Argentina faces a prolonged economic crisis in 2021
The lack of foreign reserves combined with currency controls and new taxes mean the country is going to face another year of economic pain.
Argentina was in an economic crisis before coronavirus. While many other countries will begin to rebound next year, Argentina’s crisis is likely to continue. Barring an economic miracle driven by an unexpected commodity price boom, the situation is almost certain to worsen.
The accessible foreign reserves are near zero.
Argentina’s government has almost no money left to defend the peso. They retain very strong currency controls, limiting the amount of dollars and other foreign currencies that Argentina’s citizens can access. They are taxing exports, taxing payments made by Argentine citizens to international businesses, and trying to find a way to take a cut of any foreign money coming into the country.
Every option to tap additional reserves and buy more time until the next devaluation and/or crash digs the country’s economic hole a bit deeper. As a recent Bloomberg outlined, there are other options including IMF special drawing rights and selling gold, but the downsides are significant.
As I write this, Argentina’s peso is around 85 to the dollar at the official rate and 150 to the dollar on the black market. Without foreign reserves, more devaluation is on the way next year. The only question is whether the government can control the speed of the coming crash in the peso.
Fernandez’s economic policies ignore the second order consequences
Every other journalist and analyst has used the Maradona funeral as a metaphor (for example, see this great column by Bello last week), so I will too. The government decided to hold a wake for the country’s most famous soccer player at the Casa Rosada. Fernandez ignored the fact that doing so in the middle of a pandemic would lead to greater spread of the disease that has already killed thousands in his country and deepened the economic recession that began before we ever heard about Covid-19.
In a similar way, the government is managing the economy. As occurred under Cristina Kirchner’s presidency, the Fernandez government tries to defend its economic policies by explaining only their direct effects. It takes actions that make sense on the surface. However, it’s obvious to anyone looking at the economy that the government’s currency controls and tax policies create second order consequences that hold the economy back.
For example, even though the Fernandez government reduced the export tax, the country’s currency controls and concerns about a further drop in the peso have agricultural exporters hoarding their stocks instead of exporting them.
Last week, Argentina’s Senate passed a one time wealth tax that will hit approximately 10,000 wealthiest citizens of the country, raising over US$3 billion. The bill taxes wealth stored outside the country at higher levels than assets inside the country. In that way, beyond raising money, the tax is a way for the Fernandez government to punish the capital flight that has occurred in recent years. This is another policy that makes some sense on paper but will likely lead to more innovative ways to hide wealth and discourage investors from putting money in the country.
Much of the money raised by the wealth tax is earmarked for various health initiatives or economic development projects. Whatever remains won’t make a dent in recovering the US$20 billion in foreign reserves lost over the past year and a half.
The Peronists still lead for next year’s midterms
The Peronists are much better at politics than at managing the economy. Even as the economy tanks, the ruling party is looking to use the advantages of incumbency and a divided opposition to maintain its hold on power. Two columns this week help show how. James Neilson writes that the federal government is targeting the budget of the city of Buenos Aires as a way to weaken the opposition including Horacio Rodriguez Larreta. Claudio Jacquelin writes how Cristina Kirchner is plotting to change the PASO process as a way to both strengthen her hold on the Peronist Party and undermine the party’s opponents in the congressional elections.
Recent polls show the base of the party remains firmly in support of President Fernandez. Cash transfers have helped ease the pain of the poorest in the country during the current recession, even as the middle class has seen their standard of living drop significantly.
It is too early to know who will win the congressional elections, but a declining economy is not yet a reason to count the Peronists out politically.
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