The Argentinians felt in a film that they have often seen during the past week: in three days the peso, the currency of the country, is temporarily worth 25% less than the dollar. When President Mauricio Macri announced that he would ask the International Monetary Fund (IMF) for larger aid loans, this did not increase the confidence of financial investors, on the contrary. When the IMF hesitated a bit with his reply, the peso crashed into the bottomless. Although the weekend has stabilized again, the only currency in August alone has dropped by 40% against the dollar. Compared to the beginning of the year, the Argentines now have to pay twice as much pesos for a dollar.
Nervousness on the markets
Macri worked with his business team on austerity measures and tax increases over the weekend, which he plans to present in Buenos Aires on Monday and negotiate with the IMF on Tuesday in Washington. IMF spokesperson Gerry Rice said that the IMF wanted to have a revised program approved by the Executive Committee as soon as possible. Argentina could then quickly receive higher loan payments from Washington.
The financial markets in Buenos Aires are now nervous at the beginning of the week. It is unclear whether the tax measures will be sufficient to neutralize the depreciation of the peso. The government can only stabilize the markets with clear and powerful signals for budget recovery, according to the American bank JP Morgan. In Buenos Aires, the government is expected to reduce the primary deficit – excluding balance sheet expenditures – to 0.4% of gross domestic product (GDP) by the end of 2019, rather than 1.3% of GDP, as planned earlier. So far, Macri had intended to propose a balanced budget until 2020.
The IMF and Argentina agreed at the beginning of June. That should happen sooner. Now the government is planning to reduce spending by an additional quarter, as it says in the media. At the same time the government is considering the revenue side, so that the export of agricultural products is taxed again. Former parliamentary president Cristina Fernández de Kirchner had made farmers angry because she charged high taxes on exports to finance their expenses. Macri had abolished it shortly after taking office for corn and wheat and monthly reduced soy load by 0.5 to 26%.
As far as monetary policy is concerned, the government has already taken over the reins in the last week of the crisis: the main interest rate is expected to remain at 60% (previously: 45%) by the end of the year. In addition, it increased the minimum reserves of the banks.
The government's strategy is to ensure stability on the financial markets with high interest rates, a lower budget deficit and the IMF loan guarantee until the election date of the end of 2019. The pressure on the peso could decrease, as according to JP Morgan first appears to be undervalued. With Washington's stand-by loan, Argentina can pay all interest and repayments due at the end of 2019. The weaker peso will also reduce the current account deficit because Argentineans can import less.
Nevertheless, the procedure is risky. With the measures, the government is finally strangling stagnating growth. Argentina is heading for a severe recession. Now that inflation is currently around 32%, which is now expected to rise significantly as a result of rising import prices, the government is facing labor disputes. The stronger the adaptation measures turned out, the more unpredictable Macri should be, according to a review by Banco Itaú. The Brazilian bank fears that the unrest on the international financial markets and the instability in the neighboring country Brazil will be the biggest obstacles to further stabilization. Paul Greer, fund manager with asset manager Fidelity, recommends that President Macri exchange his economic and financial team and focus entirely on more restrictive austerity measures. Because the government has neglected the savings targets for too long and it has long been foreseeable that investors would withdraw their money from unstable emerging markets.
Doubt the Argentines
Crucial will be whether the Argentines trust their own government to overcome the crisis – and to put an end to the run on the dollar. But that is not to be expected: in twelve months foreign funds and domestic savers demanded a total of $ 32 billion – although until April the prospects for Argentina were still optimistic. In recent weeks, sales of durable consumer goods such as cars and refrigerators have increased more than total consumption. "Argentinians traditionally protect their savings against inflation," says Matiás Boils Wilson, chief economist at the Argentine Chamber of Commerce. These are also many Argentines such as a journey back in time.