme of his policies has been a reliance on piecemeal steps to limit economic pain, such as temporary price freezes and a ban on firing workers. Economy Minister Sergio Massa, who took office in August, has met targets in the IMF deal so far but failed to roll out an economic plan that markets view as credible. His projections on inflation have also fallen short of the mark.
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8. How does politics figure into this?
All of this economic turmoil is playing out before October’s presidential election. The very public infighting between Fernandez and his powerful Vice President Cristina Fernandez de Kirchner (a former president who is unrelated) over the past few years has left the coalition divided and without a single candidate. Since the main opposition coalition also hasn’t picked a single candidate, both parties appear headed toward August primary contests. The political uncertainty and economic problems are carving a path for outsider candidate Javier Milei, a far-right congressman who praises former US President Donald Trump. Milei’s top policy proposal is replacing the peso with the US dollar as Argentina’s national currency, which he says would tame inflation. Overall, the wide-open election will likely fuel more market volatility, which in turn is likely to affect inflation, growth and society.
The Reference Shelf
- A profile of presidential candidate Javier Milei.
- An article about Russians moving to Argentina to evade the war in Ukraine.
- An interview with a top economist in the opposition coalition.
© 2023 Bloomberg L.P.
