Buenos Aires Times

opinion and analysis ECONOMIC QUESTIONS

Russian roulette

The dice remain loaded in Macri’s favour – a better harvest next year plus an electioneering splurge on the public works postponed under the recent austerity might well make the approaching recession relatively short-lived.

Saturday 30 June, 2018
What will Argentina's economic fate be?
What will Argentina's economic fate be? Foto:JOAQUIN TEMES

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If last week was midwinter, this weekend marks midyear – half-time of a kind in the World Cup too between the group play and the knockout stage (even if threequarters of the 64 matches have already been played).

Dr Hale has the same calendar up in New England (apart from the midwinter bit) since he writes:

“We are now on the brink of the second half of the year and that has a familiar ring for me from my notes on Argentina – it would seem that the second halves of even years are not President Mauricio Macri’s forte, although we will only know for sure around Christmas how it will have all played out. It’s impossible to say right now because I cannot detect any watershed in this midyear. Too much news most of this month but what do we have since Argentina’s return to emerging market status and formal approval of the IMF agreement? Whatever Bill Clinton might have said, contrasting World Cup dramas between the meltdown against Croatia and euphoria over last-minute qualification for the decisive stages plus last Monday’s general strike seems to have squeezed the economy out of the public mind, despite all the problems. The strike at least gives me one question for you – where does that strike leave the multi-sectorial consensus preached by the government?”

My reply:

“Multi-sectorial consensus is overrated in my opinion. I’ve always found it curious that the same voices who press the need for a conventional two-party system of adversary politics insist on total consensus for socio-economic issues. Their pet model (and I’ve seen literally hundreds of articles with this theme) is Spain’s Moncloa Pact of 1977-1978 between all parties and sectors but the real game-changer finally burying the ‘Africa begins at the Pyrenees’ of Alexandre Dumas was entry into the mass market of the European Union in 1986.

“As for your midyear watershed, it might well have occurred before this week with the currency crisis and the IMF agreement, but we will not know any time soon – if the lag between monetary policy decisions and their effects being felt in the economy is estimated at up to six quarters by economists, we would be lucky to see much change in the rest of this year. It remains to be seen whether the switch in monetary policy to a genuine float will be sustained – whether the temptations of an overvalued peso will be resisted, not only as an anchor against inflation but also to create an artificial purchasingpower enabling the country to live beyond its means. If a realistic monetary policy is sustained, it will eventually correct various imbalances but it will take time.

“One example of this is the shock of a 10-digit trade deficit in the single month of May, a month marked by sharp devaluation of the peso which is supposed to help exports and discourage imports. If last year’s trade deficit was already dire at almost US$9 billion, last month’s was nearly US$1.3 billion – an alarming slide. The May figures reflect a nightmare combination between exports hit by the drought and imports continuing their previous momentum despite the higher cost of a dollar – imports are already starting to fall in volume but devaluation jerks their value sharply upwards. Both imports and the trade gap stand to fall in a presumably recessive second half but the 2018 deficit is still likely to be several billion. Meanwhile the balance of payments is over five percent of gross domestic product in the red.

“For the second non-electoral year running, Macri faces a disappointing second half but it remains to be seen just how recessive it will be – whether there will be negative growth or if 2018 will be minimally positive thanks to strong figures from the first third of the year. Another guessing-game is on what side of 30 percent this year’s inflation figure will end up, although a repeat of 2016 stagflation is on the cards. Interest rates remaining at or above 40 percent will obviously be recessive but are being maintained – not out of sheer masochism but to win the investor confidence which is vital for emerging from recession. However, much financial speculation is deplored, capital flight on the scale of May’s US$4.6 billion makes growth impossible. Yet high interest rates cut both ways in the eyes of investors – on the one hand, they are necessary to defend the currency and curb inflation but, on the other, they burden the credit which is central to most investment projects. The rates must thus be lowered at some point but the timing will be delicate.

“You quote Bill Clinton but in many ways it’s the politics, stupid. And here high interest rates could increase as much as reduce the risks. If the recession proves too long and recessive, Macri might blow his re-election next year with a populist comeback – despite the massive confidence shock of the IMF agreement, international investors are alive to this possibility and could easily sit this one out, just as they did after the election of a market-friendly government in late 2015. Yet the dice remain loaded in Macri’s favour – a better harvest next year plus an electioneering splurge on the public works postponed under the recent austerity might well make the approaching recession relatively shortlived.

“The political angle is not limited to next year’s elections – legislating the conditions of the IMF agreement and working them into the 2019 Budget will be extremely tricky with an increasingly hostile Congress. Macri’s rejuggled economic team has signed up for austerity with the IMF but implementation is easier said than done, given the staggering magnitude of the imbalances. You’d have to go back to the wake of the South Atlantic war defeat and the collapse of a military dictatotorship which quadrupled the foreign debt to find bigger deficits.

“The statutory deadline for submitting the budget to Congress is September 15 (which, strangely enough, has always been met by the most varied governments in unpunctual and unpredictable Argentina) so all that work and political jockeying will have to advance pretty fast once the World Cup is over. Talking of which, I will now break off for the next match of an event which is trumping Argentina for unpredictability. As far as I can work out, the World Cup in Russia has little to do with either FIFA or Vladimir Putin, but has been entirely organised by the Russian betting mafia.”

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