EDINBURGH — South Africa under the leadership of Cyril Ramaphosa has continued to lose its attractions in the eyes of the international community. He can’t be blamed solely for the country’s slide, although as deputy president alongside corrupt president Jacob Zuma he arguably must shoulder much of the blame for South Africa’s economic woes. The Economist, a leading financial magazine, explores the cases of Argentina and Turkey for answers as to how an emerging market that has lost favour with its creditors should respond. There’s no easy answer, with bad luck playing as much of a role as poor policymaking when sentiment turns negative. – Jackie Cameron
By Thulasizwe Sithole
The Economist asks: When an emerging market loses favour with its creditors, how should its government respond? Its analysts look at Argentina and Turkey, finding no clear logic to possible solutions.
Unsurprisingly, the policy prescriptions do not typically include intimidating the central bank, railing against the ‘interest-rate lobby’, falling out with allies, eschewing the IMF’s help, pouring scorn on the dollar or appointing the president’s son-in-law as finance minister. “Turkey has done all of these things, and its currency has duly lost 40% of its value this year.”
Argentina, by contrast, has stuck much closer to convention, The Economist points out. “Its finance minister has two economics-related degrees. Its central bank has raised interest rates through the roof (lifting them to 60% on August 30th), and its government has secured prompt and generous assistance from the IMF, which agreed to a $50bn loan in June, the largest in its history. And yet Argentina’s currency has lost over 50% of its value this year.”
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The peso’s underperformance reflects three factors: idiosyncratic misfortunes; the structural differences between Argentina’s economy and Turkey’s more trade- and credit-intensive growth model; and the awful starting position that Mr Macri inherited from his predecessors, Cristina Fernández de Kirchner and her late husband, Néstor Kirchner, who indulged in years of mismanagement that would appal even Turkey’s iconoclastic government, says The Economist.
“Start with the idiosyncrasies. Argentina’s worst drought in 50 years has damaged farm output and dried up an important source of hard currency. That bad luck has been accompanied by several eminently avoidable blunders. In a short video posted on YouTube on August 29th, Mr Macri attempted to quash any doubts over Argentina’s solvency by announcing that the IMF had agreed to hasten the disbursal of its loan, only $15bn of which was paid out upfront. But this claim was followed by neither clarification from the finance ministry nor confirmation from the IMF. Panic and confusion spread. The next day – soon dubbed ‘Black Thursday’ by Argentines – the peso fell by almost a fifth.”
That miscommunication, note The Economist analysts, may reflect a deeper failure of co-ordination. “Whereas investors in Turkey worry that power is too concentrated in the hands of its president, Recep Tayyip Erdogan, investors in Argentina worry that economic authority has been dispersed too widely. The government entered the crisis with a finance minister and treasury minister whose remits intertwined, both of whom had to contend with a powerful cabinet chief. Investors did not know who was in charge.”
Many still believe that Nicolás Dujovne, the finance minister, should be given a stronger mandate to set economic policy. Marcos Buscaglia of Alberdi Partners, an economic consultancy, says the government needs to secure a joint agreement with provincial governors to cut spending together. “The provinces are where the biggest waste lies,” he is reported as saying.
The peso’s plunge also reflects deeper differences between Argentina’s economic structure and Turkey’s, The Economist continues. “International trade, for example, plays a far bigger role in the Eurasian country, which belongs to a customs union with the European Union. Trade is equivalent to 54% of the country’s GDP, compared with only 25% of Argentina’s. A city like Istanbul generates foreign exchange from both antiquity and novelty. The Byzantine and Ottoman architecture in its city centre attracts droves of tourists, and the nimble textile firms on its outskirts serve fast-fashion retailers on Europe’s high streets.”
Turkey does not therefore need as big a devaluation for the same improvement in its trade balance, says The Economist. “According to the IIF’s estimates, the combination of the economic slowdown and the lira’s fall is already enough to turn its current-account deficit of 6% of GDP into a surplus in due course. The greater fall in Argentina’s currency has merely narrowed its underlying current-account deficit, from about 5% of GDP to 3%, according to the IIF’s calculations.”
Turkey’s economy also boasts greater financial depth than Argentina’s, points out The Economist. “Loans to the private sector (excluding lending between financial institutions) amounted to 85% of GDP at the end of 2017, according to the Bank for International Settlements. The figure for Argentina was under 22%. Thus Argentina needs a larger increase in borrowing costs for the same slowdown in growth, notes Charlie Robertson of Renaissance Capital, an investment bank.
“Turkey’s private-sector austerity has been more swift and savage than Argentina’s public-sector version. The economy is already slowing sharply. Only half as many cars were sold last month as a year before, the distributors’ association said on September 4th.
“Foreign investors may have become fixated on the shared vulnerabilities of Turkey and Argentina: high inflation, large foreign-currency debts, troublesome budget deficits and wide current-account gaps. But the underlying differences between the two economies are equally stark,” says The Economist.
“Mr Macri, who won office at the end of 2015, inherited a warped economy, in greater disrepair than Turkey’s is in even today. A dispute with holders of its defaulted debt had left Argentina’s government cut off from international credit markets. Currency controls meant the peso was artificially expensive and export taxes prompted producers to hoard grain.
“If Argentina’s public debt remained modest, it was only because the government financed itself with freshly created money from the central bank. If inflation appeared manageable, it was only because the government fiddled the figures and capped prices. And if the trade balance looked favourable, it was only because the government banned many imports and rationed access to foreign exchange,” says The Economist.
“As these distortions were removed, Argentina’s problems became manifest. It faced high and stubborn inflation, perpetuated by many wage settlements tightly linked to past increases in the cost of living. It inherited an underlying fiscal imbalance that had to be financed by increased debt, if it were not to be financed by the central bank. And it was saddled with a sharply overvalued currency. According to Renaissance Capital, even after its recent plunge Argentina’s peso is only 25% below ‘fair value’ (based on long-term, inflation-adjusted averages). The Turkish lira, by contrast, is already 44% undervalued,” it adds.
