On August 29th, the International Monetary Fund’s Managing Director Christine Lagarde confirmed that her organization would be prepared to assist the Argentine government, by offering access to a multi-billion dollar bailout. Argentina’s ongoing economic crisis has prompted a record-breaking interest hike and seen the peso plunge to record lows against the US dollar.
President Macri announced in a televised address that approaching the IMF “aims to eliminate uncertainty” in a climate of deepening uncertainty. The early indications are that uncertainty will continue to reign. Argentina reached a Stand-By Arrangement with the IMF in May, agreeing $50 billion in provisional financing. However, Macri had previously stated his expectation that the economy could recover without forceful intervention. The unexpected nature of of his request threw the Argentinian economy into further turmoil, prompting a further 7% decline in the currency. The peso is now experiencing its biggest decline since December 2015, and now stands at close to 37 to the dollar, having lost more than 45% of its relative value this year.
This provisional arrangement envisioned a strengthening of the country’s economy by restoring market confidence via macroeconomic programs that would lessen its financial needs, a reduction in Argentina’s public debt, efforts to reduce inflation, and greater independence for the country’s central bank. The plan also foresaw the maintenance of social spending, and the provision of a greater social safety net to protect the country’s population from deteriorating conditions.
Analysts anticipate that $15bn in IMF funds will now be deployed for immediate budgetary support. The remaining $35bn is likely to be made available over the three-year duration of the arrangement, subject to quarterly reviews by the IMF’s Executive Board. However, Argentina’s economy has deteriorated to such an extent that the safety net proposed by the IMF’s original plan now looks unlikely. Lagarde has confirmed that the IMF would be altering their policy to better focus on insulating the country’s markets from recent global financial shifts. This would necessitate harsher monetary and fiscal policies.
How did it come to this?
How did Latin America’s third largest economy transition from being debt-free in 2007, to one experiencing sky-high inflation, a devalued currency, and a failing commodities market? Much of the blame lies with former president, Cristina Fernandez de Kirchner, who held office from 2007 until 2015. Her administration raised public spending, nationalized companies, and subsidized commodities. Efforts were also made to control the exchange rate, giving rise to a black market for dollars that heavily distorted prices. Given the context, it should come as no surprise that Macri’s promises have fallen through.
Between Macri’s failed policies and the conditions likely to accompany the IMF loan, confidence that Argentina’s economy can recover from this shock is at rock bottom. Argentina has an unemployment rate of 9%, and World Bank figures suggest that close to 28% of its 43 million people live in abject poverty. Inflation is rampant, with the highest rate amongst G20 nations at 25.4%. That rate undermines its vital commodities market, reinforcing the hardship experienced by Argentinians across the country. The Central Bank efforts to shore up the country’s currency – tightening monetary policy by raising the country’s interest rate from 45 to 60% – is a desperate roll of the dice. Rising inflation combined with spending cuts mean that wages will not keep up with higher prices.
Having ultimately failed to enact the economic reforms aimed at curbing public spending and borrowing, investors are concerned that the government of Latin America’s third largest economy could default on its commitments. That reality has forced the resort to the IMF, where goodwill is in short supply. Even before the latest bailout, Argentina had promised to lower its debt and inflation by 2019. Those targets now seem impossible to meet.
Hostility is mutual. Historically, Argentines have expressed resentment when contending with IMF-enforced policies. Many blame the international organization for its 2001 economic collapse, when Argentina defaulted on its debt, leaving its banking system paralyzed. At that time, the government-imposed restrictions intended to prevent a run on the banks resulted in measures that prevented many from withdrawing money from their accounts. Many whose lives were affected by that crisis fear the government might be forced to return to those policies in the coming months. In May, a survey of 1,000 Argentinians revealed that 75% felt seeking assistance from the DC-based organization was problematic.
Misery for Macri
President Macri was elected in 2015, pledging to revive the economy, bring about the elimination of poverty, and return Argentina to a market-oriented economy by ending market distortions. His decision to seek IMF loan assistance is a concession that his policies have not been sufficient to improve Argentina’s financial conundrum. Prior to turning to the IMF, he had already failed to make good on his promise to repair the economy without making severe cuts to social spending, resorting instead to austerity measures to try and control rising inflation.
Seeking international assistance by aligning with the IMF will exacerbate negative perceptions of his performance, and cast doubt on his ability to secure re-election in next year’s Presidential poll. Fiona Mackie, the Economic Intelligence Unit’s regional director for the region, was only stating the obvious when she warned that the country’s upcoming economic adjustment will create “political risk… amid dwindling confidence at home.” Opposition parties blame Macri’s center-right policies, which included the end of capital controls and cuts to social programs, decisions that were part of a broad effort to curb government spending and make good on the country’s many international loans. In attacking the decision to ask the IMF for a loan in May, Macri’s opponents reiterated those critiques. Recent events have justified their skepticism.
Most Argentine’s do not believe that IMF loans will make a significant dent in the overall amount of money the country owes. If Argentina cannot find a way to balance both its high levels of debt as well as its expensive social promises to its people, then the country’s inflation will continue to rise and its currency will continue to depreciate. Evidence of the anger that will prompt is already on display. In August, 15 shipyard workers in La Plata were injured whilst protesting austerity measures. Last week, Argentina’s university professors ended their third week of protests, rallying against the austerity-driven cuts that have affected higher education budgets. Members of Fernandez’s Citizens’ Unity have gone so far as to call for nationwide protests against the government. As Argentina’s economic turmoil accelerates, political turmoil is likely to follow.