Federico Sturzenegger, Argentina’s Central Bank governor for 30 months until mid-2018, has emerged from recent obscurity to tell Washington’s Brookings Institution think tank what he thinks went wrong with a team which looked so good.
His 56-page analysis (given the pungent title: Macri’s macro: The meandering road to stability and growth) centres on a perceived clash between fiscal and monetary policy. Sturzenegger argues that President Mauricio Macri’s emphasis on gradualism during more than half his term was a double-edged sword. Thanks to low debt and interest rates, the former Central Bank governor argues that financing the deficit by borrowing abroad was initially feasible, if risky. However, the primary motivation for this strategy was political: to build support for structural reforms.
Nevertheless, Sturzenegger expresses approval of the policies during most of the time he was on board such as the removal of currency controls in favour of a floating exchange rate (quickly followed by peso stability after an initial devaluation) and the settlement with hold-out creditors, a landmark move that restored Argentine access to international markets and enabled the Central Bank to accumulate reserves.
Despite the criticisms, Sturzenegger defends his experiment with inflation targeting (IT), pointing to both its strong international track record and its success at home in bringing down inflation averaging 25 to 40 percent for the previous decade to a core inflation figure of 17 percent by late 2017.
What derailed this experiment, in Sturzenegger’s opinion, was the failure to bring down the fiscal deficit in either 2016 or 2017 despite fiercely slashing energy and transport subsidies – in part due to tax cuts and the “historic reparation” for pensioners.
The former official also criticises the government for going backwards with its index-linking by basing it on past rather than future data.
These economic hitches failed to impede electoral victory in the 2017 midterms (attributed by Sturzenegger to the progress against inflation), which made the Macri administration overconfident, according to the former Central Bank chief.
On December 28, 2017, the government famously replaced inflation targeting with lower interest rates and a more “realistic” projection, which only increased inflationary expectations while permanently destroying credibility by undermining Central Bank independence – the “original sin” in the eyes of many market analysts. This policy shift unhappily coincided with higher international interest rates and a severe drought, although Sturzenegger sees both these adversities as less important than the failure to start balancing the budget until this year and government interference in monetary policy, which he blames far more than gradualism.
The downturn obliged Macri to turn to the International Monetary Fund for a US$57-billion loan, the largest in its history. The tighter fiscal and monetary policy conditioning this credit-line led to the return of export duties and public works cuts among other reversals of previous policy. Last month’s PASO primary and the resultant market panic, causing the peso to lose roughly half its value, only made things much worse, despite the huge IMF credit.
Sturzenegger’s autopsy mostly blames Macri’s failure on fiscal policy, underlining that it serves as a reminder of the importance of Central Bank independence. Unlike most of the Cambiemos coalition, he attributes Argentina’s current plight to its current rather than previous government while also self-critically recognising some errors of his own in his handling of monetary policy (such as not using core inflation for targeting). But he defends his major sale of reserves to defend the currency in the first half of 2018.
The “fault” of the economic crisis “lies in the policies that were decided” by the Casa Rosada, Sturzenegger concludes. “Even if the macro-economic heritage received by the government was not ideal, it is hard to blame it for the results.”
“In the end, the fault lies in the policies that were decided. The deterioration of fiscal policy in the first place and then the choice to bet on short-term growth, even at the expense of monetary institutions and inflation,” he added.