No plan (B)?

The Argentine economy has been under acute stress since at least the first half of 2018, when self-inflicted wounds and an unfavourable set of exogenous shocks caused the first of many violent devaluations of the peso. According to economist Alejandro Radonjic, the director of Ecolatina consultancy firm, the first green shoots are expected to begin to appear in the last couple of months of 2020, meaning we will have suffered 33 consecutive moons of economic freefall, the longest ever recorded. Even in the context of currency controls (the cepo) and public service price freezes, inflation remains stubbornly high, hitting 3.7 percent in December to cap off 2019 at 53.8 percent. And, while President Alberto Fernández and his team have unveiled a series of emergency measures, none of them appear aimed at generating an economic recovery. Rather, they focus on fiscal prudence, which appears to be a prerequisite for any conversation with the International Monetary Fund and private creditors regarding Economy Minister Martín Guzmán’s only silver bullet: a successful renegotiation of the debt. With Alberto having set March 31 as the deadline for any restructuring plan, it appears irreversible damage to the embattled private sector will continue at least until then, undermining the potential recovery. Even if Guzmán comes back with an acceptable proposal, how will the economy grow?

For a second, let’s ponder the optimistic scenario. Speaking at the World Economic Forum in Davos, Switzerland, IMF chief Krystalina Georgieva indicated her teams had had “constructive interactions so far” with Fernández and Guzmán. “We agree with the need to restore the economy and address the increase in poverty that has negatively affected many Argentines,” she added. Pope Francis has already played his cards, with the Vatican set to host an economics seminar called “New Forms of Solidarity Towards Fraternal Inclusion, Integration and Innovation,” on February 5, where Georgieva and Guzmán are expected to be in attendance,. That will come just days after President Alberto is scheduled to meet His Holiness the week after Israel where he will participate in a ceremony remembering the Holocaust. Guzmán – an ardent critic of the IMF that has called for a moratorium on all debt service payments for at least two years when he was still at Columbia University – is reportedly making his way to New York in a few weeks time to give a conference at the Council of the Americas, where he’s expected to at least have informal meetings with major creditors.

If all goes according to plan, Guzmán and Fernández would inject confidence into Argentina’s self-conscious economy, recovering a little of that lost self-esteem and therefore pushing the machine timidly into action. With doubts over the capacity of the state to finance the fiscal deficit lifted, pressure on the peso-dollar exchange rate should ease, in turn helping lower inflation and eventually activating output. The dream scenario would include a virtuous cycle where consumption feeds a growing economy that would put the installed capacity back to work (it’s currently around 50 percent), while productive investment should at some point increase productivity. Wages would grow and unemployment would fall, and everyone would be happy.

Unfortunately, it doesn’t look all that rosy. The series of measures taken by the Fernández administration under the “Solidarity Law” amount to austerity, which is much needed, and increased taxes. These, by definition, are recessive. At the same time, freezing public service costs is an ailment for the population, particularly the lower classes, but it is unsustainable given the fiscal deficit. In parallel, the Central Bank, now run by Miguel Ángel Pesce, is aggressively lowering interest rates, which have come down to 50 percent already, while increasing the money supply to the tune of 22.2 percent. Fears of an inflationary spiral are contained given currency controls, yet the multiple exchange rates that operate outside of the official market have continued to distance themselves from the official rate, indicating that pressure on the peso is still a very real phenomenon. What happens on day 181, once the “Solidarity Law’s” freezes expire?

The private sector, which deals with one of the highest tax burdens in the world, is agonising. Default risk is extremely high at the time, with major names including grain exporter Vicentin and paper mill Celulosa Argentina having missed payments, and many other major players on the verge. “Given the amount of accumulated debt, many firms have been ‘de-capitalised’, meaning the ship will continue to sink,” explained Miguel Arrigoni, CEO of First Capital Group, to Perfil, as he argued for a “bailout for companies.” On the back of more than two years of recession, astronomical inflation, and credit-crunching interest rates, the private sector finds itself increasingly unable to face its obligations, meaning the potential for job destruction is high. Furthermore, firms are relying on a successful debt renegotiation which is expected for the end of March, the effects of which could be felt in the immediate term in terms of easing pressure on the peso, yet the spillover would still be delayed, lagging it by months. Output, as mentioned previously, won’t pick up until the last few months of the year. Will they resist?

One of the major criticisms lodged at Mauricio Macri and his ‘team of CEOs’ was their lack of an alternative plan. Particularly after the first big devaluation, which occurred in the first half of 2018, the only thing they repeated was an obsession with fixing the fiscal deficit. Macri tried “gradualism” until he ran out of other people’s money, while austerity was imposed from outside, when he was forced to run to the IMF for an emergency loan. Macri, with Federico Sturzenegger running the Central Bank, Nicolás Dujovne in the Economy Ministry and buddy Luis “Toto” Caputo raising capital, artificially generated economic growth in 2017 by allowing the peso to become overvalued against the dollar. But once he defeated Cristina Fernández de Kirchner in that year’s midterm elections, he was unable to implement structural reforms that would aim at making the country more competitive. It was the beginning of the end.

Now, Alberto and his team must avoid relying on the peso-dollar exchange rate, and an appreciation of the peso, as his tool against inflation, and therefore re-activation. The debt renegotiation is a first step, but Fernández and Guzmán, along with the rest of the economic team, need to present a plan that is reasonable and based on a series of logical steps that will loosen rigid labour laws, lower an intolerable tax burden, and create the conditions for productive investment in the relative short-term. It sounds like a lot, and it isn’t entirely clear whether they will be able to figure it out. Let us hope they at least have a “Plan B.”