Argentina: Reform process in crisis?

Since the end of 2015, Argentina’s ‘Reform’ President Mauricio Macri has been battling with the legacy of the populist economic policies of the Peronist Kirchner Era (2003-15), which led to excessive state spending, foreign exchange controls, an overvaluation of the Peso and a jungle of regulations. In the wake of the reform steps he has taken so far, such as floating the exchange rate, the gradual abolition of subsidies in the electricity market, the removal of price controls and also certain cuts to welfare spending, there have not yet been any incisive consolidation successes. The twin deficit by the state and in foreign trade has stubbornly persisted and of late Argentina’s vulnerability in foreign trade increased. Inflation is having to be combatted by extremely high key lending rates.

The about-turn in key lending rates in the USA caused the currencies of many emerging markets to take a negative direction. Capital has flowed back into the countries with higher growth and the prospect of better real interest rates. Argentina is also affected by these capital outflows, especially as its current account deficit has of late actually risen. Since May, there have been various bursts during which the external value of the Peso has come under great pressure. International investors appear to no longer really trust the country’s economy – despite Macri’s reform steps to date such as floating the currency, the gradual reduction of subsidies in the electricity market and cuts to welfare spending. Macri is on the defensive, but has shown political courage and successfully requested a standby loan from the International Monetary Fund (IMF), despite the IMF being viewed with extreme suspicion by Argentina’s citizens on the back of the last debt crisis and the government default of December 2002.

To make matters worse, in addition to the unfavourable global conditions, a drought has led to Argentina’s agricultural sector posting high production losses. The country is currently going through crisis-like slumps to growth. Whether the IMF facility suffices to parry current economic problems and the attacks on the currency depends on whether Macri’s “gradualist” reform strategy eventually succeeds. He considers tougher reform steps in the form of “shock therapy” as counterproductive, because the population would not back them. And he also has to gain enough support among the electorate in the run-up to the presidential elections in October 2019. However, the prospects of growth picking up in election year 2019 are good, so that he can hope to press ahead with his reform project with greater emphasis.

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