Argentina faces major problems even after the change of government

Alberto Fernandez has, as generally expected, won the presidential election in Argentina. He won 48.1 percent of the vote, compared to 40.4 percent for former incumbent Mauricio Macri. After four years, his term of office will expire on December 10, 2019.

The challenges for the new president are enormous. Argentina has been in recession since spring 2018, the second in four years. Gross domestic product has now shrunk by a cumulative 7.8 percent for six consecutive quarters until mid-2019, with no sign of a near end to the downturn. In some respects, the current situation looks even gloomier than at the beginning of Macri’s term in December 2015. The unemployment rate has climbed to over 10 ½ percent, a 14-year high. Key interest rates of currently 68 percent are expected to dampen devaluation and inflationary pressures, but will choke investment. Small and medium-sized businesses, actually Macri’s core voters, have recently complained in particular. Added to this is the exorbitant national debt.

Fernandez has promised expansionary budget plans despite high national debt and oppressive interest payment burdens. In return, corporate taxes and wealth taxes for wealthy households may be raised. He wants to get inflation under control with a „concerted action“ by the state, companies, and unions.

It is still unclear whether the central bank under him will remain independent. Its current net foreign exchange reserves of around USD 15 billion are hardly sufficient for longer-term foreign exchange market interventions. The recently introduced or tightened capital market controls will probably be maintained beyond December.

At the moment, everything is boiling down to a rescheduling agreement for Argentina’s sovereign debt. The question is to what extent Fernandez is responding to the „haircuts“ (payment defaults for private creditors) demanded by the IMF. It is probably impossible for him to be allowed to cut back repayments to the IMF. However, an extension of the maturities is probably possible. In view of the budget squeeze, he will sooner or later be forced to accept cuts in his expansive fiscal plans.

Rate this article

Thank you for your rating. Your vote:
There is no rating yet. Be the first! Current average rating: 0

Leave an answer

Your e-mail address will not be published. Required fields are marked *